Daiwa Q2 FY2027: Operating profit surges 72% in first half

Daiwa (Daiwa Securities Group) reported operating revenue of ¥865.4 billion for the first half of FY2027, up 23.3% from a year earlier. Operating profit rose 72.5% to ¥148.4 billion, while interim net income attributable to owners of the parent increased 36.6% to ¥107.8 billion. Growth in net operating revenue boosted profit.

• Commissions and fees: ¥281.2 billion, up 28.6% year on year, with gains in brokerage commissions and underwriting and offering-related fees.
• Trading gains: ¥62.1 billion, up 36.0% year on year, contributing to revenue growth.
• Financial revenue: ¥381.9 billion, up 13.7% year on year. Financial expenses also increased, to ¥317.2 billion.
• Selling, general and administrative expenses: Rose 22.3% to ¥295.9 billion, below the 35.5% increase in net operating revenue.

Higher fee and trading income lifted net operating revenue after financial expenses and other costs. SG&A expenses, including personnel costs, also increased, but revenue growth outpaced the rise in costs, driving a sharp increase in operating profit. Extraordinary gains fell because the year-earlier period included a gain on the sale of fixed assets, but growth in the core business supported higher net income.

The earnings release does not provide revenue or operating profit figures by business segment. The table below therefore shows year-on-year changes in major revenue items that make up consolidated operating revenue, rather than segment results.

The increase in commissions and fees reflects stronger revenue from securities transactions and product sales. Financial revenue also rose, but financial expenses must be taken into account, making growth in net operating revenue an important measure alongside gross income. Orix Bank was consolidated for only part of the first half. Investors will be watching how its contribution and ties with Daiwa's securities business affect the revenue mix going forward.

Total assets at the end of September were up 6.1% from the end of March, while the equity ratio was unchanged at 4.6%. The interim dividend was increased by ¥10 from a year earlier, to ¥39 per share.

Daiwa's basic policy is to pay dividends twice a year, at the interim and fiscal year-end, with a payout ratio of at least 50% of consolidated earnings in each half. The company has set a minimum annual dividend of ¥44 for FY2025 through FY2027, but the year-end dividend for the current fiscal year remains undecided pending a review of results. The release does not include cash flow statement figures or mention a share buyback.

Daiwa has not disclosed a consolidated earnings forecast for FY2027, saying that forecasts are difficult because the securities-related business is highly exposed to economic conditions and market movements.

• Revenue and profit forecast: Full-year forecasts for operating revenue, operating profit and net income have not been disclosed.
• Year-end dividend: The per-share amount has not been decided. The annual dividend has a floor of ¥44 per share.

Daiwa delivered strong profit growth in the first half, but that momentum cannot simply be extrapolated into a full-year forecast. Given the business's sensitivity to market conditions, investors will focus on revenue trends and the year-end dividend, which will be determined in light of results.

Daiwa Next Bank completed its acquisition of all shares in Orix Bank on Aug. 3, making the lender a consolidated subsidiary. The cash consideration was ¥385.2 billion, and the consolidated results include Orix Bank's performance from July through September.

• Acquisition and accounting: Daiwa acquired 100% of voting rights. Goodwill of ¥103.5 billion will be amortized evenly over 20 years.
• Orix Bank assets and liabilities: Assets acquired on the business combination date totaled ¥3.2946 trillion, while liabilities assumed were ¥3.0128 trillion. The assets included a substantial amount of loans, and the liabilities included bank deposits.
• Strategic rationale: Combine lending and trust functions, along with specialized staff, with Daiwa Securities Group's customer base and ability to attract deposits.

Daiwa says the shift to a higher interest-rate environment is increasing customer demand for advice on both assets and liabilities, including lending and trust services. The group aims to strengthen its ability to offer securities-backed and real estate-backed loans, as well as inheritance-related services, and to create a virtuous cycle of deposit and loan growth. A future merger of the two banks to integrate their functions is also under consideration, making post-acquisition integration and monetization key priorities.

First-half profit growth was strong, but securities earnings remain sensitive to market conditions. Daiwa will also need to manage integration and costs as it expands its banking business.

• Markets and the economy: Changes in equity markets and economic conditions affect earnings from securities-related businesses. This is also why the company has not issued a full-year forecast.
• Interest rates and funding: Changes in interest rates affect both financial revenue and financial expenses, influencing net operating revenue.
• Post-acquisition integration: A key challenge is linking Orix Bank's lending and trust capabilities with the group's customer base and realizing the expected synergies.
• Balancing growth and costs: SG&A expenses, including personnel costs, are rising alongside revenue. Investors will be watching whether Daiwa can maintain margins as it integrates the bank and expands its businesses.

For the acquisition, the long-term amortization of goodwill and the pace of integration will both affect future profitability. The key test is whether Daiwa can expand stable earnings that are more resilient to market swings while also realizing the benefits of the acquisition.