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Nomura Holdings, Inc. (NYSE:NMR)
Q2 2021 Earnings Call
Oct 28, 2020, 5:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good day, everyone, and welcome to today's Nomura Holdings Second Quarter Operating Result for fiscal year ending March 2021 conference call. [Operator Instructions] The question-and-answer session will be held after the presentation.

Please note that this telephone conference contains certain forward-looking statements and other projected result, which involve known and unknown risks, delays, uncertainties and other factors not under the company's control, which may cause actual result, performance or achievement of the company to be materially different from the result, performance or other expectations implied by those projections. Such factors includes economics and market conditions, political events and investor sentiments, liquidity of secondary market, level and volatility of interest rates, currency exchange rate, security evaluations, competitive conditions and size, number and timing of transactions.

With that, we'd like to begin the conference. Mr. Takumi Kitamura, Chief Financial Officer, please go ahead.

Takumi Kitamura -- Executive Managing Director and Chief Financial Officer

Thank you for joining us. This is Kitamura speaking. I will be presenting the results for the first half and second quarter for the year ended March 2021. In my presentation, I will be following the uploaded document entitled consolidated results and operations.

Please turn to page two. Speaking about the first half market, market dislocation caused by the pandemic subsided, driven by hopes toward economic recovery and reassurance of extensive liquidity provision by central banks, we saw recovery in equity indices and bond prices after some events like presidential election in the United States and Brexit, there was appropriate level of volatility in the equity market and there was investor activity.

There were strong needs from the investor against the backdrop of low rates in the fixed income market and there was inflow into the yield products, including agency mortgages and spread products. In the primary market, along with the improvement of sentiments, we saw the resumption of equity finance and there was continued appetite for bond insurance.

Against this backdrop, net revenue in the first half was JPY829.7 billion, increase of 16% year-on-year; pre-tax income JPY265.4 billion, plus 31%; net income JPY210.2 billion, increase of 8%. This was the highest first half income since introduction of US GAAP in the year ended March 2002. The pre-tax income of the three segments increased by 176% year-on-year, the highest first half results. EPS JPY67.1, ROE 15.6%, dividend with the base date of end of September, JPY20 per share.

Please go to page three. These are the highlights for the first half. The bar on the left hand side is the pre-tax income by region. As you can see, the total pre-tax income for the first half was JPY265.4 billion, an increase of JPY62 billion from the JPY203.3 billion of the previous term. The driver was global, especially, the Americas and the total of the three regions was JPY107.7 billion accounting for approximately 40% of the -- total of the company.

As mentioned in the Investor Day in April last year, in wholesale we conducted the business portfolio review, focused our resources on businesses with top five market share. Under the corona pandemic we continued our provision of liquidity, while at the same time supporting the growth strategy of our clients. These initiatives delivered results and we were able to increase revenue in global rates, Asian currency emerging and US equity business. Also cost reduction efforts made great contributions to the improvement of profitability in the global business.

On the right hand side, we give the breakdown by segment. Income increased in all business areas. The pre-tax income for wholesale was JPY153.3 billion, 3.9 fold of the previous term. Income for retail was 2.8 fold the previous year and recovered to JPY37.9 billion. Of course, the market was a positive factor, but last years channel realignment supported by branch integration gradually has begun to deliver results. And in Asset Management, stable income was generated and the underlying strength to deliver revenues in the three segments is improving in a steadfast manner.

Next, let me describe the highlights for Q2, going on to page four. As indicated on the top right, the total pre-tax revenue was JPY83.6 billion, net income JPY67.6 billion. In Q1 fixed income recorded record high revenue and partly because of the one-off income of JPY71.1 billion for Nihonbashi redevelopment, there was a slight decline, but high level was maintained for Q2. The pre-tax income for the three global markets was JPY43.4 billion, accounting for more than half of the total and contributed to the reduction of effective tax rate. The annualized ROE 9.8%, EPS JPY21.52.

As indicated on the bottom right, the pre-tax income for the three segment was JPY99.7 billion or negative 18% Q-on-Q. But as Q2 income, it was the highest since the year ending March 2002. Compared to the previous year, the income for all business areas increased and the total for the three segments saw an increase of 191%.

In and after page seven we describe each business area. First, retail. Net revenue for Q2 JPY92.8 billion, 14% increase. Pre-tax income JPY22.8 billion Q-on-Q, increase of 51%. As I said in the previous session, we are contacting our clients, not only through face-to-face meeting, but we're using online system, telephone and email, now facial contact is also being promoted, hybrid model is evolving and these efforts are delivering results. And on top of that, with the primary activities also contributing, sales increased for all products and services.

