46 Daiwa Securities Group Integrated Report 2019

Wholesale Division

Toshihiro Matsui Deputy President and COO Head of Wholesale Daiwa Securities Group Inc.

GM: Global Markets GIB: Global Investment Banking

Main Sources of Earnings Key Factors Affecting Earnings

GM ▷ Trading commissions from the buying and selling of GM ▷ Fluctuations on financial markets and changes in marketable securities for institutional investors, trading income customers’ trading behavior, in reaction to international geopolitical risk and economic conditions GIB ▷ Underwriting commissions from underwriting business, M&A commissions from M&A advisory services GIB ▷ Economic conditions inside and outside Japan that affect customer decisions regarding fund raising methods and demand for M&A ▷ Whether Daiwa Securities can seize corporate demand and be assigned to deals Engagement with Stakeholders

Customer ▷ Institutional investors in Japan and overseas Main Products GM ▷ Equities ▷ Bonds and foreign exchange Attributes ▷ Corporations ▷ Financial institutions and Services ▷ Derivatives ▷ Public entities GIB ▷ Primary and secondary equity underwriting ▷ Bond underwriting ▷ M&A advisory services ▷ Consulting for share listings

Channels GM ▷ Sales ▷ Analysts ▷ Dealers Social Value GM ▷Ensure healthy markets ▷ Provide global GIB ▷ Corporate client sales (RM and sector investment opportunities to investors in Japan coverage) ▷ Institutional sales (brokerage) and overseas GIB ▷ Support industrial development ▷ Identify and support new growing industries ▷ Assist raising funds for public projects with high social significance, such as Impact Investments Awareness of Environment

GM ▷ Ongoing recovery in world economy ▷ Greater uncertainties in outlook for world economy due to trends in monetary and trade policies in each country ▷ Increase in geopolitical risk around the world ▷ Tighter regulations and changes in competitive landscape as companies enter from other sectors ▷ Increase in ESG investing and dialogue with issuers due to greater emphasis on responsible investing among institutional investors GIB ▷ Changes in industrial structures due to technological innovation ▷ Increase of support for development of venture companies ▷ British exit from the EU ▷ Relaxation of restrictions on foreign investment in China’s financial markets Daiwa Securities Group’s Daiwa Securities Group’s Business Strategy Retail Sales Reform Strategies by Division HR Strategy Governance Strategy Financial Section Other Information 47

Initiatives and Performance in FY2018

The Wholesale Division covers Global Markets and Global Investment Banking. The Global Markets business provides sales and trading services of equities and bonds as well as of foreign exchange and derivative products, mainly for institutional investors and corporations, while providing financial products and sales support to the Retail Division. In FY2018, although the Nikkei Stock Average reached its highest price in 27 years, earnings declined because it was a year of violent fluctuations, such as the adjustments made toward the end of December 2018 against a backdrop of concerns about U.S.-China trade friction and a global economic slowdown. In contrast, continuing our focus on equities-related business from the previous fiscal year, the timely provision of products that respond to changes in customer needs and market environment contributed to profits due to collaboration between the Retail Division and Wholesale Division. Having been successful in the development of young people, external recruitment and in overall improvements, we captured first place in the overall ranking by company in the Nikkei Veritas Analyst Rankings for the first time in 10 years. Global Investment Banking conducts business in, for example, marketable securities underwriting and M&A advisory services. In underwriting deals for Japanese companies, in addition to serving as joint global coordinator for the equity offering in Renesas Electronics and the Mercari IPO*1, we served as the lead manager for the SoftBank IPO. We also served as lead manager and Green Bond Structuring Agent*2 for the green bonds, Japan’s first publicly offered hybrid bonds*3 qualified as green bonds, issued by Tokyo Tatemono. Nikkei Veritas analyst ranking In M&A advisory services, Daiwa Securities served as advisor to Idemitsu Kosan in a business integration project between Idemitsu 1st 1st Kosan and Showa Shell Sekiyu. Daiwa Securities also participated in 2nd many M&A deals through collaborations of Group companies. These included our three bases in Japan, the United States and Europe 3rd 3rd 3rd (Daiwa Securities, DC Americas and DC Europe) working together and Medium-term targets Daiwa Securities serving as advisor to Taisho Pharmaceutical when 4th 4th 4th that company made UPSA—a French pharmaceutical manufacturing 5th 5th and sales company owned by Bristol-Myers Squibb—a wholly owned subsidiary and acquired related business assets. 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Furthermore, we acquired Montalbán Atlas Capital in Spain to Source: Overall ranking by company, equity research ranking strengthen our M&A advisory business globally, particularly in Europe.

