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Nomura Holdings Inc (NYSE:NMR)
Q1 2022 Earnings Call
Jul 30, 2021, 3:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

Good evening, this is Takumi Kitamura, CFO of Nomura Holdings. Now, for our first quarter results of the fiscal year ending March 2022, I'm using the document titled Consolidated Results of Operations.

Please turn to Page 2. Net revenue increased 108% quarter-on-quarter to JPY353.3 billion, while income before income taxes improved to JPY78.5 billion as shown on the top right.

Three segment income before income taxes was JPY35.6 billion recovering from a loss last quarter due to two main reasons. First, Investment Management established in April this year made a significant contribution, and second, Wholesale performance improved. Wholesale performance was again impacted this quarter by transactions with a U.S. client last quarter, but we exited all our positions in May.

Fixed Income revenue grew quarter on quarter, while strong momentum in Investment Banking continued. Segment Other, income before income taxes was JPY39.6 billion, representing an increase of around JPY100 billion from last quarter's loss. Last quarter we also booked an impairment charge of JPY47.7 billion in Nomura Real Estate Holdings. That was no longer present this quarter and in June we booked a realized gain of JPY36.2 billion from the sale of part of our stake in Nomura Research Institute. Net income was JPY48.5 billion, annualized ROE was 7.1% and EPS was JPY15.69 -- JPY15.59, sorry.

Now, let's take a closer look at each business, starting with Retail on Page 5. Retail first quarter net revenue declined 12% to JPY85 billion, while income before income taxes down 27% to JPY19 billion. Retail clients remained on the sidelines due to another wave of the pandemic and a slump in equity markets in early May, pushing down sales of stocks and investment trusts.

Despite this, we continued to make progress in our efforts to expand client assets. As shown on the top right, net inflows of cash and securities was positive JPY470 billion, and the Retail client assets hit a record high of JPY127 trillion. The top right of Page 6 shows investment trust net inflows of JPY89.2 billion, representing another quarter of net purchases.

Discretionary investments had been trending down for a while, but that started bottoming out in November last year when we introduced CIO services and this quarter we reported net inflows of JPY78.5 billion. This combined with market factors to lift recurring revenue assets to JPY19.1 trillion and recurring revenue to JPY25.2 billion, marking the highest levels since we started monitoring these indicators.

Growth of consulting-related revenue, shown on the bottom left, was sluggish given the restrictions on face-to-face services, but the number of active clients, shown to the bottom right, is trending smoothly at 500,000.

Now Page 7. As you may know, we dissolved the Asset Management and Merchant Banking divisions and created the new Investment Management division on April 1. The graph on the top left here shows a reclassification of past figures under the new disclosure format to make it easier for comparisons.

Business revenue includes relatively stable revenues such as from the Asset Management business and Nomura Babcock & Brown's aircraft leasing business.

Investment gain/loss includes, gain/loss related to American Century Investments, private equity investment gain/loss, and mark-to-market gain/loss for securities held under Investment Management. As such, this figure is subject to fluctuation depending on changes in fair value and investment exits.

First quarter net revenue in Investment Management increased 17% to JPY63.5 billion, while income before income taxes grew 27% to JPY44.9 billion. This performance was driven by investment gain/loss which came in at JPY35.5 billion, a 47% rise over last quarter. We booked a total of JPY24 billion in realized and unrealized gains on the IPO of Nomura Capital Partners investee company at the end of June.

ACI related gain/loss contributed around JPY13 billion this quarter. Business revenue was down 6% at JPY28 billion. In the January to March quarter, there was an overlap in the timing of recognizing performance fees, which meant there was extra performance fees booked last quarter. As shown on the bottom left, inflows boosted assets under management to a record high of JPY65.8 trillion and asset management fees increased.

Please turn to page 8. The graph on the top left shows inflows into our investment trust business and the investment advisory and international business, giving total inflows of JPY474 billion.