As indicated on the bottom left, total sales increased in equities primary deals and foreign equity saw increase and a high level as we had recorded in Q1 is being maintained. There has been great improvement in investment trust and bond on Q-on-Q basis and we saw increase in discretionary investments and insurance.

Please take a look at page eight. Recurring revenue assets and recurring revenue has seen the improvement since end of June. In addition to market elements, we saw increasing investment trust sales for global equities and ESG. And investment trust net inflow was a positive by more than JPY100 billion. Consulting related revenue on the bottom left, JPY3.9 billion, there has been improvement, especially in insurance and real estate related business.

Number of active clients on the bottom right. This is the cumulative number of clients who used our services or products at least once since April. The total as of end of September was 717,000, which was beyond the previous term.

Asset Management on page nine. Revenue JPY26.8 billion, declined by 21%; pre-tax income JPY11.4 billion, minus 40%. In the previous term there was JPY10.3 billion of American Century related gains and losses, so the revenue excluding ACI was JPY24.7 billion or 4% increase. As indicated on the bottom left, AUM JPY55.7 trillion, partly because of the tailwind in the market, we have delivered a record high.

Please turn to page 10 for the full fund shown on the top left. The Investment Trust business reported net inflows of JPY563 billion from inflows into ETF and ESG related funds launched in August. In the investment advisory business alternatives, such as private equity and infrastructure funds booked inflows [Indecipherable] overseas usage front. But in Japan, there were redemptions in Japan equity value funds, leading to outflows of over JPY640 billion yen. Asset management has been focused on increasing assets under management in funds for DC plans.

As we can see on the bottom right, assets under management of these funds was nearly JPY1.3 trillion at the end of September and thanks to broad product offering, our AUM market share has increased 19.5%.

Please turn to page 11 for wholesale. Second quarter net revenue was JPY220.3 billion, down from the record last quarter, but on an year-on-year basis all business lines and regions reported stronger revenues. JPY220.3 billion represents the fifth highest quarterly revenues and the best second quarter revenue performance.

As we can see on the bottom left, net revenue by region shows recent stronger contributions from the three international regions. Second quarter net revenue from the three international regions was JPY161.7 billion, accounting for 73% of wholesale revenues. In particular, the Americas net revenue was JPY95.2 billion, representing over 40% of total revenues and a record quarter since we started rebuilding our business in 2009. For the KPI shown just about net revenue by region. Our cost to income ratio was 70% versus March 2023 target of below 82%. Our modified RWA as a percentage of revenue was 8.5% versus our target of around 6%. Both KPIs are ahead of target.

Please turn to page 12 for an overview by business line. Global Markets second quarter net revenue declined 17% to JPY192.3 billion. Fixed income net revenue was JPY104.6 billion, down 32% compared to the record high last quarter, but performance remained strong at over JPY100 billion. Rates in agency mortgages had a good quarter and credit securitized products and FX in EM were solid. Equities net revenue grew 13% to JPY87.6 billion.

As we can see on the heat map on the top right, Americas is pointing up on significantly stronger revenues from derivatives, while AEJ revenues also increased on contributions from derivatives.

Please turn to page 13 for investment banking. Net revenue increased 74% to JPY28.1 billion. Revenues were at six quarter high driven by Japan related ECM transactions, cross border M&A and several business reorganizations for Japanese companies. In Japan, of the ECM deals executed this quarter, we acted as lead manager on all of the top five transactions by deal size and our ECM revenues grew substantially. Demand for bond issuances remained strong. And our solutions business had a robust quarter on transactions for equity and real estate sales. Internationally we supported multiple ALF DCM and ECM transactions, leading to higher net revenue both quarter-on-quarter and year-on-year.

As you can see on the top right, we supported our clients' growth strategies and several business reorganizations through cross border and Japan domestic M&A transactions. As a result, we ranked in the top 10 of global M&A lead table for the nine months through September.

Please turn to page 14 for an overview of expenses. Firmwide non-interest expenses were JPY285.4 billion, up 2% from last quarter. Compensation and benefits, commissions and floor brokerage and information processing and communications were all roughly unchanged from last quarter. Occupancy and related depreciation increased 12% due to one-off cost related to office relocation from Nihonbashi to Toyosu. In other expenses, we reported an increase in expenses related to legacy transactions and consultant fees.

