Company Reports

We will discontinue analyst coverage of Daiwa Securities on or about Feb. 7. We provide analyst research and ratings on over 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

We are raising our fair value estimate for Daiwa Securities to JPY 800, or 0.76 times book value, from JPY 650, or 0.62 times book value, while maintaining our estimate for Nomura Holdings at JPY 590, or 0.54 times book value. Daiwa’s September-quarter ROE of 8.0% outperformed Nomura’s 4.3% and our estimate of around 6% for the sector average. Daiwa’s earnings were well-balanced among its retail, wholesale, and asset-management segments, in contrast to Nomura, which lagged in its global wholesale business even as it enjoyed strong retail-segment profits in Japan.

We look favorably on Daiwa’s decision not to chase its larger rival Nomura in international business and focus instead on its core businesses in Japan, where it has a defensible position. We think Daiwa’s record in the second half of the 2010s of achieving stronger returns than Nomura is evidence of the soundness of this decision. Nomura has made progress improving its overseas profitability, but our forecasts still project a higher return on equity for Daiwa than for Nomura over the coming five years. We also think Daiwa is slightly ahead of Nomura in realigning its retail business away from a transaction-fee-based model toward one focusing on wealth management.

We are maintaining our fair value estimates of JPY 590 for Nomura Holdings, equivalent to 0.55 times book value and 0.4% below the current share price, and JPY 650 for Daiwa Securities, 0.64 times book value and 18% below its share price, after June quarter results.

We look favorably on Daiwa’s decision not to chase its larger rival Nomura in international business and focus instead on its core businesses in Japan, where it has a defensible position. We think Daiwa’s record in the second half of the 2010s of achieving stronger returns than Nomura is evidence of the soundness of this decision. Nomura has made progress improving its overseas profitability, but our forecasts still project a higher return on equity for Daiwa than for Nomura over the coming five years. We also think Daiwa is slightly ahead of Nomura in realigning its retail business away from a transaction-fee-based model toward one focusing on wealth management.

We reduce our fair value estimate for Nomura Holdings to JPY 590 from JPY 615 and keep our fair value estimate for Daiwa Securities at JPY 650 as we roll forward our forecasts for Japanese securities firms following results for the year ended March 2023. Our FVE for Nomura is 0.56 times book value as of March 2023 and implies a fair price/earnings ratio of 10.8 times based on our average five-year forecast ROE of 5.2%, while our fair value for Daiwa is 0.67 times book value and implies a fair price/earnings ratio of 10.6 times based on our average forecast ROE of 6.3%. Using dividend payout ratios of 40% for Nomura and 50% for Daiwa, this in turn implies fair dividend yields of 3.7% for Nomura and 4.7% for Daiwa. Our fair value estimates imply 23% upside for Nomura from the current share price and 3% upside for Daiwa, making Nomura our investment preference. We, however, forecast a higher average ROE for Daiwa, as has been the case for Daiwa historically. It's possible that the market is assigning similar dividend yields to both stocks—Nomura currently yields 4.8% based on Pitchbook consensus earnings and its 40% payout ratio policy while Daiwa currently yields 4.3% based on consensus and its 50% payout ratio—but even so we think Nomura looks a bit more attractive at current prices.

We maintain our fair value estimate of JPY 615 for Nomura Holdings, equivalent to 0.58 times book value; and our fair value estimate of JPY 650 for Daiwa Securities, equivalent to 0.67 times book value, after Japan’s securities brokers’ results for the second quarter of their fiscal year ending March 2023. Though we think Daiwa Securities deserves a higher price/book multiple than Nomura—reflecting lower historical earnings volatility and smaller risk than Nomura—we think Nomura is making progress toward reducing its future risk, such as by emphasizing recurring sources of revenue in its retail segment rather than flow-based sources. Recurring sources comprised 47% of Nomura’s retail revenues in the July-September period, up from 45% in the previous quarter and 39% a year earlier. Daiwa Securities, meanwhile, said that asset-based revenue comprised 52% of its retail revenue, up from 50% in the previous quarter and 40% a year earlier, slightly ahead of Nomura. At current P/B multiples of 0.45 times for Nomura and 0.60 times for Daiwa, Nomura looks more undervalued relative to its intrinsic value. Our fair value estimate for Nomura's ADR moves from $5.00 to $4.40 due to the Japanese yen's depreciation.

We look favorably on Daiwa’s decision not to chase its larger rival Nomura in international business and focus instead on its core businesses in Japan, where it has a defensible position. We think Daiwa’s record in the second half of the 2010s of achieving stronger returns than Nomura is evidence of the soundness of this decision. Nomura has made progress improving its overseas profitability, but our forecasts still project a higher return on equity for Daiwa than for Nomura over the coming five years. We also think Daiwa is slightly ahead of Nomura in realigning its retail business away from a transaction-fee-based model toward one focusing on wealth management.

We maintain our fair value estimate of JPY 615 for Nomura Holdings, equivalent to 0.60 times book value; and our fair value estimate of JPY 650 for Daiwa Securities, equivalent to 0.69 times book value, after Japan’s securities brokers’ results for the April-June quarter. Although we think Daiwa Securities deserves a higher price/book multiple than Nomura—reflecting lower historical earnings volatility and smaller risk than Nomura—we think Nomura is making some progress toward reducing its future risk, such as by emphasizing recurring sources of revenue in its retail segment rather than flow-based sources. Such recurring sources of revenue covered 49% of retail-segment costs in the past quarter, compared with 47% a year earlier. We change our Morningstar Uncertainty Rating for Nomura to Medium from High, in line with Daiwa’s Medium rating, though we still think Nomura's risk is slightly higher. At current P/B multiples of 0.48 times for Nomura and 0.63 times for Daiwa, Nomura looks more undervalued relative to its intrinsic value.