A breakdown for the investment trust business is shown on the bottom left. Core investment trust flows, which exclude ETFs and MRFs, had been negative through to the last quarter, but turned positive this quarter, due partly to the bank channel showed on the top line -- right. Inflows this quarter centered on ESG-related products, and Wealth Square, which provides fund wraps, saw an increase in assets under management.

The graph on the bottom right shows alternative assets under management, which we have grown steadily and were JPY634 billion at the end of June.

Please turn to Page 9 for Wholesale. As shown on the top left, net revenue was JPY132.8 billion and loss before income taxes was JPY28.4 billion. As I said earlier, performance was significantly impacted by an additional loss of JPY65.4 billion arising from transactions with a U.S. client. Of this, JPY56.1 billion was booked as a trading loss in Equities revenues and the remaining JPY9.3 billion was booked as loan loss provisions in expenses.

The regional breakdown of net revenue on the bottom left shows the Americas was largely affected. While revenues in Japan and AEJ slowed quarter-on-quarter, EMEA delivered steady revenues driven by Rates.

Please turn to Page 10 for a breakdown by business line. Global Markets net revenue improved from last quarter to JPY97.2 billion, declining 8% excluding the trading loss related to transactions with a U.S. client.

Cash Equities and Derivatives both slowed due to a drop in volatility and lower trading volumes. As the heat map on the top right shows, AEJ and Japan are both pointing down.

Fixed Income revenues increased to JPY88.1 billion driven by spread products such as Credit and Securitized Products. The heat map shows a strong performance in Securitized Products in the Americas and higher Credit revenues in Japan as we tapped into the demand for yield. AEJ Credit had a good quarter but FX and emerging, EM, slowed and the arrow is pointing down.

Next, Investment Banking. Please turn to Page 11. Net revenue was JPY35.5 billion, marking the third strong quarter with revenues over JPY35 billion. M&A had another strong quarter and we supported multiple cross-border and sustainability-related deals driven by Nomura Greentech. ECM and DCM revenues also increased.

Key deals are shown on the right. We supported a diverse range of fundraising this quarter. We are seeing results from strategic alliances shown on the bottom right. We won multiple co-lead manager mandates in Americas ECM through alliance with Wolfe Research. Our alliance with Jarden in Australia and New Zealand announced in May, got off to a good start as we executed the first deal already.

Please turn to Page 12 for an overview of non-interest expenses. Total non-interest expenses declined 18% to JPY274.7 billion. Other expenses dropped by about JPY90 billion to JPY48.2 billion as loan loss provisions related to a U.S. client transactions declined by JPY32 billion. And the JPY47.7 billion impairment charge on an affiliate booked last quarter was not present this quarter. Compensation and benefits rose about 40% in line with pay for performance.

Please turn to Page 13 for our financial position. The table on the bottom left show Tier 1 capital at JPY3 trillion, up JPY150 billion from the end of March, due mainly to higher retained earnings and the issuance of additional Tier 1 bonds.

Risk-weighted assets declined JPY1.2 trillion from the end of March to JPY14.7 trillion as market risk declined due to a drop in volatility and we stringently risk managed our positions, and also due to lower credit risk.

As a result, our June-end Tier 1 capital ratio was 20.3% and CET1 ratio was 17.7%, both improving markedly.

That concludes today's overview of our first quarter financial results.

To conclude, this quarter saw a number of positives despite slowing from the year ended March 2021.

Investment Management division newly established in April plays a key role in our strategy to expand into the private markets and this quarter a private equity investee company listed and we saw a strong contribution to earnings.

Retail reported a decline in brokerage fees due to the market, but investment trusts and discretionary investments grew each month and recurring revenue reached a record high. Recurring revenue accounted for about 30% of Retail revenues and has grown to around JPY100 billion on an annualized basis, highlighting the transformation of our revenue mix into a more stable one.

Recent performance in July has slowed slightly due to macroeconomic uncertainty over the recent wave of the pandemic, but we will continue to make effective approach by segment to meet the needs of our Retail clients.