Next, our financial position on page 15. Our balance sheet at the end of September was JPY42.7 trillion, up JPY1.1 trillion from the end of June, due mainly to repo transactions. As shown on the bottom left, our Tier 1 capital ratio at the end of September was 19.3% and our CET1 capital ratio was 17.2%, both up from the end of June. The numerator in the equation, capital remained roughly unchanged, while the denominator risk assets declined about JPY1.3 trillion to JPY14.8 trillion, due mainly to credit spread tightening and lower market risk by acquisition [Phonetic] reductions.

The red line graph on the bottom right shows Net Level 3 -- Net Level 3 assets as a percentage of Tier 1 capital at 16%, which has trended down from the peak of 28% at the end of March. This is because Tier 1 capital has increased since March. And we have sold off Level 3 assets, mainly securitized products, credit and loan-related positions.

That concludes the overview of our second quarter results. In the second quarter as market tailwinds eased compared to the first quarter, we started to see results from our efforts to realign our business platform last year, which is leading to improved underlying profitability.

For instance, in wholesale, our business portfolio realignment and focused on areas of competitive strength resulted in continued strong revenues. Although each quarter we see stronger or weaker performance at each product level, we are benefiting from an overall portfolio effect. Even compared to our US peers who announced results earlier this month, we have demonstrated that our very strong first quarter was not a one-off.

There are a number of macro events ahead, such as the US elections and Brexit. Central banks are continuing with monetary easing. And we expect a certain level of activity to continue into the end of the year.

Wholesale revenue performance in October has remained at second quarter levels. We will continue to provide liquidity and support -- and support our growth strategies, while stringently controlling risk and the costs.

In retail, following the realignment of our channels we have enhanced our approaches to clients and proposals. For instance, in the corporate and owner space we are actively using email, videos and webinars going beyond the division and company to enhance our content for clients, while increasing relations and touch points. This has resulted in a more than doubling of average new client on boarding compared to the second half of last year.

We have also seen a large increase in transactions involving head office support functions. In the mass affluent space, the volume of email content and use of online tools has grown significantly leading to an increase in the number of active clients. In October, we have maintained revenues at second quarter levels. We will continue to work on new initiatives.

Globally the second wave of the pandemic has become series in some regions and we must remain vigilant. We will continue to prioritize the safety of our clients, communities and people, while ensuring business continuity as a financial institution participating in the capital markets. Thank you.

Questions and Answers:

Operator

You are now in a Q&A session. [Operator Instructions] The first question will be by Watanabe San [Phonetic] of Daiwa Securities. Please go ahead, Watanabe San.

Kazuki Watanabe -- Daiwa Securities -- Analyst

This is Watanabe of Daiwa Securities. I have two questions. First of all, on page 15 of the material, on capital. Risk assets in comparison to the previous quarter declined by JPY1.3 trillion, what was the factor behind? And you did not conduct a buyback, what was the reason? With share prices low, the environment was favorable, but why didn't you conduct a buyback?

Secondly, on page 12. On global market, equity in comparison to your US peers, you achieved strong momentum. It seems that you did well, especially in the United States. What were the factors behind? And do you think that this trend is sustainable? Those are my two questions. Thank you.

Takumi Kitamura -- Executive Managing Director and Chief Financial Officer

Thank you very much for the question. First of all, on your initial question, RWA. The reason why RWA declined, the big factor is reduction of market risk. At the end of March there was a rebound of the market and RWA increased sharply, but we saw the calming down of the market after the dislocation in March, which is well known to you. The average of 60 days is the indicator we use and March, April market dislocation impact disappeared. So that is the major reason. And around March risk origination position, which was incurring losses declined and that has contributed to the reduction of RWA.

The second question is on the reasons why we did not conduct buyback. As we mentioned at the previous Investor Day, our US peers have also decided not to do share buyback. And on daily basis in the western countries there has been increasing new cases of COVID-19. So we cannot loosen our grips at the momentum. We're not saying we're bearish, but dividend of JPY20 has been announced. So we are offering benefits to our shareholders. JPY20 is the third highest interim dividend and in the past 10 years, it's been the highest interim dividend. So in that sense, we feel that the momentum -- the high momentum will be sustained in Q3. So we've committed to total payout ratio of 50% and higher. So if we find the right timing, we would like to conduct a share buyback.

Finally, strength in equity, especially in the US market, what's the reason? Why and whether we feel that this trend is sustainable? US equity market with the approaching presidential election, the hedge requirement of investors increased quite significantly, and there was strong appetite. As we've been saying, we have a great team in the United States looking after equity derivatives and thinking around [Indecipherable] there has been many inquiries and orders from our customers. So there was active flow from our customers and from that flow we were able to lead to market making and risk revenue. We took a very good position to capture the opportunities.

