Japan Securities Firms: Nomura’s Shares More Attractive Than Daiwa’s Despite 4% Cut to Fair Value

We reduce our fair value estimate for Nomura Holdings to JPY 590 from JPY 615 and keep our fair value estimate for Daiwa Securities 8601 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.

For the year ended March 2023, Nomura generated ROE of 3.1%, around half its 10-year average of 5.9%, while Daiwa had ROE of 4.6%, half its 10-year average of 9.1%. Industrywide ROE, which has been around 7% or 8% most years recently (excluding a moderate boom at the beginning of Abenomics in 2013-2014 when industrywide ROE was in the low single digits, and a slump to around 4% in 2018-19), fell back to the slump levels this past year. This followed a two-year recovery in 2020-21, when the monetary-policy response to the pandemic temporarily boosted trading income. Our new forecasts assume average industrywide ROE of only around 4%-5% in the next few years.