Corporate Summary Executive Messages Business Strategy Summary of the Daiwa Securities Group’s Medium-Term Management Plan Business “Passion for the Best” 2014 14 Strategy Interview with the CEO 16 Message from the COO 20 Management Systems At a Glance 22 Retail Division 24 Wholesale Division 26 Asset Management Division 28 Investment Division 30 IT/Think Tank Division 31 Financial Section Other Information Daiwa Securities Group Annual Report 2013 13 Summary of the Daiwa Securities Group’s Medium-Term Management Plan “Passion for the Best” 2014 Daiwa Securities Group Management Vision • To become Asia’s leading financial services firm possessing and leveraging a solid business platform in Japan • Establish a robust business structure capable of securing profit even under stressful economic conditions Daiwa Securities Group Basic Management Policy • Achieve sustainable growth by linking Japan and the growth of Asia Outline of Medium-Term Management Plan • Establish a robust business structure immune to the external environment and aspire to achieve sound growth based on a new growth strategy “Passion for the Best” 2014 Milestones FY2012 Turnaround FY2013 Growth Management Targets Consolidated Ordinary Income [Initial FY] Return to Profitability Basic Policy I: Return to profitability by pursuing management efficiencies (Focus of execution in the first fiscal year) R Steadily implement the plan to reduce SG&A R Realize greater organizational efficiencies by shifting personnel from the middle and back offices to the front divisions Basic Policies for Medium-Term Management Plan R Progress under Basic Policy I Trends in SG&A, Stable Earnings, and the Fixed Cost Coverage Ratio l Variable costs L Fixed costs L Stable earnings P Fixed cost coverage ratio (¥ billion) (%) 200 50 190.7 187.1 187.8 172.1 176.8 172.0 168.7 164.7 160 43% 40 39% 31% 31% 31% 32% 28% 29% 120 30 121.5 117.6 117.0 117.8 116.6 113.2 107.0 103.5 80 20 44.4 31.7 34.6 35.2 34.9 37.3 35.8 41.7 40 10 0 0 9/09 3/10 9/10 3/11 9/11 3/12 9/12 3/13 (Month-end/year) 14 Daiwa Securities Group Annual Report 2013 Corporate Summary nagement Plan ssessing and leveraging a solid business platform in Japan Executive Messages uring profit even under stressful economic conditions growth of Asia external environment and aspire to achieve sound growth based on a new growth strategy Business Strategy FY2013 Growth FY2014 Expansion [Final FY] Over ¥120.0 billion Fixed Cost Coverage Ratio [Final FY] Over 50% Management Systems Basic Policy II: Achieve client-based high-quality earnings growth v Drastically expand our client base in Japan by investing management resources in the Retail and Asset Management businesses—Expand stable earnings by increasing investment trusts and deposit balances— v Strengthen revenue capacity centered around the launch of the “new” Daiwa Securities—Step up approaches to Financial Section high net worth individuals and the middle market— v Rebuild our Wholesale business—Re-strengthen the brokerage business and build an efficient global network— Other Information Middle- and Back-Office Headcount (two former securities subsidiaries and group holding company) (Persons) 2,500 Medium-Term Management Plan 2,040 Ahead of schedule 2,000 1,919 1,750 1,751 Original plan 1,479 1,387 1,500 1,500 1,370 1,000 500 0 4/99 2/11 4/11 10/11 4/12 4/13 4/14 (Immediately after (Beginning of (Present) demerger) HQ streamlining) Daiwa Securities Group Annual Report 2013 15 í Interview with the CEO What is your take on changes in the business environment that are affecting the financial industry, such as the tightening of international financial regulations as well as the reversal of the strong yen and rally in Q1 stock markets? International financial regulations are being reformed in the wake of the financial crisis that started with the Lehman Shock. Tightened regulations are gradually entering the implementation phase, beginning with derivative-related rules, and this will put down- ward pressure on business profitability in the context of reduced capital efficiency, high- er capital costs, and an increase in systems investment. In response to these events in FY2012, the Company shifted personnel to the front divisions and made steady prog- ress reducing Selling, General and Administrative Expenses (SG&A) in Japan and over- seas in the pursuit of greater business efficiency. Meanwhile, we are aware that conditions are gradually becoming more conducive for money to start shifting from savings into investments. After the change of government, we witnessed an unexpected reversal of the overly strong yen and a rally in stock mar- kets that finally brought Japanese equities back to the level they were at prior to the Lehman Shock. On foreign currency markets, the overly strong yen has corrected sharply over a short period of time as a result of the government adopting an ultra-easy monetary policy. We think that 2013 may be the year that the floodgates are opened, and the stream of money flowing out of savings accounts into investment vehicles turns into a torrent. 