Daiwa Weighs Job Cuts Abroad as Third-Quarter Profit Drops

(Bloomberg) -- Daiwa Securities Group Inc. is weighing job cuts overseas and will buy back shares after posting a smaller- than-estimated 31 percent drop in third-quarter profit.

Japan’s second-biggest brokerage is considering restructuring its investment banking operations in Hong Kong and its fixed-income, currency and commodities division in London, Chief Financial Officer Mikita Komatsu told reporters Thursday in Tokyo. Net income declined to 26.4 billion yen ($223 million) in the three months ended Dec. 31 as brokerage commissions and trading profit dropped, the firm said in a statement.

Global banks from Barclays Plc to Standard Chartered Plc are cutting jobs to save costs and become more selective in their business areas following stricter regulations and a global slump in trading. Tokyo-based Daiwa’s smaller footprint overseas may limit fallout from the recent worldwide market rout, according to analyst Koichi Niwa.

“Daiwa can return to a recovery trajectory once markets settle,” Niwa, senior analyst at SMBC Nikko Securities Inc., said before the results. “Although the market environment is tough,” the firm’s overseas business is less vulnerable because of its relatively small size and cost structure, Niwa said.

Buyback Surprise

Net income was higher than the 21.4 billion-yen average estimate of three analysts surveyed by Bloomberg. The firm will spend as much as 20 billion yen buying buy back 1.57 percent of its stock, a move that Jefferies Group LLC analyst Mac Salman said was unexpected.

“This is a surprise given Daiwa’s reluctance to perform something like this before and is clearly reactive to the market as they are now trading below book -- that most magic of numbers,” Salman wrote in a note, maintaining his hold rating. Daiwa’s share price is 0.94 times the book value of its assets.

Revenue fell 14 percent from a year earlier to 153.6 billion yen, the results showed. Brokerage commissions dropped 21 percent to 15.9 billion yen, while trading profit declined 23 percent to 29.9 billion yen. Underwriting fees slid 38 percent to 6 billion yen.

Overseas Loss

Daiwa posted a 3.5 billion yen pretax loss from operations abroad, swelling from 2.4 billion yen a year earlier, the statement showed.

“We need to revise our business portfolio and we will reduce some unprofitable operations or do restructuring,” CFO Komatsu said. “We’ve been doing strict cost controls, so there’s no need to take drastic action.”

The brokerage has been trimming headcount overseas while larger competitor Nomura Holdings Inc. has resumed expanding abroad. Daiwa had 1,611 employees outside of Japan as of Sept. 30, 11 percent of total staff, and Nomura employed 12,870, about 44 percent of the total, according to October filings.

Chief Executive Officer Takashi Hibino’s strategy of counting on Japanese consumers to invest more of their savings has been hindered by the recent global market turbulence that erased last year’s gains in the nation’s stocks.

‘Calming Down’

Trading at exchanges in Tokyo and Nagoya dropped about 8 percent in the three months ended December from a year earlier to about 340 trillion yen, according to Japan Exchange Group Inc. data.

The renewed market volatility this year has sent the Nikkei 225 Stock Average down 10 percent. Daiwa has lost 7 percent in 2016 and Nomura, which is scheduled to report earnings next Tuesday, has slumped 10 percent.

Komatsu expects the turmoil to ease.

“It seems to be gradually calming down, and I expect Japan’s stock market to recover,” he said.

To contact the reporter on this story: Takahiko Hyuga in Tokyo at thyuga@bloomberg.net To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net Russell Ward