Daiwa Falls Most in Six Months as Topix Slump Threatens Profit

Daiwa Securities Group Inc. fell the most in six months in Tokyo trading as a slump in Japanese stocks threatens to crimp trading commissions and curtail earnings growth at the nation’s second-biggest brokerage.

Shares of Daiwa declined as much as 6.1 percent, the biggest intraday drop since July 26, and traded 4.4 percent lower at 927 yen at 12:51 p.m. local time. The Topix index slid 1.5 percent, heading for a 11-week low. Nomura Holdings Inc., Daiwa’s bigger domestic rival, fell 2.6 percent to 706 yen.

The stock’s tumble underscores investors’ concern that Daiwa may not be able to sustain profit growth. The brokerage reported on Jan. 31 that net income tripled to 43.4 billion yen ($424 million) in the three months ended December, beating analysts’ estimates. Japan’s equity rally has stalled this year on speculation that the global economic recovery will falter as growth in China slows.

“Although earnings are currently solid, the external environment is becoming less secure,” Wataru Otsuka, an analyst at Nomura, wrote in a note on Jan. 31. “It will take some time until we can verify the steady expansion in groupwide earnings and synergies between wholesale and retail businesses that the company is targeting.”

Third-quarter profit at Nomura more than doubled to 48.3 billion yen, led by brokerage commissions and asset management fees, the Tokyo-based firm reported on Jan. 30.

With a stock price trading at 1.5 times its book value, Daiwa looks overvalued compared with the industry average of 1 times, Katsunori Tanaka, an analyst at Goldman Sachs Group Inc. in Tokyo, wrote in a report today. Nomura trades at 1.1 times book value, data compiled by Bloomberg show.

Daiwa Chief Financial Officer Mikita Komatsu said last week that the Tokyo-based company has no plans to buy back shares and has yet to decide whether to increase dividends. The firm plans to raise salaries for most staff, he said on Jan. 31.