*1 Initial Public Offering: The offer and sale of an initial issuance of shares to the general public *2 Agent supporting the issuance of green bonds through the establishment of a Green Bond framework and advice on gain of Second-Party Opinion *3 Publicly offered subordinated bonds

Strengths

GM ▷ Ability to provide products and information across Japan and overseas utilizing the network of overseas bases ▷ Robust and advanced execution platform for equities and bonds ▷ Analyst coverage of major Japanese companies ▷ World-leading equity research GIB ▷ Sales network in Japan and overseas ▷ Utilize personnel with experience of the secondary market ▷ Cross-border M&A network ▷ RM structure that covers all listed companies and unlisted companies in Japan

Business Risks

GM ▷ In trading services, the risk earnings will deteriorate owing to weaker transaction demand from customers due to market trends or changes in taxation and accounting systems; the risk of losses materializing as a result of sudden, large-scale changes in market conditions that are detrimental to the market value of positions held by dealers; and the risk of losses materializing from an inability to sell in reaction to changes in market conditions due to the holding of low-liquidity positions ▷ In brokerage services, the risk of a significant decline in earnings if a slump in market conditions weakens demand for securities investment at customers, leading to risk-averse investment behavior on Japan’s securities markets and investors who are more reluctant to own risk assets ▷ System investment risk on large-scale trading systems, risk of system failure GIB ▷ In underwriting and M&A advisory services for corporate customer needs on the financial and management strategy fronts, the risk of sudden changes in transaction scale and volume due to securities market conditions ▷ In underwriting deals, the risk of losses on underwritten securities held, caused by a fall in market prices in the event that the securities cannot be smoothly sold to investors for reasons such as a decline in the market

Action Plan for FY2019

1. Promote the company’s shift to higher added value 3. Support changes in business structure and in 2. Provide products and services that capture customer Japan’s industrial structure needs 4. Provide pan-Asian business support as a regional Asian broker 48 Daiwa Securities Group Integrated Report 2019

Wholesale Division

Wholesale Division Strategies

Providing products and services Evolution of IPO platforms

having identified customer needs Having served as book runner for several large underwriting One focus area in Global Markets is the strengthening of projects, including the Mercari and SoftBank IPOs, Daiwa sales support for foreign equities and bonds. Out of the Securities won second place for both POs and IPOs in the current Japanese individual financial assets, foreign currency- FY2018 league tables. denominated assets account for only 2.5%, and thus it can Particularly with regard to IPOs, we have been able to be said that there is a lot of room for future expansion. With advance the establishment of the Daiwa IPO Platform, a regard to foreign equity and foreign bonds, we will promote robust system that can maintain a structurally competitive the provision of easy-to-understand information while advantage. The underlying pipeline status is extremely good, focusing on providing diversified investment opportunities for and we will work to capture more IPO deal mandates. the formation of richer assets for customers through proactive proposals for products denominated in foreign currencies. Core Competence of Daiwa IPO Platform

Foreign Equity AUC* Sourcing Capability Quality of Human (Deal-finding skill) Resources ■ Utilize Japanese venture capital ■ Continuous ■ Strengthen relationships and reinforcement of 2.1times partner with external venture personnel capital firms (DG LAB FUND, WiL, ■ Strengthen the etc.) and universities. coverage of unicorn ■ Cooperate with Daiwa PI Partners IPO companies and Daiwa Corporate Investment