Wholesale performance has normalized from the very strong prior fiscal year, but Global Markets revenue are trending above where they were in the fiscal year ended March 2020, before the pandemic.

Investment Banking maintained strong momentum driven by M&A. Excluding the U.S. loss, Wholesale income before income taxes was JPY37 billion, or JPY150 billion on an annualized basis, trending in line with our March 2023 target.

Recent market activity has been muted due to macroeconomic risks related to the Delta variant. And low liquidity and volatility can tend to spike in this slower summer months. In July, we have taken a prudent approach to risk taking and the second quarter has gotten off to a slower start than the first, but we remain optimistic.

There are a lot of activities out there to prompt investors to rebalance their portfolios such as the full restart of the economy, expectations of inflation, and talk of tapering by the central banks. We expect to see structural changes once the pandemic is over and push to pursue growth opportunities.

Our management vision announced last year to achieve sustainable growth by helping resolve social issue remains unchanged. We will also focus on building out in private markets in addition to public, and work to take the firm to the next level. Thank you very much.

Questions and Answers:

Unidentified Speaker

Now the first question comes from Mr. Muraki of SMBC Nikko. Mr. Muraki, please go ahead.

Masao Muraki -- SMBC Nikko Securities, Inc. -- Analyst

Thank you. This is Muraki from SMBC. I have two questions. First, revenue from the markets department, Page 10, top left Fixed Income on a year-on-year basis is in line with U.S. peers, for Equities are slightly weaker compared with U.S. peers, but how do you evaluate the performance of the first quarter? Also, after August, what kind of situation will create another downside? Could you elaborate on your outlook? That is my first question. My second question goes a bit away from the financial reports, but I would like to ask a question about the enhancement of risk management. Yesterday Credit Suisse publicized the report more than 100 pages, and looking at the content of their report, it appears that if the exposure exceeds limit by more than 20 times -- well the exposure exceeding the limit by 20 times. And that was left for a long time and that was identified as the cost. But looking at your securities report, liquidity risk was monitored and if the limit is exceeded, then immediately action is going to be taken. That is the wording that was newly added. So, market risk and credit risk and liquidity risk, if the limits are breached, what kind of specific procedures is in place in your case for enhancement of monitoring or escalation to the management? And also what is the time frame before you make disclosure? What is the procedure that you have put into place, could you disclose on those as much as possible? Thank you.

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

Thank you very much. This is Kitamura. Regarding your first question regarding the Global Markets revenue, how do we evaluate the Global Markets revenue in the first quarter? So, as Mr. Muraki you said, for Fixed Income our performance is in line with our U.S. peers, especially when it comes to our core business which is Rates business. The Rates business declined in -- as the markets normalized. So as the market normalized, our Rates revenue was also normalized. And that's our evaluation.

Equity business is underperforming somewhat, however excluding the impact from the incident in the USA, Wholesales overall performance is that bottom line is JPY37 billion. This includes Investment Banking. Annualized number is JPY150 billion. This is not that bad. If anything, FY '19, '20 -- compared with FY 20 -- '19-'20 before pandemic, we are above that level now. That means we have accumulated the power. Looking at the numbers on the daily basis, we acknowledge -- we have acknowledged the difficult environment, but excluding that -- an instant in the USA, we have JPY37 billion end of bottom line profit. Our evaluation is that the performance was decent. And our outlook into the future as of now, there is mixed reviews toward the market conditions. The market moves seem quite unstable. When it comes to risk taking, we are being quite prudent. But moving forward, of course, there will be some ups and downs. We believe the environment will not be that bad. As I mentioned earlier, reopening of economy and infrastructure package announced by Biden Administration and inflation expectation triggered by them, and the tapering moves by central banks. There will be a progress in discussions on those matters. There'll be some twists and turns moving ahead, but there will be various factors that will urge investors to rebalance their positions. Current situation will not continue forever, especially the monetary easing created lots of money that have been left to be invested somewhere. Sometime in the future we will start to see the move with such funds waiting to be invested.

