02 Daiwa Securities Group Integrated Report 2019 Message from the CEO By changing our earnings structure we will create a more robust business structure and, placing the SDGs in the foundation of management, aim to be an integrated securities group that is society’s first choice. Seiji Nakata President and CEO Daiwa Securities Group Inc. In a difficult business environment, steady execution of initiatives adopted in the Medium-Term Management Plan In FY2018, the market environment deteriorated particularly in the second half, but we recognize that economic growth, which had continued for 10 years since the global financial crisis, peaked at the beginning of 2018. In addition to the feeling that domestic business conditions had come full circle, there was an increasing sense of uncertainty about the direction of global business conditions brought about by the outbreak and widening of U.S.-China trade friction, and thus the securities markets, and the Japanese market in particular, lost momentum. As a result, activities related to securities transactions, especially for individual customers, slowed down significantly, and the Group was unable to escape from the impact. The Daiwa Securities Group reported consolidated net operating revenues of ¥441.2 billion, a decrease of 12.7% over the previous fiscal year, ordinary income of ¥83.1 billion (down 46.6%), and profit attributable to owners of parent of ¥63.8 billion, a decrease of 42.3% over the previous fiscal year, punishing results in what was the first year of the Medium-Term Management Plan (the Plan). With regard to shareholder returns, from FY2018 the dividend payout ratio has been increased from around 40% to 50% or higher. Based on that policy, the full-year dividend for the fiscal year was ¥21 per share, and the dividend payout ratio was 52.6%. The total return ratio exceeded 100% after adding the total amount paid for the share repurchase of ¥34.8 billion implemented during the period. Daiwa Securities Group’s Daiwa Securities Group’s Business Strategy Retail Sales Reform Strategies by Division HR Strategy Governance Strategy Financial Section Other Information 03 With regard to the state of progress with the Plan, under performance KPIs, ROE was 5.1% and ordinary income was ¥83.1 billion. The reality is that the external environment is worse than expected when the Plan was formulated. However, we do think that there is sufficient possibility of a future market recovery, and so have not changed the target figures at this time. In the Page 14 meantime, we are making good progress with customer-oriented KPIs. The Daiwa Securities Medium-Term Management Plan version of NPS®*, which was introduced in earnest in FY2018, has been installed at all branches as originally planned. Assets under custody declined compared with the end of the previous fiscal year due mainly to the decline in the market, but if you look at the amount of asset inflow that deposited new assets with the Group, the pace of progress was significantly higher than expected. Especially in the Retail Division, which is promoting customer-oriented sales reforms, the annual net assets inflow (the amount newly deposited with the Retail Division minus the amount of withdrawals) totaled ¥1,222.2 billion, the highest level since FY2007, before stock certificate digitization came into effect. The consolidated total capital ratio, which is the financial KPI, continues to maintain a robust financial base at 22.1%. Although it was a tough market environment in FY2018, we believe that we were able to achieve certain results in each division. Page 37 Strategies by Division * NPS®: Net Promoter Score, an indicator that quantifies customer-oriented loyalty. NPS® is a registered trademark of Bain & Company, Fred Reichheld and Satmetrix Systems Inc. Accelerating earnings structure change, creating more robust business structure From the current fiscal year onward, even if the harsh market environment continues, we will accelerate productivity improvement efforts to achieve sustainable growth over the medium to long term. While reviewing the cost structure of existing businesses, we will also increase profits by boldly investing management resources in priority strategies. In FY2018, we established the Business Reform and Productivity Improvement Committee. Due to having adopted business efficiency KPIs, such as the reallocation of more than three million hours a year, a reduction of 134,000 hours was achieved by making meetings more efficient, 8,000 hours was saved by the use of voice recognition tools, and 23,000 hours by the use of chatbots. We are also commencing efforts to improve efficiency by utilizing digital technologies such as robotic process automation (RPA). Under the Retail Division’s branch