Japan Securities Firms’ Earnings: We Lift Our Fair Value for Daiwa After Big Buyback Announcement

We look favorably on Daiwa’s 8601 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.

That said, it is unclear where Daiwa has sufficient scale to thrive in Japan over the long term, let alone in the broader global investment banking market. The firm has smaller scale and less advantage of brand name when compared with Nomura and has a smaller balance sheet than the securities units of the megabanks. Daiwa’s less-than-satisfying experience being affiliated with a megabank from 1999 to 2009, when it housed its wholesale operations in a joint venture with Sumitomo Bank (which became SMFG), likely makes it wary of another alliance that might seem to make strategic sense on paper but turns out to be difficult to execute in the human realm of disparate corporate cultures.