Regarding our future risk factors. Firstly, the Delta variant and also further deceleration of economy as a result of the spread of the virus, that is possible. Recover -- economic recoveries and yield spread widening, they are the market consensus, as of now. But the level of conviction in relation to the Indian Delta variant, depending on how it expands. The level of conviction seems to have come down and the markets interest move have become quite volatile. With the spread of infection we have -- we are carefully watching the market, when the market would become risk off. And although we are not certain, but heightened geopolitical risks is another risk factor, naturally. I spoke a lot but that is my answer to your first question.

To your second question regarding the risk management that you inquired about. At Nomura, according to our procedure and policy we have individual limits set. Limits are limits. They are not there to be breached. Our people have to follow limits. But rarely there are cases where the limits are breached. In those situations, based upon the rules that are pre-set. The second line of defense, meaning, risk management and the finance will conduct escalation. And regarding the plan to reduce exposure. Of course such reduction plan is developed by front office, the first line of defense. But the timeline for the reduction, there is a variance. But in a certain period of time, we are ensuring that we will be in line with the limit. And the regarding the market risk, credit risk, and liquidity risk, and there are various types of risks. But the -- what is the easiest to control is market risk by applying hedging, risk weighted asset can be suppressed. So, through such a measures we can properly address market risk. On the other hand, credit risk takes more time for us to address, but as I mentioned earlier, limits are stringent rules. So, if there is a case of breach then immediate action is taken. That concludes my answer. Thank you.

Masao Muraki -- SMBC Nikko Securities, Inc. -- Analyst

Thank you very much, Mr. Kitamura. Regarding, my first question. My follow-up question is regarding risk. You mentioned the geopolitical risks. But in these days, China's regulatory risk has been drawing attention. But in your case at Wholesale business or local Retail business in China, is there possibility that geopolitical risk will materialize as a true risk?

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

Thank you. This is Kitamura. The last couple of days, Chinese Equities and Hong Kong Equities have on trended in a quite volatile manner, I acknowledge that, but it does not immediately affect our business at this point in time. But the regarding this matter, we are carefully monitoring the situation. That is my answer.

Masao Muraki -- SMBC Nikko Securities, Inc. -- Analyst

Thank you very much, Mr. Kitamura for a clear answer. Thank you.

Kazuki Watanabe -- Daiwa Securities Co., Ltd. -- Analyst

This is Watanabe from Daiwa Securities. I would like to ask two questions on capital policy. First, CET1 percentage is up to 17.7%, and there is a cash-in about JPY50 billion by selling Nomura Research Institute shares. And can you tell me about your thinking around share buybacks? And next is the -- on dividends. The profit revenue, I think that has taken into consideration the losses from the U.S. incident. And so that JPY65 billion loss in the first quarter, would that be brought back in? Could you tell me your thinking of what would be the profit level of the -- or of your distributable dividends?

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

This is Kitamura. Thank you. I think your first question is why we did not conduct a share buybacks this time. Now, we had made -- we have had discussions and different considerations, and quite honestly, if I may, we just thought, this is not the right timing for share buybacks. At some point in time, as we have promised we will be conducting it, in sometime in the future. Second is on the thinking around dividend and distributable dividends and the profit. When we distributed dividends the end of last fiscal year, we had excluded the impact from the loss of the U.S. incident. So, this time it will not be consistent, if we apply it differently this time, compared to what we did end of last fiscal year. So that would actually be difficult to treat it differently this time around.

Kazuki Watanabe -- Daiwa Securities Co., Ltd. -- Analyst

This is Wantanabe. Just a confirmation. So, even if you had cash from NRI sale of JPY50 billion, you would be making considerations around, I think, in that loss from the U.S. incident?

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

So yes, we will be making that consideration.

Kazuki Watanabe -- Daiwa Securities Co., Ltd. -- Analyst

Thank you very much.