strategy, we have been opening small, low-cost sales offices based on thorough area marketing with the aim of expanding contacts with customers. At the same time, we have been operating businesses with an emphasis on cost efficiency, such as consolidating existing branches with overlapping sales areas. At the present time, however, the business environment in the securities industry remains difficult. We realize that, should this harsh situation continue, further steps to reduce costs and increase profitability by improving the top line will become urgent issues. We thus positioned initiatives up to and including FY2018 as Phase 1, and formulated an income/expense structure reform plan to contribute to medium- to long-term profit expansion with FY2019 and FY2020 regarded as Phase 2. With regard to cost reductions, we have accumulated highly feasible numbers from each department and created a roadmap for future profit expansion through the reallocation of management resources. Through these efforts, we will create a pool of more than 400 people and reallocate them to priority strategic business areas in a phased manner. By accelerating the rate of increase in revenue contribution from priority areas, including new businesses, we aim to increase the top line by ¥15.0 billion and aim to improve consolidated ordinary income by a total of ¥30.0 billion. Under the reassignments to priority strategic areas, in addition to those employees reassigned to the focus fields of existing businesses—such as Anshin Planners and Financial Consultants in the Retail Division and the M&A and IPO businesses in the Wholesale Division—others will be assigned to new businesses, such as Daiwa Energy & Infrastructure and CONNECT, or deployed as external partnership personnel. 04 Daiwa Securities Group Integrated Report 2019 Message from the CEO The point I would like to emphasize here is that the Group currently maintains a surplus even under these testing business conditions, and these initiatives to improve profitability are not “restructuring” designed to rid ourselves of losses. Restructuring centered on cost reduction leads to diminished balance and carries with it the risk of nipping in the bud future profit growth. Rather, our approach is to divert limited management resources to businesses that are more likely to grow in the future through a thorough review of existing businesses. We are reviewing our business portfolio and believe that this is an extremely positive, forward-looking measure that can be expected to greatly improve productivity per employee. Road Map to Reforming the Income / Expense Structure “Passion for the Best” 2020 Next Medium-Term Management Plan Phase 1 (FY2018) Phase 2 (FY2019 – FY2020) Phase 3 (FY2021 – FY2023) Pursue retail sales reform Improve the income/expense structure Establish a Quality No. 1 management base Continue Phase 1 measures + Branch strategy expand profits through reallocation of management resources Goal for improvement in income/expenses （expand sales offices, integrate + ¥50 billion (by FY2019 to FY2023) large branches） Segmentation （Allocation of personnel by customer attribute） Improve productivity and operating efficiency Sell investment securities Improve the top line Goal for improvement in income/expenses through reallocation of + ¥30 billion (by FY2020) management resources and taking other steps Improve the top line through reallocation of + ¥50 billion management resources and taking other steps + ¥15 billion Reallocate management resources + ¥30 billion Optimize costs -Effective use of human resources -Effective use of assets Severe business environment Reduce costs + ¥15 billion Current income/ expense structure Measures for FY2019 – FY2020 Retail Division: • Carefully examine cost-effectiveness by, for example, reviewing the FX business structure and various Reassess unprofitable businesses and promotions services Wholesale Division: • Review secondary business lines, such as European FICC • Middle/back function systems optimization Slim down headquarters and division • Optimize and slim down number of departments and personnel through organizational restructuring functions Improve the efficiency of sales branch • Consider promoting the integration of nearby branches in the Tokyo metropolitan area and Kansai region functions • Consolidation of middle-back functions at sales branches near Tokyo Reassess owned assets • Sale of owned properties, impairment of systems/facilities, external sales Cut unnecessary SG&A expenses • Reduction of advertising, entertainment, travel, transportation and other expenses throughout Group Daiwa Securities Group’s Daiwa Securities Group’s Business Strategy Retail Sales Reform Strategies by Division HR Strategy Governance Strategy Financial Section