2016 2017 2018 (Fiscal year-end)

*Assets under custody Networking Skills Execution and Marketing Skills ■ Knowledge and experience backing our extensive track record ■ Solid sales base in Japan and overseas

Quarterly Earnings Trends Global Markets Global Investment Banking

■ Net operating revenues ■ Ordinary income (loss) ■ Net operating revenues ■ Ordinary income (loss)

(¥ billion) (¥ billion) 40 20

30 15

20 10

10 5

0 0

-10 -5 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY2017 FY2018 FY2017 FY2018 Daiwa Securities Group’s Daiwa Securities Group’s Business Strategy Retail Sales Reform Strategies by Division HR Strategy Governance Strategy Financial Section Other Information 49

Further strengthening of global Stable overseas business M&A network contribution to profits

As an integrated securities Group, Daiwa Securities is working From around 2011, as the European debt crisis deepened, to further strengthen its global M&A network to propose global financial regulations tightened and maintaining the solutions to client companies. structural balance between income and expenditure became In December 2018, the Group acquired Montalbán more exacting, the Daiwa Securities Group either reduced or Atlas Capital through DC Advisory Europe. From April withdrew from unprofitable overseas divisions and bases and 2019, we will use the brand in a globally integrated put reductions of personnel into effect. In the two years up manner as DC Advisory and will promote the consolidated until the end of FY2012, the Group implemented cost management of M&A business. reduction measures overseas, mainly in Europe and Asia, Revenues related with M&A increased steadily, and in totaling approximately ¥38 billion*; those measures included FY2018 the temporary cost burden associated with the reducing personnel by 800 people, which represented more acquisition of two companies acquired in the United States than 30% of the peak number. On the other hand, while (Sagent Advisors and Signal Hill, both of which were integrated curbing costs, we had been working to expand our alliance into DC Americas) had a significant impact on earnings. They network with leading Asian financial institutions from the are, however, expected to steadily increase profits in the years perspective of supplementing services provided in Japan and to come. expanding profits over the medium to long term. In the FY2018 mid-cap advisory ranking (excluding On account of the major restructuring phase completed at accounting-related firms), the Daiwa Securities Group was that time, the Group’s overseas business has become an ranked eighth with 120 projects in the global M&A market. efficient management system, leading to a surplus for the 12 Going forward, we will target inclusion in the top consecutive quarters and three consecutive years since tier in the global mid-cap M&A market by FY2016. From FY2017 onward, we have been investing in continuing our strengthening measures, including a global M&A network as an area in which we can expect increasing the number of personnel in the M&A significant growth even overseas. business and considering further acquisitions. In November 2018, we agreed to establish a 51%-owned joint venture securities company in China, where the capital markets are expected to expand, with the Beijing State-owned Capital Operation and Management Center, wholly owned by M&A-related Revenues the Beijing city government, that focuses on management and

(¥ billion) restructuring of state-owned enterprises. 22.8 We will continue to maintain and strengthen this muscular ■ Japan ■ Asia ■ DC (Europe) 21.7 ■ DC (Americas) earnings structure and strengthen our global M&A network, 16.2 thereby expanding its profit contribution to the Group. 11.4 9.1 10.3 * Europe: ¥13.5 billion, Asia: ¥22.0 billion, Americas ¥2.5 billion Page 39: Domestic and Overseas Networks

2013 2014 2015 2016 2017 2018 (Fiscal year)

Overseas Ordinary Income (Loss)

■ Europe ■ Asia ■ Americas ■ Overseas total (¥ billion) 20 13.5 11.4

10 3.8

0 – 5.2 – 3.9 – 4.7 –10 –10.6

–20 – 21.5 –30 – 25.8

FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 FY2018 50 Daiwa Securities Group Integrated Report 2019