Wataru Otsuka -- J.P. Morgan Securities Japan Co., Ltd. -- Analyst

Thank you. This is Otsuka from J.P. Morgan Securities. I have two questions. My first question is about the page 7. So this is a new disclosure. The way to look at the numbers is what I want to ask about. This time the normalized capital partners investees IPO is mentioned. I believe it's about Plus Alpha Consulting JPY24 billion of gain. I'm not sure this is everything but this IPO portion, without this IPO portion, then from this gain/loss number JPY24 billion, this would have been or might have been lower than the revenue compared with the previous quarter's number of JPY54 billion. The number could have been lower than the previous quarter. Is it the right way of thinking -- looking at this number? This is my first question.

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

This is Kitamura. Thank you. JPY35.5 billion is the investment gain. If we exclude JPY24 billion, then the remaining a number, of course, will be short or smaller as you pointed out. In the previous quarter, JPY24.2 billion, the investment gain, in the previous quarter. Actually, this number partially includes the former Merchant Banking department's markup numbers. This JPY24.2 and -- number that we have JPY24 billion deducted from JPY35 billion, that is not a proper comparison. If you go back to the previous financial report, then previously what was disclosed as Asset Management division, ACI gains was JPY10 billion or so of number was booked to ACI lines. The other remaining number was included in the investment gain, previously. I hope I answered your question.

Wataru Otsuka -- J.P. Morgan Securities Japan Co., Ltd. -- Analyst

Yes, thank you very much. That was clear. Let me move on to the next question. My second question is about page 12 about personnel expense. In this most recent quarter as you show depending on the performance, on a Q-on-Q basis there has been an improvement. And this U.S. incident related loss compared with the previous quarter and this quarter excluding that loss, if we take numbers from three segments then, unfortunately, the revenue is -- sorry, a profit is down, I believe. But personnel expense is it linked to the pre-tax income?

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

Thank you, this is Kitamura speaking. Regarding the personnel expense, on a quarterly basis, well, it's difficult to look at personnel expense on a quarterly basis because of some technical factors involved, especially in the fourth quarter. For example, the bonus model. Change to bonus model could have a big concentrated effect. Compared with previous quarter, quarter-on-quarter analysis or comparison is something that doesn't match your -- our situation. Of course, as much as possible during the fiscal year or period, we are trying to equalize the volatility of P&L, however we cannot rule out such special factors. And also, our thinking about the bonus is that, of course, revenue is an important factor. But there are other factors considered as well. Q-on-Q comparison is not that easy. And especially in the first quarter, technical accounting factors are also involved. As you know, deferred compensation is grounded to our employees. And accounting impact from that tends to concentrate in the first quarter. The first quarter personnel expense tends to look big, and also there is a factor of weak Japanese Yen and other factors. My answer is not that straightforward, but there are various factors involved here.

Wataru Otsuka -- J.P. Morgan Securities Japan Co., Ltd. -- Analyst

Okay. Thank you, Mr. Kitamura. Then page 9, the expense ratio 121%. The U.S. incident excluded, then this ratio is around 80% and it's a bit high but that's linked to the factors you mentioned. So, it's volatile and the tricky?

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

Kitamura speaking. Yes. So, in the middle of the quarter, or quarter-on-quarter, the expense ratio is volatile so we should take a look at the full year number. But 80% that percentage itself, excluding various factors as Mr. Otsuka calculated and that ratio Wholesales KPI, income -- a cost-income ratio is 80%. This number is in line with the KPI of Wholesale.

Wataru Otsuka -- J.P. Morgan Securities Japan Co., Ltd. -- Analyst

Thank you very much, Mr. Kitamura for the clear answer.

Unidentified Speaker

The next question comes from Mitsubishi UFJ Morgan Stanley, Ms. Tsujino.

Natsumu Tsujino -- Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. -- Analyst

First, I have a question on the Market division. And at this time compared to the average situation last year, equity has come down. And when we look at the contents of what's going on, equity, you look at the market and comparing it with U.S. peers, you're not doing much in U.S. equities. I can see that. But for Fixed Income, what are the areas that would -- did worse than last year? Basically, when we look into the second quarter, what were the areas that you can expect improvement or do you expect this situation to continue? If you could talk about that situation, say, on different products? That would be my first question. Should we do one on one? Can you reply to that question, please?