So will this trend continue in the months ahead? Of course, it would partly depend on the market, but in terms of the strength of franchise, we are quite confident of the robustness of the franchise. We have a diverse customer platform as well as diverse product lineup. So we don't know will the share prices will go up or down, but in different phases of the equity market we think that we can capture the opportunities in the derivative market. I hope I answered your question.

Kazuki Watanabe -- Daiwa Securities -- Analyst

Thank you very much. I have a follow-up question on the first point, on buyback. Are you saying that total payout ratio of 50% will be delivered by the end of this fiscal year? And at the results announcement for Q1 you said that, rather than the quarterly results you would like to consider Q2 and Q3 and Q4 together to speak about the shareholder benefits, but does that policy still hold true?

Takumi Kitamura -- Executive Managing Director and Chief Financial Officer

When I said by the end of the fiscal year, that means by the time we announced the yearly results. So by the time we announced the fiscal year results we want to fulfill our commitment of 50% total payout ratio. First half and year-end results will serve as the basis and that philosophy remains unchanged. Thank you very much.

Operator

Next we have Mr. Nakamura from Goldman Sachs, Japan. Mr. Nakamura, please.

Nakamura -- Goldman Sachs, Japan -- Analyst

Thank you very much for taking my questions. I'm Nakamura from Goldman Sachs, Japan. I have two questions. First question. This was also a question in the first quarter results teleconference. It seems that cost control is effective continuously in wholesale, retail, asset management. Will tight cost control continue? Is it possible to continue cost control in these segments? Or with the normalization of business operations will there be worsening in terms of cost control? That is my first question.

And the second question is with respect to investment banking. I believe ECM was very strong, ECM DCM M&A based on the pipeline that you have right now, could you share with us your outlook toward the second half of the year?

Takumi Kitamura -- Executive Managing Director and Chief Financial Officer

Thank you for your questions. First regarding cost reduction. We committed to reducing cost by JPY140 billion and we have achieved about 85% of that recently, which means that we still have to reduce the remaining 50% in cost. We would like to make sure that that is achieved. That is number one. Because of COVID pandemic business acceleration cost and other costs declined. Perhaps, I don't think we will go back to the situation before in terms of cost, even after normalization of economic activities we do not anticipate our cost going back to the levels before the pandemic. Because of COVID-19 these things have undergone a major change and we have to have a cost structure that is in alignment with the new normal. So we will continue to tightly manage cost. And to adapt to new normal, of course, I think there will be necessary investments. But overall, we will continue to control cost tightly.

Regarding your second question, ECM DCM and mergers and acquisitions and pipeline. Worldwide interest rates are low and there is impact from the pandemic and there is a strong need on the part of our customers to have ample cash on hand. And I think there will continue to be funding needs for that purpose.

As I mentioned in the first quarter result announcement session, first fixed income and then to raise a fund with capital nature. I think those activities will continue. Regarding mergers and acquisitions, as there are dislocations in the economy to adapt to economic changes, business growth is through mergers and acquisitions and business reorganization or transformation through M&A are showing even stronger appetite then before, we see stronger appetite in these respects than before. And I believe actual developments that we see recently reflects this.

As a matter of fact, in Japan, we have received inquiries regarding M&A, which is about 20%, 30% greater than usual years. In view of the new normal, I think that there will continue to be strong needs for ECM, DCM and M&A. I don't think the strong performance in these areas is not transient. I don't think it is transient.

Nakamura -- Goldman Sachs, Japan -- Analyst

Thank you very much for those answers.

Operator

Next question is by Otsuka San [Phonetic] of JP Morgan Securities. Please go ahead, Otsuka San.

Wataru Otsuka -- JP Morgan -- Analyst

Thank you. This is Otsuka of JP Morgan Securities. I have two questions. But let me ask one by one, because they are on different topics. Is that agreeable?

Takumi Kitamura -- Executive Managing Director and Chief Financial Officer

Yes. Please go ahead.

Wataru Otsuka -- JP Morgan -- Analyst

First question is on retail, page seven. I understand this page, but I wanted to learn about more details. Other security brokerages are announcing flash reports, but Q-on-Q income improvement was quite robust. In corona there was a slump in Q1, so that is one of the reasons for the recovery, but sales and income balance -- the results were strong. So can you elaborate on the backdrop to this strong result?