Wholesale Division

Initiatives for SDGs

Global Investment Banking

Underwriting of SDGs Bonds*1, including Green Bonds Since the Daiwa Securities Group launched sales of vaccine bonds to individual investors in 2008, the domestic ESG/SRI bond market, including Green Bonds, has been developed mainly with individual investors. In addition, the issuance of green bonds, mainly overseas, jumped sharply after the International Capital Market Association established the Green Bonds Principles in 2014. The Japanese government thereafter launched its support, with the Ministry of the Environment in Japan formulating in March 2017 its Green Bonds Guidelines, 2017 and proposing a variety of related measures. This contributed to enhanced green bond interest not only by individual investors, but also institutional investors in Japan. Active since 2008 in developing the ESG/SRI bond markets in Japan and overseas as a means to promote Impact Investment that contributes to solving environmental and social issues, the Group is promoting the full-scale spread of SDGs bonds, including Green Bonds, in Japan and overseas. Examples include serving on the committee developing the Ministry of the Environment’s Green Bond Guidelines, 2017 and participating in the International Capital Market Association’s working group on Green Bond Principles. In FY2018, the Group built up a track record of serving as lead manager in some landmark underwriting projects. In addition to the first Green Bonds aimed at individual investors from a domestic business corporation, Mitsui O.S.K. Lines, the world’s first green CB*2 from Sumitomo Forestry, and Japan’s first publicly offered hybrid bonds*3 qualified as Green Bonds, issued by Tokyo Tatemono, these included Social Samurai Bonds*4 from BPCE, an overseas issuer, and Development Bank of Japan Sustainability Bonds*5 on the Euro market. The issuance of SDGs bonds entails additional costs and procedures for the issuer, including selection of the use of funds and the reporting of results, and given the additional burdens on the investor, including in regard to establishing new investment standards, there remain a number of challenges to overcome before these bonds become more prevalent. The Group is committed to ongoing educational activities aimed at deepening knowledge in this area among investors and issuers, leveraging its leading position in the industry in impact investment bonds while simultaneously contributing to an expansion in the market by providing reliable solutions to both investors and issuers.

Main SDGs Bonds Underwriting from FY2018 Onward

Period Issuer Notes Issue Amount Green Bonds Mitsui O.S.K. Lines (Including first domestic Green Bonds for individual investors Total ¥10.0 billion from a business corporation) Sumitomo Forestry Green CB (world first) ¥10.0 billion Sumitomo Mitsui Trust Bank Green Bonds 500 million euros Development Bank of Japan Sustainability Bonds 700 million euros Daio Paper Green Bonds Total ¥20.0 billion FY2018 Daiwa Securities Group Green Bonds ¥10.0 billion

Japan International Cooperation Agency Social Bonds Total ¥40.0 billion

Japan Housing Finance Agency Green Bonds ¥10.0 billion BPCE Social Bonds ¥50.0 billion Export-Import Bank of Korea Green Bonds ¥5.1 billion*6 Japan’s first publicly offered hybrid bonds qualified as Green Tokyo Tatemono ¥50.0 billion Bonds Toyota Finance Green Bonds ¥60.0 billion ORIX JREIT Green Bonds ¥7.0 billion FY2019 Sustainability Bonds Mitsui O.S.K. Lines (Including first domestic Sustainability Bonds for individual Total ¥20.0 billion investors from a business corporation)

*1 In April 2019, the Japan Securities Dealers Association published its Guidebook on Financial Products Contributing to the SDGs, in which SDGs Bonds is used as a standardized term for bonds that will be allocated to businesses whose fundraising will contribute to the SDGs. *2 Convertible Bond: A convertible bond with stock acquisition rights *3 Publicly offered hybrid bonds: Publicly offered subordinated bonds *4 Social Bond: Bonds allocated to businesses to assist in social projects the fundraising for which will contribute to resolving social issues *5 Sustainability Bond: Bonds allocated to businesses whose fundraising will assist in both green and social projects *6 Sales by Daiwa Securities (estimate) Daiwa Securities Group’s Daiwa Securities Group’s Business Strategy Retail Sales Reform Strategies by Division HR Strategy Governance Strategy Financial Section Other Information 51

Daiwa Innovation Network The Group is strengthening its efforts toward open innovation. As an example, we are making greater use of the Daiwa Innovation Network (DIN), a business matching event between large companies and venture companies, to discover and foster new industries. In FY2018, the number of participants was 1.5 times more than the average of the events held between FY2014 and FY2017. Furthermore, the DIN on the theme of FinTech held in January 2019 attracted a record number of more than 200 participants.