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

This is Kitamura. The Global Markets. We have client revenues from clients and there is a risk revenue coming from flows. There is two streams of revenues or there are two components that we look at. When we look at the trading volume compared to last year, the trading in government bonds were down about 11% and as a result, the client revenue has declined somewhat because of that. And when we look at volatility, it is low compared to last year. The ask bit is a lot. The risk revenue. It has been an environment where we have not been able to get revenue from that -- given that environment. And this time around, that is this first quarter, the direction of the yield curve is -- hasn't been set. And in the middle of this quarter, we've been a return of the replacing -- replaced incent trade and because of macro factors we have seen a lower activities -- lower trading activities of our clients. Moving forward, as I've mentioned, the direction of the rates, interest rates are mixed. Will probably be mixed. But the overall trend would be that in -- there'll be inflation and the expansion of the yield spread. That is how we see it and in that environment, especially our business, especially around Fixed Income, it will be an environment where we should be able to have a better business for Fixed Income. I think the biggest catalyst would be tapering.

Natsumu Tsujino -- Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. -- Analyst

This is Tsujino. For Fixed Income, so when we look at your U.S. peers' earnings, I thought that you could have done better or higher. Compared to the peers, is there anything that is of concern to you?

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

This is Kitamura. It just so happens that we're faring similarly with what the U.S. peers did last year. Now, if you look at the first quarter, when we look at the securitized products and credit, they did well. On the other hand, for us, our strength or core business, the slowdown in Rates has been more pronounced this year. And even in that environment, our performance fairing as well as our U.S. peers, I think we could say that we've done a relatively good job.

Natsumu Tsujino -- Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. -- Analyst

This is Tsujino. Thank you very much. The valuation gained from ACI -- unrealized gain from ACI. How should we evaluate that? There are realized and unrealized portion and the unrealized gain -- realized gain of Plus Alpha. And you said that on the unrealized gain are going to be part of the distributable dividend -- I mean the profit for distributable dividend. I think since this is more of a temporary, the unrealized gain, so I don't think you will be canceling it against the U.S. incident loss. But when we see this kind of volatility in earnings. So there is a fluctuation in unrealized gains and there is a fluctuation in your actual earnings. What are -- what is your thinking around the dividends and the thinking of profits?

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

This is Kitamura. I think your first question was around how we think about the unrealized gains around ACI, and the impact to our P&L. Now ACIs earnings -- so regarding the valuation, we take into consideration what we expect for their earnings moving forward. And since they are a non-listed company. I don't know to what extent I could comment on this, but when we look at the AUM of ACI, they have been expanding. There are market factors. There is also increase in AUM by inflows. And that is the reason why we have increased our valuation there. So, there is an unrealized gain there. And evaluating ACI. The valuation of ACI, it may not be straightforward, but as I mentioned, it is a non-listed company. Therefore, when we make the valuation or valuation, we are quite conservative. Of course, it's a bit difficult to, if you ask us to prove, what it is that they do. Now we are -- even when we look at our third-party valuation entities, we do think that's the way we valuate, ACI is quite conservative. Now, the thinking around dividends. I think that was your second question. As a matter of course, since we are part of the market, of course, there will be fluctuations or -- in our P&L. But we are striving to stabilize our earnings, stabilize our revenues. That is what we've been planning. And the thinking around shareholder returns. Of course, our basic performance of our core business to be linked with that, that is -- of course that's important. In addition to that, to make as stable return -- dividend returns as possible, is also important. So that has been taking in -- on a comprehensive manner and that is how we decide our dividend amount. Now, since there is a large fluctuation and our earnings on P&L, there would be fluctuations there inevitably. But we are thinking is that we want to be able to make stable dividend payments, stable as much as possible.

Natsumu Tsujino -- Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. -- Analyst

Thank you very much.

