Daiwa Posts Third Straight Profit on Trading, Underwriting

Daiwa Posts Third Straight Profit on Trading, Underwriting Fees
Net income was 7.4 billion yen ($92 million) for the three months ended Sept. 30, compared with a loss of 19.4 billion yen a year earlier, Tokyo-based Daiwa said in a statement today. Photographer: Tomohiro Ohsumi/Bloomberg

Daiwa Securities Group Inc., Japan’s second-largest brokerage, posted a third straight quarterly profit as income from trading and underwriting fees rose.

Net income was 7.4 billion yen ($92 million) for the three months ended Sept. 30, compared with a loss of 19.4 billion yen a year earlier, Tokyo-based Daiwa said in a statement today. That beat the average estimate for 5.2 billion yen profit based on a Bloomberg News survey of six analysts.

Daiwa won a role leading Japan Airlines Co.’s $8.3 billion initial public offering last quarter, a deal that Chief Financial Officer Nobuyuki Iwamoto predicted in August would provide a “significant” boost to revenue. The securities firm is scaling back operations abroad by cutting jobs and trimming costs to stay profitable.

“JAL’s IPO and healthy bond trading boosted results in the quarter,” Takehito Yamanaka, a Tokyo-based analyst at Credit Suisse Group AG, said before the report. “Earnings levels are still low but cost cutting is helping to keep a profit trend.”

Revenue rose to 113.4 billion yen in the quarter from 102.5 billion yen a year earlier, Daiwa said. Trading profit jumped to 22.7 billion yen from 14.9 billion yen.

Stock and bond underwriting fees gained to 9.2 billion yen from 4.8 billion yen. Brokerage commissions declined to 8.1 billion yen from 10.2 billion yen.

Daiwa continued to lose money abroad last quarter, posting a pretax loss of 2.1 billion yen from overseas operations, narrowing from 7.1 billion yen a year earlier.

Cutting Jobs

The company led by Chief Executive Officer Takashi Hibino said in September that it will eliminate as many as 50 derivatives jobs in Hong Kong and may shrink investment banking and equity research in the city as part of an expanded cost-cutting program. The reductions were in addition to 500 positions eliminated in Asia and Europe since October 2011.

Personnel expenses fell to 37.5 billion yen last quarter from 41.8 billion yen a year earlier, the company said today. The number of staff declined to 14,339 as of Sept. 30 from 14,675 three months earlier.

Shares of Daiwa climbed 2.8 percent to 330 yen at the close of trading in Tokyo today before the earnings were released. The Nikkei 225 Stock Average increased 1.2 percent. Daiwa has gained 38 percent this year.

Daiwa got 5.5 billion yen of revenue from the Japan Airlines deal, the country’s largest IPO this year. The figure includes underwriting fees and retail broking, Chief Financial Officer Iwamoto said at a news briefing.

Beat Nomura

The firm was the top equity underwriter in Japan last quarter after it arranged public offerings for seven companies including Japan Airlines, data compiled by Bloomberg show. It was the No. 3 bond underwriter for the quarter, and seventh in mergers and acquisitions advisory.

Daiwa’s profit exceeded that of rival Nomura Holdings Inc. Japan’s biggest brokerage this week posted second-quarter net income of 2.8 billion yen as bond trading made up for declining brokerage commissions. Nomura’s profit was the fourth in a row and compared with a loss of 46.1 billion yen a year earlier.

Both companies have been embroiled in an insider-trading scandal this year after regulators found that staff leaked information on share sales they managed in 2010. In Daiwa’s case, the actions were found to be isolated and it wasn’t punished.

The ramifications for Nomura have been greater, as its top two executives resigned, it lost investment banking business and the banking regulator told it to improve compliance. Nomura has also been fined more than 500 million yen.

Japan’s government selected Daiwa and Goldman Sachs Group Inc. in June to lead a global offering of shares it holds in Japan Tobacco Inc., Asia’s largest cigarette maker by market value, while Nomura missed out.

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