Takumi Kitamura -- Executive Managing Director and Chief Financial Officer

Thank you. I'm not in the position to speak about our peers, but there are some compounded elements that had led to these results. Of course, the market is fair to all players, so we face the same market as do our peers. In Q1 there was constrained in our sales activities, especially, in retail. And of course, things have not come back to where it was, but activity has recovered to probably 50% of the original level, so that was a big element. And also non-face to face approach to our customers have taken root, because our employees skills have improved in making those virtual contacts. The number of emails, the number of phone calls are being monitored and we are seeing that the frequency is quite high and the number of calls and emails is quite high, which is also a positive effect. Even if our employees did not meet face to face with their customers, by converting with them they would be able to capture their requirements. So that's one differentiation that we have against net security companies. And also last year we engaged in a channel realignment which has delivered results. So the level of expertise in each area has been elevated.

In corporate owners the average number of new customers in comparison to the second half of last year has reached double. So in comparison to pre-COVID-19, we've been able to cultivate double the number of such customers. So I think the skills have improved. And also high net worth customers, in the midst of low interest rate, how can they ensure the work for the future and how again they increase their work, that kind of demand is stronger on the part of our customers. And the number of people who need our services is increasing. So those different elements have come together to achieve these second quarter results, which may be relatively better than our peers. But we're still midway in terms of the reform, but the effect of the initiatives that we have done so far is probably beginning to deliver results.

Wataru Otsuka -- JP Morgan -- Analyst

This is Otsuka speaking. Thank you very much. For retail, can you speak about October. You said wholesale did well in October, but does the same apply to retail.

Takumi Kitamura -- Executive Managing Director and Chief Financial Officer

This is Kitamura speaking. October was as good as second quarter.

Wataru Otsuka -- JP Morgan -- Analyst

This is Otsuka speaking. Thank you very much. Sorry for asking the same question. But this is on buyback. I do understand what you said, and we have to think about it in the unit of fiscal year. And your commitment is 50% total payout ratio, we understand that, but no one can foresee how the market will fare in the second half. So if there is a deterioration in the markets in the second half. You may confront an environment where you are disabled from conducting buyback. So rather than waiting, [Indecipherable] it have been better if you had done buyback, while you performance was good in the first half. So my point is especially in comparison to your American peers, the continuity of income generation, you say it's not one time off, you say that the current robustness of the franchise will deliver results regardless of how the market will fare. Equity, fixed income, the US brokerages have seen decline in performance, but you're doing well. So is it correct to consider that because you're confident about the months ahead and years ahead, that you are going to be considering share buyback in the unit or time spent of one fiscal year.

Takumi Kitamura -- Executive Managing Director and Chief Financial Officer

This is Kitamura speaking. How do we perceive the second half market? How do we perceive the sustainability of our revenue and income? I think that was the chest of your question. And in that context the current momentum should continue, that is our assumption. We have a stronger customer franchise and we think that the current environment is, the market is sustainable and transformation of the retail business has gradually begun to deliver results. So on a full year basis, we think that we will be able to deliver a certain level of performance.

Wataru Otsuka -- JP Morgan -- Analyst

This is Otsuka. Thank you. Then you will be judging from the performance in share prices to consider buyback, is that correct?

Takumi Kitamura -- Executive Managing Director and Chief Financial Officer

This is Kitamura. Yes, that's correct. Otsuka, again, thank you very much for your responses.

Operator

Next question is from Mr. Muraki of SMBC Nikko Securities. Mr. Muraki, please.

Masao Muraki -- SMBC Nikko Securities -- Analyst

Thank you. I have two questions. First question is related to fixed income. The US peers were strong in commodities, but you do not have commodities. And I believe that the share has increased in fixed income, how do you analyze the situation furthermore regarding the future outlook? Amongst the US peers because of COVID-19 there is an expectation of fund raising as a result of mergers and acquisitions or trading revenue may be supported the year after next because of the change in indices. So next year and onward what do you expect in terms of customer activities that will support your fixed income business.

The second question is about capital adequacy. How do you view capital adequacy? Risk has been reduced significantly and capital ratio has improved. On the other hand, Basel III finalization was deferred and the Fed has changed the definition of NSFR, these are the recent developments. And in the future because of the review of these criteria or introduction of these criteria, Nomura may be able to benefit from that. And how do you view your current capital adequacy level? Has your view changed?

Kazuki Watanabe -- Daiwa Securities -- Analyst

Thank you for your question. First was about fixed income. In that regard, government bond trading in comparison to the first quarter was slightly down, on the other hand, because of decline in interest rate agency mortgages were very strong. In the FX, Asian currency and dollar relations, when we look at the relationship, I think the direction was very clear. In these areas we were able to generate revenues. We are not like US peers, where they have [Indecipherable] businesses. We are focused on areas where we are strong. And I think that's why we were able to achieve strong results.