We roll forward our model for the Japanese securities industry by a year and keep our fair value estimates of JPY 615 for Nomura and JPY 650 for Daiwa Securities, respectively. Our fair value estimate for Nomura’s ADRs declines from USD 5.45 to USD 5.00 to reflect the yen’s depreciation versus the U.S. dollar. Although we forecast that Daiwa’s future earnings will be closer to meeting our assumed 8.5% cost of capital than Nomura’s, at current valuations (0.50 times book value for Nomura and 0.67 for Daiwa) we see Nomura as undervalued and Daiwa as fair. Our fair value estimate for Nomura, which is equivalent to 0.64 times book value, is 27% above the current share price.

We look favorably on Daiwa’s decision not to chase its larger rival Nomura in international business and focus instead on its core businesses in Japan, where it has a defensible position. We think Daiwa’s record in the second half of the 2010s of achieving stronger returns than Nomura is evidence of the soundness of this decision. Nomura has made progress improving its overseas profitability, but our forecasts still project a higher return on equity for Daiwa than for Nomura over the coming five years. We also think Daiwa is slightly ahead of Nomura in realigning its retail business away from a transaction-fee-based model toward one focusing on wealth management.

We maintain our no-moat rating on Daiwa Securities while raising our fair value estimate modestly to JPY 650 from JPY 635 after its latest quarterly results. We think JPY 650, equivalent to 0.72 times book value and about 6% below the current share price, is an appropriate fair value estimate for Daiwa as we expect its return on equity to average around 7%, in line with Daiwa’s long-term historical average and somewhat below our assumed cost of equity of 8.5%.

We look favorably on Daiwa’s decision not to chase its larger rival Nomura in international business and focus instead on its core businesses in Japan, where it has a defensible position. We think Daiwa’s record in the second half of the 2010s of achieving stronger returns than Nomura is evidence of the wisdom of this decision. Nomura has recently made progress improving its overseas profitability, but our forecasts still project a higher return on equity for Daiwa than for Nomura over the coming five years.

With results out from all companies on Friday, we estimate that Japan’s securities industry as a whole had a return on equity, or ROE, of around 6% for July-September, compared with around 7% in the previous quarter. Excluding the JPY 39 billion provision Nomura posted this quarter for transactions prior to the global financial crisis, we estimate the sectorwide ROE was around 8%. Daiwa’s ROE rose from 7.1% to 8.0%, SMBC Nikko’s from 6.4% to 7.7%, Mizuho Securities from 8.9% to 13.0% (benefitting from the removal of around JPY 400 billion in excess capital from the unit earlier this year for use elsewhere in the Mizuho group), and Mitsubishi UFJ Securities from negative 5.8% to 5.1%.

We look favorably on Daiwa’s decision not to chase its larger rival Nomura in international business and focus instead on its core businesses in Japan, where it has a defensible position. We think Daiwa’s record in the second half of the 2010s of achieving stronger returns than Nomura is evidence of the wisdom of this decision. Nomura has recently made progress improving its overseas profitability, but our forecasts still project a higher return on equity for Daiwa than for Nomura over the coming five years.

We maintain our no-moat rating on Daiwa Securities and raise our fair value estimate slightly from JPY 620 to JPY 635, equivalent to 0.71 times book value as our previous fair value estimate had been. Net profit for July-September, the second quarter in Daiwa’s fiscal year ending March 2022, was JPY 26.6 billion, representing annualized ROE of 8.0%, close to our assumed cost of equity for Daiwa of 8.5%.

We look favorably on Daiwa’s decision not to chase its larger rival Nomura in international business and focus instead on its core businesses in Japan, where it has a defensible position. We think Daiwa’s record in the second half of the 2010s of achieving stronger returns than Nomura is evidence of the wisdom of this decision. Nomura has recently made progress improving its overseas profitability, but our forecasts still project a higher return on equity for Daiwa than for Nomura over the coming five years.

We maintain our fair value estimates of JPY 585 for Nomura Holdings and JPY 620 for Daiwa Securities after their April-June earnings reports. Our fair value estimates are equivalent to 0.69 times book value for Nomura and 0.72 times for Daiwa; and are 7% and 8%, respectively, above Friday’s closing prices. We continue to think that Daiwa will earn a slightly higher average ROE over the cycle with less volatility than Nomura despite Nomura’s scale and brand-name advantages--but Nomura has improved in the past two years, as seen in more positive net inflows of retail customer assets even as it has restrained retail-segment costs. We think that Nomura could earn better returns with less volatility if it were to pare its overseas wholesale business a bit more.

We raise our fair value estimate for Daiwa Securities from JPY 600 per share to JPY 620, equivalent to 0.71 times book value and 9% above the current price, as we roll forward our model by a year.

We look favorably on Daiwa’s decision not to chase its larger rival Nomura in international business and focus instead on its core businesses in Japan, where it has a defensible position. We think Daiwa’s record in the second half of the 2010s of achieving stronger returns than Nomura is evidence of the wisdom of this decision. Nomura has recently made progress improving its overseas profitability, but our forecasts still project a higher return on equity for Daiwa than for Nomura over the coming five years.