Futoshi Sasaki -- Bank of America Securities -- Analyst

Thank you. This is Sasaki from Bank of America. Please answer to each of my question. First question is about the Retail. After July, you mentioned the current situation of Wholesale, but you didn't comment on the current situation of Retail after July. What is the current situation? And also in the first quarter performance, looking at the total sales due to COVID in the first quarter last year, the sales activities stopped and the level in the first quarter was the same as last year. So, how do you evaluate the current situation?

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

Thank you for the question. This is Kitamura. I thought I touched upon that. But let me repeat the situation of Retail in July is as follows. Because of the spread of COVID infections and concerns about that, there is uncertainty about the macroeconomic situation. The Retail division is off to a slow start in July. On the other hand, the approach by type of customers or the initiatives to expand our clients' assets, that's been our focus. Even in July, investments trusts and the discretionary investment services have continuously enjoyed net inflow.

Futoshi Sasaki -- Bank of America Securities -- Analyst

Thank you, Mr. Kitamura. Then regarding the level of total sales in the first quarter, was there any special factor that impacted the total sales level in Q1?

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

This is Kitamura. In the first quarter, our customers' activities were slow and the total sales, especially the Equities declined by 28% because of the customer staying on the sidelines. However, our business model is being transformed in a significant manner. We are single-mindedly focused on expanding the assets of clients. As a result, the decline came in that juncture. And we are not, of course, satisfied with the situation, but to a certain extent some of what happened was not avoidable. But as we continue with our initiative, once we have support from the market then necessarily we will see recovery.

Futoshi Sasaki -- Bank of America Securities -- Analyst

Thank you, Mr Kitamura. Regarding the Wholesale business, there was a loss in the U.S. incident and that, I believe, has been a challenge, but in your transactions with family offices has there been any changes that you've implemented, especially with single-family offices? No regulatory tightening has been discussed but at Nomura have you changed the way to conduct business with them?

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

Thank you. This is Kitamura speaking. Regarding the family offices, we cannot say that all family offices are to blame. We cannot generalize family offices and make a singular comment. Family -- many of our family office clients have huge assets, and in terms of the asset management and the financing and then there are various needs on their end, and the numerous global platform and numerous capabilities of making proposals and products. Those services of ours, we believe, are appropriate in satisfying the needs of those clients. On the other hand, compared with the regular investors or institutional investors, there is only so much information that we can obtain from family office clients. So, we will do what we can to obtain information from them, family office clients, and we will do the best we can in managing risks. This time they were weaknesses exposed in our risk management. So regarding that, by strengthening risk management frameworks, we would like to continue providing certain services. Regarding the regulatory tightening being discussed, I'm aware of that, but what is going to be the end result? Honestly speaking, it's something we cannot control directly, but due to the -- if the regulatory tightening urges family offices to open up and disclose more then market will become more favorable. Then regarding the regulatory trend, we will keep monitoring the regulatory trend.

Futoshi Sasaki -- Bank of America Securities -- Analyst

Thank you, Mr Kitamura. Regarding the Prime Brokerage in some regions, I believe you've downsized your Prime Brokerage in some regions. How would that hit your revenue in the future or will there be no impact?

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

This is Kitamura. The PB, Prime Brokerage business itself, it is positioned as playing a supporting role to the overall Equity business. Some Prime Brokerage business might have been downsized but the impact on our performance is limited. Nomura has strength in Japan Equities and Asian Equities and U.S. Equity derivatives. For those areas by having the -- a refined risk management, we will be continuing with those businesses. In that sense, the impact on our business or performance will be limited. Thank you.

Futoshi Sasaki -- Bank of America Securities -- Analyst

Thank you, Mr. Kitamura for your answer.