16 Daiwa Securities Group Annual Report 2013 Corporate Summary The Group set a goal to return to profitability in FY2012 under the basic management policies of “estab- lishing a robust business structure immune to the external environment and aspiring to achieve sound Q2 growth based on a new growth strategy” in the Medium-Term Management Plan. Can you elaborate on Executive Messages these achievements in the first fiscal year of the plan? The themes of each fiscal year in the Medium-Term Management Plan are “Turnaround” for the first year, “Growth” for the second, and “Expansion” for the third. In FY2012, the first fiscal year, we concentrated on steadily implementing the plan to reduce SG&A and increasing organizational efficiency under the guise of the “Turnaround” theme. These efforts resulted in substantial year-on-year growth in both revenues and Business Strategy profits on the back of marked improvement in business conditions. By segment, profits remained stable in the Retail Division and the Asset Management Division, and profits grew in the Investment Division. The Wholesale Division posted a profit on a fiscal year basis. Accordingly, all divisions contributed to consolidated earnings improvement. Due to stable revenues, the Group achieved a fixed cost coverage ratio of 43%, which we view as a Key Performance Indicator (KPI) that is as important as profit targets. The “Turnaround” process was completed as anticipated in the first fiscal year of the Management Systems Medium-Term Management Plan. Since being appointed CEO, I have put forth “establish a robust business structure” as a basic management policy. Due to the peculiarities of the securities business, it is inevitable that earnings will be affected by market conditions. Accordingly, the Daiwa Securities Group aims for an earnings structure that generates outsized profits when a tailwind blows, and avoids losses when headwinds prevail during weak market Financial Section conditions. Our policy to “establish a robust business structure” aims to build an earnings structure such as this. In the first half of the previous fiscal year, the TOPIX reached new lows in June since the bursting of Japan’s economic bubble, making for extremely challenging market con- ditions. In addition, the financial industry was rocked by scandals involving insider trad- ing related to the public offering of new shares, making for the worst-possible business environment. Nevertheless, the Daiwa Securities Group remained profitable on a con- Other Information solidated basis. Moreover, when market conditions turned favorable in the second half, both net operating revenues and net income rebounded sharply to high levels reminis- cent of good times past. Although FY2012 was a year of both strong headwinds and strong tailwinds, our performance in the first and second halves demonstrates that the earnings structure we aspire to build is gradually coming into shape. In the Medium-Term Management Plan, we have adopted a “rolling method” system. Each fiscal year, we review our progress toward targets, validate our targets against the market outlook for the remainder of the plan, and revise our strategies as needed. Although we have revised up our market projections by 10%-20% to reflect yen depre- ciation and higher stock prices in light of market conditions at the end of the previous fiscal year, the overall impact of these adjustments on our numerical targets was limited because they were based on a bullish market outlook from the start. Accordingly, no changes have been made to our targets for the final fiscal year of the plan for consoli- dated ordinary income of over ¥120.0 billion and a fixed cost coverage ratio of over Daiwa Securities Group Annual Report 2013 17 50%. In FY2013, as we enter the “Growth” phase of the plan, we will vigorously acceler- ate business development to seize the dynamic transition from “savings to investments.” We are facing a pivotal time in history as the overly strong yen corrects, weak stock markets rally, and the Japanese economy pulls out of deflation. Please explain what would motivate individuals to move their Q3 money out of savings accounts into investment products. In a prolonged deflationary economic environment, the maldistribution of personal finan- cial assets in savings accounts is unavoidable from a rational economic point of view. However, the Japanese government and the Bank of Japan have cooperated in setting an inflation target and commencing quantitative and qualitative monetary easing. As the inflation target becomes more feasible, there is no economic rationality for keeping financial assets in cash deposits, government bonds, and the like. As motions were being made to dissolve the lower house of parliament, the correction to the overly strong yen and weak stock prices gained momentum, reaffirming the trend.