The Japanese are notoriously risk adverse; but that trend has been shifting, with savers gradually moving towards greater equity allocations and driving demand for retail brokerage services, observes Benjamin Shepherd, of Global Investment Strategist.
Daiwa Securities Group (JP:8601) (OTC:DSEEY) reported that its operating revenues, such as commissions received, net trading income, and net gain on private equities, shot up in its first quarter when it reported results at the end of July.
Brokerage commissions received were up 54.5% to JPY31.7billion, as sales of mutual funds shot up and operating revenues of Daiwa Asset Management, the firm's wealth management operations, hit a record high of JPY21.8 billion.
Asset inflows in the company's retail division strongly favored individuals, as flows hit JPY146.5 billion, up from JPY136.3 billion in the previous quarters, while corporate asset inflows fell to a two-year low of JPY11.1 billion.
That's a clear indication that retail investors are skewing their asset allocations more towards equities, while corporations are increasingly opting to invest in their own businesses.
As a result, Daiwa Securities Group's net operating revenues rose to JPY155.2 billion, a 78.5% year-over-year increase, while net income was up 17.5% to JPY57.2 billion.
From a financial perspective, Daiwa is an extremely strong financial enterprise. Even as revenues and earnings are growing, Daiwa's leverage is falling with its gross leverage ratio coming in at 17.3 times and adjusted leverage of 12.5 times, well off the high of 20 and 15.2 last year, respectively.
Its consolidated capital adequacy ratio also came in at a strong 20% based on Basel III standards.
While shares are up better than 82% so far this year, they have recently pulled back from a 52-week high of JPY1,033. I believe shares will break higher from here, though, as renewed investor confidence pulls retail investors out of government bonds and into the equity markets.
Daiwa also boasts a robust investment bank business that will benefit from an uptick in corporate actions.
While merger and acquisition (M&A) activity has slowed so far this year in Japan, largely thanks to an improving business environment, Prime Minister Abe is widely expected to alter tax laws to make it easier for companies to merge.
Historically, Japanese M&A activity has largely centered on companies struggling to survive independently, but if deals could be done on more favorable financial terms, a wave of consolidation could occur.
In a strong financial position and benefiting from secular shifts in asset allocation, Daiwa Securities Group is a new member of our Long-Term Portfolio, as a buy up to JPY1,150 on the Tokyo Stock Exchange or up to USD11 on the OTC market.
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