Koichi Niwa -- Citigroup Global Markets Japan Inc. -- Analyst

This is Niwa. I have two questions. On Investment Management and the thinking around personnel expenses. My question is that in the area of alternative investments, the unrealized gain and what is related to the IRR, the right-bottom in page 8. You haven't disclosed the AUM there. So, how much unrealized gain is there. And the investment period from the vintage. So, the capital gain that you've seen in this first quarter, is this a level -- the capital gain level is something that you expect to see regularly moving forward as well? Next question is around personnel expense and to acquire talent and talking about international personnel expense. So, for the new joiners or the new recruits, it seems that the pressure to higher compensation is increasing, and it seems that all the other companies are having a niche -- having troubles with that, which would be posing pressure on increased costs, and how are you going to tolerate that and when we think -- when you think about the outflow of people how -- what are you doing to retain them?

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

This is Kitamura. On your first question. The large profit came from, not from the alternative investment area. On that area, on the alternative investments, the AUM, I mean, we will -- we are investing our clients' assets to alternative products. That is a different profit. If the profits are coming from the X Merchant Banking business, and it's a bit difficult to know how much we could expect. Now, if we could markup and of course when there is an exiting from the position, we would see profits of this way. It is difficult to say what we could expect moving forward. How much or what was the level. So, that is something difficult to comment on. On your second point, on the personnel expense costs and gaining talent. And newspaper -- when we look at newspaper reports, we see that companies are increasing compensation to capture young talent. What we need to retain our talent, I think what's most important is to give a fair evaluation of what they are doing and their contribution. I think that is most important. And to return to their expectation to their growth, career growth, provide training opportunities, education opportunities, and to support their career growth, and to provide a working place that has diversity, and to provide a platform or place where you can expect people with high capability to flourish. And we have been conducting things to increase the engagement of the employees. So, we've been conducting engagement surveys as well. And of course, compensation or salary, wage, is an important factor in retaining talent and attracting talent. But in addition to that, by different im -- by implementing different initiatives, we intend to attract and retain talent. On the other hand, just a more bigger picture, the role of employees or people is changing quite substantially, compared to the past. Now, human capital is, needless to say, very important for a company, but things that could be replaced by -- I mean, what people need to do, what they don't need to, what could be replaced. That is changing and we expect that, that will change in the future as well. We need to understand that and to attract necessary people. So, when we think about that, I think it is possible to control a personnel cost rise to some extent. Did I answer your question?

Koichi Niwa -- Citigroup Global Markets Japan Inc. -- Analyst

I'd like to ask further a question on your latter part, this new up. Even looking at your peers, when you look at your medium-term profitability of 25%, that doesn't need to be changed?

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

This is Kitamura. No, no intention to change that target.

Koichi Niwa -- Citigroup Global Markets Japan Inc. -- Analyst

This is Niwa. Thank you very much.

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

This is Kitamura. Thank you very much for your time today. There are some ups and downs, some items are going up, there are others going down. But as we came out of the first quarter, we believe the result was decent. And though it's not reflected in P&L, there are some positive moves such as expansion of client assets. Also, our activities for stabilizing revenue, I believe, are starting to show effectiveness. And today, I haven't had time to talk about this, but for example, we are working on establishing a entity to invest in private equities and also we are working on enhancement or enrichment of contact centers. And in a way we are sowing the seeds for future growth. So, these new activities so that they will start to grow and bear fruit, and contribute to the bottom line profit that you see. We would like to make our utmost effort and I ask for your continued support. Thank you very much and thank you for your time today.

Duration: 55 minutes

Call participants:

Takumi Kitamura -- Executive Managing Director, Chief Financial Officer and Director, Investor Relations

Unidentified Speaker

Masao Muraki -- SMBC Nikko Securities, Inc. -- Analyst

Kazuki Watanabe -- Daiwa Securities Co., Ltd. -- Analyst

Wataru Otsuka -- J.P. Morgan Securities Japan Co., Ltd. -- Analyst

Natsumu Tsujino -- Mitsubishi UFJ Morgan Stanley Securities Co., Ltd. -- Analyst

Futoshi Sasaki -- Bank of America Securities -- Analyst

Koichi Niwa -- Citigroup Global Markets Japan Inc. -- Analyst

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