Daiwa: Lost in transition
With its lack of drive and direction, shareholders of the Japanese financial institution look on nervously as the investment bank faces questions about its future.
Daiwa chairman Takashi Hibino
However you look at the figures, they are bad for Daiwa Securities. The storied Japanese investment bank is not having a good financial time of things.
Data only tell one part of the story, but it’s a useful one. The Tokyo-based firm reported a 46.6% fall in net operating revenues in the financial year to the end of March 2019, with profits tumbling 42.3% over the same period. This year has hardly started any better, with income slipping another 13.3% year on year in the April to June quarter.
Anyone keen to unearth good news in its latest quarterly report has a tough job. Its retail division, described last year to Asiamoney as “the only thing of true value” in Daiwa, had a stinker of a time, suffering a 73% year-on-year fall in ordinary income and a 15% decline in net operating revenues.
Its overseas operations offered a mixed picture. Daiwa reported income of ¥1.5 billion ($14 million) in the Americas, but set that against a ¥1.7 billion loss in Europe, more than double the ¥796 million loss of the previous quarter.
By late August, the investment bank’s shares were trading in Tokyo at ¥447 apiece, their lowest level since the dog days of 2012.
As ever, the solution to the investment bank’s manifold problems – and, possibly, the source of at least some of its future headaches – lie abroad. Led by chairman Takashi Hibino, Daiwa has spent most of the current decade slowly unpicking a fairly good cross-section of its foreign operations. It has shut branches in Dubai, Frankfurt and Milan, exited Hong Kong warrants, withdrawn from European equities, and cashed out of its global equity finance business.
Having squeezed what remained of its global operations until the pips squeaked, and acknowledged tacitly that growth opportunities were lacking in its home market, it then reversed course, switching from sell to buy mode. It struck non-acquisition alliances with Indonesia’s Bahana Securities and Mumbai-based Ambit Capital, and raised its stake in Vietnam’s Saigon Securities to 20.39%.
In July 2017, it bought the rest of the shares it did not already own in the New York investment bank Sagent Advisors, and acquired Baltimore-based Signal Hill, paying $90 million for the pair. Eight months later, it combined the two to create DCS Advisory, a new North America-focused M&A adviser.
Daiwa Securities lacks drive and direction in its home market, where it is constantly facing questions about its future
The deal and the idea behind it looked simple, and indeed it was. Signal Hill, a specialist in technology and healthcare, would complement Sagent, with its broader sector coverage. Together, the new vehicle was sold as a premier global mid-market advisory firm, which would help acquisitive Japanese clients target US assets, while actively targeting non-Japan deals. Slowly, the deals began to trickle in, suggesting that there was, indeed, enough untapped income in the mid-market segment.
When Euromoney met Joseph Donohue, co-president of DCS Advisory and former co-chief executive of Sagent, in early 2018, he was bullish about the firm’s prospects.
The ex-JPMorgan and Morgan Stanley banker talked up the firm’s “talent and judgement”, and its status as the “adviser of choice in our chosen industry sectors”. He added: “When you stack all these things together, the greatest thing you can be today is a middle market M&A banker in the United States.”
In a hole
Alas, hope has faded fast. Daiwa generated ¥22.5 billion worth of net operating revenues from its global M&A business in the full financial year to the end of March 2018. The following year, it reported revenues of ¥24.5 billion – a rise, yes, but a tiny one. Its revenues of ¥7.5 billion in the April to June 2019 quarter were higher than the same period a year ago, but down on the previous quarter.
In short, Daiwa Securities is in a hole. It lacks drive and direction in its home market, where it is constantly facing questions about its future. Its policy of shedding foreign assets over the past decade, then buying different assets and jamming them together, perhaps more in hope than expectation, has so far failed to bear fruit.
The investment bank has a strong retail division, shackled to an OK investment bank. But that’s not enough to transform the Tokyo-based financial institution into a true global force.
Not even close.