How are we looking at the business environment going forward. I believe your question was, what our outlook is? As for interest rate volatilities, we believe that volatility has come down. On the other hand, because of our large fiscal expansion, government bond supply will continue to be at high level in many countries. As a matter of fact, in Europe, many countries are issuing government bonds and we are involved in underwriting of some of these. And we expect a certain level of activities to continue.

As Muraki San [Phonetic] pointed out, there is a transition from LIBOR to a new index to [Indecipherable] to what extent. It is not clear to me yet, but the change in the index may support [Indecipherable] support to full rates. As for agency, I mentioned that we had strong result and although yield has come down, but looking at the world, we have very few products that offer yield -- positive yield as customers in Japan, customers in Asia are looking for yield and are showing strong demand for agency mortgages. We believe that this will continue. In the first quarter next year we believe that this strong environment will continue.

Now turning to your second question regarding capital adequacy. It seems that market has come down substantially. Our Tier 1 ratio and leverage ratio have recovered significantly as well. Regarding NSFR final proposal in the United States and you have raised that in your question. In comparison to the rule we have before regarding the government bonds the haircut [Phonetic] ratio was reduced from 5% to 0%. And in some ways, there are revisions that are favorable to financial institutions. For US treasury trading, I believe this is going to be a positive factor. Regarding NSFR calculation, for us this is also going to be positive. And going forward finalization of NSFR in Japan is expected. That is my understanding. Whether it will be similar to the changes in the United States, we would like to continue to watch carefully, including by maintaining consultations with Japanese FSA. As for Tier 1 ratio, it is over 90% recently. It seems that it's an ample level. Of course FRTB is expected in 2023 and this is a major factor for us as we have been saying. But the current level of 19.8% seems to be sufficiently ample. Thank you.

Masao Muraki -- SMBC Nikko Securities -- Analyst

Thank you for your answer. Regarding the sufficiently ample level of capital adequacy, like Morgan Stanley some of the excess capital might be used to purchase online broker or asset manager, these are the recent trends. Do you expect more mergers or acquisitions by customers. But what is your appetite with respect to your own mergers and acquisitions, have that changed as a result of COVID-19.

Takumi Kitamura -- Executive Managing Director and Chief Financial Officer

The answer. We neither agree or deny regarding M&A prospects. If there are good deals, we are willing to buy, but of course, we have to look at profitability and in terms of the use of capital is it a good way to use capital. There is also a goodwill implications. So we cannot be reckless in terms of mergers and acquisitions. But if the question is, whether we have appetite for M&A? The answer is yes.

Masao Muraki -- SMBC Nikko Securities -- Analyst

Thank you for your answers.

Operator

The next question will be by Tsujino of Mitsubishi UFJ Morgan Stanley Securities. Mr. Tsujino, please go ahead.

Natsumu Tsujino -- Mitsubishi UFJ Morgan Stanley Securities -- Analyst

Thank you very much. I have three simple questions on numbers. First of all, you are doing well in the United States in terms of income. So the effective tax rate has been reduced as a result. But under the US tax regulations, how do you think -- do you think that this income level can be sustained? Secondly, on shareholders' equity AOCI minus, the negative number has increased by a few 10s of billions, JPY88.7 billion. So that's my second question. FIC -- the third question is on FIC. You shared with us you're up -- quite bright prospects, share is increasing, but do you think that you will be able to further increase your share in this area?

Takumi Kitamura -- Executive Managing Director and Chief Financial Officer

This is Kitamura speaking. First of all on the carry over in the United States, NOL of the United States. End of March, it was slightly less than JPY120 billion, so that's plenty still remaining. OCI negative -- this is OCA of our own proprietary bonds. Mark-to-market from our own bonds, We used to put that in our P&L, but since a few years ago we Included in the other comprehensive income. Our credit spread tightened in the previous quarter, so we saw some increase in the negative number here.

Further, can we further improve share. As I said already, the area where we compete is very focused. We're quite selective, so for those products to which we are placing focus, I think there is room for increase in share, but if we think about the general US fixed income market, it would depend, some products are doing well in some phases, some are not in certain phases. If we look at US fixed income in general, to what extent can we do better? Frankly speaking, it's difficult to answer that kind of question. But one of our competitive advantages is strong franchise as I said, but we have another competitive edge. And that is access to individual financial assets of Japanese JPY1,900 trillion is the estimated number in terms of individual financial assets. We are introducing not only Japanese products, but products from overseas. And investors are gradually beginning to focus on such products as well.