DIN Summit Networking event for the heads of start-ups

DIN Premium Matching of start-ups with individual companies

DIN Matching of start-ups with listed companies

Global Markets

Equity Research Department / Establishment of ESG Research Group ストラテジー 日本 2019 年 7 月 19 日

ＥＳＧアップデート（2019.7.19）

In response to growing institutional investor demand for ESG investments (investing with ◎環境経済観測調査（環境短観）－おおむね好調を維持－ エクイティ調査部 ESG リサーチ課

◎環境省が『「環境サステナブル企業」についての評価軸と評価の視 シニアストラテジスト non-financial information such as the environment, society and governance), Daiwa 点』を公表 大澤 秀一 ストラテジスト 小島 萌衣

Securities Equity Research Department newly established an ESG Research Group 大和証券株式会社

環境経済観測調査（環境短観）－おおむね好調を維持－： specializing in ESG research functions in May 2019. Conducting research into domestic and ７月 12 日、環境省は、環境経済観測調査（環境短観）の 2019 年６月調査結果の速報値を公表した。環境短 観は半年おきに実施され、企業の環境ビジネスに対する認識や企業の供給する環境配慮型製品・サービスの業 況等に関する調査である。環境ビジネスの業況ＤＩは+20 ％pt と前回よりも低下したものの、全ビジネスの foreign investment environments and investment strategies related to the ESG aspects of 業況ＤＩの+17 ％pt を上回り、おおむね好調を維持する結果となった。（大澤）

環境省が『「環境サステナブル企業」についての評価軸と評価の視点』を公表： ７月８日、環境省の「環境サステナブル企業評価検討会」は、『「環境サステナブル企業」についての評価軸 stocks and bonds, the ESG Research Group is contributing to the realization of a sustainable と評価の視点』を公表した。同検討会は複数の投資家がメンバーに加わっていることから、中長期的な企業評 価を行う際の実務的な参考になると考えられる。投資家に対して評価のポイントを提示することで、企業に対 しては環境問題に対する取り組みや情報開示を促進する好循環を生み出すことも期待できよう。（小島） society and the provision of long-term returns for customers through its report distribution,

investor visits, seminars, collaborations with overseas branches and other activities.

Holding of Daiwa Investment Conference (DIC) Leveraging each of its networks, in Global Markets and Global Investment Banking, Daiwa Securities Wholesale Division holds IR conferences in Tokyo (DIC Tokyo), one of the largest conferences of its kind in the world, as well as in Hong Kong, New York, 大和証券株式会社 〒100-6752 東京都千代田区丸の内一丁目 9 番 1 号 グラントウキョウ ノースタワー

このレポートは、投資の参考となる情報提供を目的としたもので、投資勧誘を意図するものではありません。 投資の決定はご自身の判断と責任でなされますようお願い申し上げます。ご利用に際しては、末尾の開示事項の記載もご覧ください。

San Francisco, Chicago, and London. The conferences provide forums for institutional investors from around the world and many companies to meet face to face. The flagship DIC Tokyo was held for the 13th time in March 2019. By promoting dialogue between investors and companies, Daiwa Securities is helping to improve the soundness of capital markets.

Holding of Daiwa Capital Markets Conference (DCMC) An international financial and economic conference involving domestic and foreign bond market participants, DCMC is held annually. Every year, there are many sessions that focus on the international situation and monetary policy, and in FY2018 a panel discussion entitled SDGs x Finance was held to meet the interests in SDGs from domestic and foreign SDG investors and issuers. Well-known issuers, including the World Bank, participated in this session, which received high praise from those who attended.