FITCH no rating impact from Daiwa Securities Group merger

(The following was released by the rating agency)

July 31 (Fitch) Fitch Ratings says the plan by Daiwa Securities Group Inc. (DSGI: 'BBB+'/Negative), a holding company of the Daiwa group, to merge its flagship subsidiaries in April 2012 has a neutral impact on the ratings of the rated group entities. The merging subsidiaries are Daiwa Securities Capital Markets Co. Ltd. (DSCM: 'A-'/Negative), a wholesale unit, and Daiwa Securities Co. Ltd. (Daiwa Securities), a domestic retail unit. The merged entity will by far be the largest subsidiary of DSGI. The overseas subsidiaries under DSCM will be shifted to DSGI by end-2011.

The merger will be the largest effort to streamline operations undertaken by the two entities since the separation of the retail and wholesale units in 1999. It primarily aims to reduce duplicated overhead costs. While operating revenue is unlikely to grow substantially in the near term, reflecting a weak Japanese economy and sluggish capital markets, reduction in overhead costs will be an important driver in improving the group's weak profitability. In early 2011, DSGI has realigned its organization including shifting headquarter staff to its sales division.

While Fitch believes the realignment will lead to efficiency gains, the weak operating environment, particularly in investment banking, suggests that any overall improvement in profitability may only be realised over the medium term.

DSGI announced financial results for the first quarter ended June 2011 (Q1FYE12) on July 29. DSCM posted a net loss of JPY18bn reflecting low activity in equity finance immediately after the natural disasters that struck Japan in March 2011, although underwriting for bond issues and trading gains increased quarterly. With profits from other subsidiaries, including Daiwa Securities and Daiwa Asset Management Co., Ltd, DSGI posted a smaller net loss of JPY9bn (annualized return on equity of -4.2%) compared with a net loss of JPY33bn (-14.3%) in Q4FYE11.