And of course, COVID-19 still is an issue, but Japanese businesses still have strong capital foundation. And from the investment or asset management perspective Asian and US products may be a good destination for such investments. So we are a financial institution in Asia, so we can take advantage of our competitive edge in Japan and in Asia. And such risk many [Phonetic] can be funneled into the Americas, and from such perspective, we might have relative advantage. So for certain products from such perspectives, we still believe that our share could be upgraded. Thank you.

Natsumu Tsujino -- Mitsubishi UFJ Morgan Stanley Securities -- Analyst

Thank you very much for your response.

Operator

[Operator Instructions] We have Mr. Niwa from Citigroup, Japan. Mr. Niwa, please.

Koichi Niwa -- Citigroup -- Analyst

This is Niwa from Citi. Can you hear me?

Takumi Kitamura -- Executive Managing Director and Chief Financial Officer

Yes, we can hear you.

Koichi Niwa -- Citigroup -- Analyst

Thank you. I have two questions. First, capital adequacy ratio and -- So regarding the first question of capital adequacy, Japanese authority and globally as well, under stress test the view on capital adequacy is regarded as important. Under the stress the scenario, if you have any estimates, could you share that with us? For example, under DoJ [Phonetic] financial reports the severe financial market downside risk has to be included -- is included in coming up with the estimate. I understand that there is a difference between Commercial Bank. But in the stress test scenario, do you believe that you still have sufficient capital adequacy level based on internal model.

And second is related to question by Mr. Muraki in organic growth. Generally speaking, what are the functions that you consider necessary that you would like to acquire through mergers and acquisitions. And through M&A, is Nomura willing to take on a major challenge again? And regarding asset management business, there are some consolidations globally. What is your view regarding asset management business?

Takumi Kitamura -- Executive Managing Director and Chief Financial Officer

Thank you for your questions. First, about the stress test. Of course, we run stress scenarios, but impact is not disclosed publicly. I would like to refrain from disclosing that information. Tier 1 ratio is over 90% of late, and I'm serving as Chief Financial Officer. As CFO I would say that, we will have to apply quite a realistic stress scenario to bridge our appetite. I think if I can make it in this way, I believe you will be able to have a better picture.

Second question was about inorganic growth. Last April IB Boutique Greentech was acquired, but because of COVID pandemic the launch was somewhat slow, but gradually with Greentech, Nomura are working together on transactions in increasing number recently, selecting on certain things. In that sense boutiques can be attractive. As for the size of the acquisition, in the past M&A we have had a much lessons learned. As of now, we do not anticipate an extremely large deal. Regarding asset management business, within the industry, in Japan, as well as outside of Japan, there are some consolidations under way and we are aware of that.

Regarding asset management AUM and the targets for 2023 is JPY65 trillion. Through organic growth, we believe that we can achieve this target. But beyond that, what should we aim for, of course, we are discussing that within ourselves. Nomura Asset Management and ACI in which we have equity investment. And during the next five to 10 years in the asset management industry we are discussing what our position should be with in [Indecipherable] and ACI. It's not a clear cut answer to your question, it's not that we are not thinking about M&A, but we are not extremely aggressive about M&A, either. We are flexibly thinking about these things.

Koichi Niwa -- Citigroup -- Analyst

Thank you for your response.

Operator

The next question is by [Indecipherable] of Jeffrey Securities. Please go ahead.

Unidentified Participant

Thank you very much. This is [Indecipherable] speaking. I have one question. And this is about wholesale and your prospects of the wholesale business. Can you give us the differences by region. First of all, Europe. If we look at the quarterly basis, they has been negative in certain countries. Global Markets fixed-income revenue has normalized according to your comment, but with the second name and more new cases are discovered, what's the downside risk and PBT forecast for the European region? And how do you intend to minimize the downside risk, they have such a strategy. That's my first point.

And secondly, this is not limited to Europe. But according to your comments, in terms of region, real estate and global PBT accounting for more than half. In Japan, resumption of the economic growth and financing of Japanese businesses, there seems to be some time lag in Japan, but do you think that the ratio of the global market or overseas regions will continue to grow. Or do you think that you will see a comeback of Japanese businesses or rebound of contribution by Japanese businesses. Can you speak about the PBT by region?

Takumi Kitamura -- Executive Managing Director and Chief Financial Officer

This is Kitamura speaking. First of all, on Europe. In Q2, losses had been incurred. I touched upon this slightly when I spoke of costs. There had been realization of expenses pertaining to past transactions in Europe. This is a legacy item that happened a long time ago. If we exclude this, we would have recorded profits, even for Europe. Although this is hypothetical, but business in Q1 -- Q1 Europe was doing very well, but in the second quarter in comparison to the first quarter it was normalization. And another factor was the summer vacation season. ECB's performance was not so bad, but -- and also the underwriting of sovereigns, there was much activity, so our London office and about [Indecipherable] of various countries and they supported and were engaged in sovereign issuance of various countries.

So in this context, your question was on downside risk, but that exists in the REITs business. So the impact would be rather limited, frankly speaking. As we have said in the past, credit business in Europe is shrinking. So in the universe of credit, you talked about COVID-19 second wave, which may impact the credit business, but the REITs business, frankly speaking, I don't think there is much downside risk.

On your second point. How shall I described, by chance non-Japan accounted for about half. But we're not being that particular about breakdown between Japan versus International. If we think about the fee pool, US is a gigantic market accounting for 50% of the fee pool. So the ratio of the United States within Nomura will naturally go up going ahead, but needless to say, it is in Japan where we have our strongest franchise [Indecipherable] ECM and DCM and [Indecipherable] depending on how many are in the pipeline, that ratio could change. We don't have any policy with regards to the ratio of Japan needing to be this percentage or US needing to account for certain percentage of our income, we don't have that indicator.

Unidentified Participant

Thank you Mr. Kitamura. But what about the level of activities. Do you think that activities in Japan will catch-up with other regions. You talked about the pipeline, but how do you foresee the number of deals in the Japanese market in the pipeline in comparison to other regions and countries. Do you think that the number of deals could increase?

This is Kitamura. In the IB business, we have the strongest franchise in Japan. So we closely monitor the changes. If we look at the M&A, we see an increase of --increase by 20% to 30% and it depends on the timing of measurement, but I think there is a likelihood that the ratio of Japan could go up.

Koichi Niwa -- Citigroup -- Analyst

Thank you very much for your answer.

Operator

It is almost our schedule time to end. We will take one last question. We have Sasaki from Bank of America. Mr. Sasaki, please.

Futoshi Sasaki -- Bank of America Merrill Lynch -- Analyst

Thank you. This is Sasaki from Bank of America. Thank you for taking my question. Regarding firewall regulation in Japan. It seems that there is a trend that is going negative.

Takumi Kitamura -- Executive Managing Director and Chief Financial Officer

Mr Sasaki. I'm sorry, your voice is breaking, I understand that you've mentioned the firewall.

Futoshi Sasaki -- Bank of America Merrill Lynch -- Analyst

This is Sasaki speaking. If discussion develop in a way that is advantageous to the banks. What will be the impact, will there be impact or not on Japan business where you have strong franchise.

Takumi Kitamura -- Executive Managing Director and Chief Financial Officer

Thank you for your questions. There is much report on the newspaper these days of firewall regulation. Convenience for the customer, development of healthy capital market, that are primarily what should be discussed. For the development and growth of healthy capital market, including the way corporate information is handled. There is much that is needed to be discussed, but for convenience of the customers that will be good for the customers. And in order to grow Japanese capital market further and there is a talk of making Tokyo a Financial Center. So what needs to be done is an area that requires much discussion going forward.

Futoshi Sasaki -- Bank of America Merrill Lynch -- Analyst

Thank you for your response.

Operator

This concludes the Q&A session. Questions can be accepted by IR division of Nomura Holdings. There will now be closing remarks.

Takumi Kitamura -- Executive Managing Director and Chief Financial Officer

This is Kitamura speaking. Thank you for staying with us until late in the evening. In Q1, there was the big tailwind in the first quarter, as we explained. So we were blessed by that strong positive tailwind, but the tailwind wasn't as strong in the second quarter, but even then we were able to achieve a certain level even in wholesale, which is due to our strong franchise. And in retail realignment of our channel gradually is bringing about results. But we will not stop. This is not the end and we are continuing our debate over transformation and continued reform. We hope that you understood the point that Nomura is changing and will continue to change. And we truly would appreciate if you could with affection continue to cover and monitor Nomura. Thank you again for joining us.

Operator

[Operator Closing Remarks]

Duration: 73 minutes

Call participants:

Takumi Kitamura -- Executive Managing Director and Chief Financial Officer

Kazuki Watanabe -- Daiwa Securities -- Analyst

Nakamura -- Goldman Sachs, Japan -- Analyst

Wataru Otsuka -- JP Morgan -- Analyst

Masao Muraki -- SMBC Nikko Securities -- Analyst

Natsumu Tsujino -- Mitsubishi UFJ Morgan Stanley Securities -- Analyst

Koichi Niwa -- Citigroup -- Analyst

Unidentified Participant

Futoshi Sasaki -- Bank of America Merrill Lynch -- Analyst

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