Daiwa's Record Machine Keeps Humming — Just Not on the P&L

A record quarter the headline number hides

Daiwa Securities Group's fiscal second quarter is a study in two businesses moving in opposite directions. Net operating revenue rose 1.6% quarter-on-quarter to JPY 223.9 billion, but ordinary income fell 11.2% to JPY 78.2 billion and profit attributable to owners dropped 8.8% to JPY 51.4 billion. Read only the P&L and it looks like a stumble — annualized ROE of 11.3% is respectable, not accelerating.

Read the stock side instead and the picture inverts. Investment trust and wrap service flows drove asset-based revenue to a record JPY 38.3 billion, and base income — the medium-term plan's stable-earnings KPI — hit JPY 62.3 billion, up 41.9% year-on-year, with the first half at JPY 125.2 billion, over 80% of the JPY 150 billion target. Yoshida framed the quarter around exactly that recurring layer: “asset-based revenues to a record high of JPY 38.3 billion” — Kotaro Yoshida, Executive/Management · 2026-10-30.

The drag was all flow. Brokerage commission fell 24.4%, underwriting and secondary offering commission 31.2%, and Global Markets revenue 15.1% with profit down 38.6% as overseas FICC faltered on rising US rates and harder position management. Overseas ordinary income of JPY 7.6 billion was down 44.6% sequentially, even as the half set an all-time semiannual high. This is the barbell: a compounding fee base, a cyclical trading arm, and a quarter where the second one got in the way.

The capital bill for buying a bank

Here is what genuinely changed. Daiwa consolidated ORIX Bank on August 3, and the price was paid in capital. The consolidated capital ratio was 21.04% at end-June; management now guides to roughly 14% at end-September after the Basel III finalisation and ORIX consolidation impacts. That is a seven-point round trip in a single quarter — and it is why an AT1 bond was announced the same morning, sized at JPY 100–120 billion depending on demand.

...at the end of September, capital ratio is probably down to around 14% or so. The maintenance of the financial soundness and need to invest for future growth. We'd like to recover some buffer capital. We'd like to gradually recover our capital level.

A quarter ago this was still hypothetical. Asked in August about the capital ratio hit and the AT1 option, Yoshida said: “We have been continuing to consider this and we are planning. In terms of the schedule, it's not decided yet.” — Kotaro Yoshida, Managing Executive Officer and CFO · 2026-08-03 Now it is decided, priced against investor demand, and the rating agencies are watching — management noted they put Daiwa on watch after the acquisition. The arithmetic offered is roughly 1 point from the AT1 and 1 point a year from retained profit, i.e. a multi-quarter walk back to a buffer, not a quick fix.

The loan to deposit ratio question is the same story on the funding side. ORIX Bank stood above 100% standalone and struggled to grow loans; combined with Daiwa Next Bank it lands near 60%, giving room to lever — “on a combined basis with the Daiwa Next Bank in terms of the loan-to-deposit ratio, it's in the 60% range” — Kotaro Yoshida, Executive/Management · 2026-10-30. That is the mechanical synergy the market was promised, but it also means Daiwa now carries a lending book it must fund, a different animal from a pure brokerage.

The savings-to-investment engine is real — and not new

Net asset inflows of JPY 312.6 billion marked the eleventh consecutive quarter of individual net inflows; wrap contract AUM reached JPY 6,946.9 billion with a record quarterly net increase of JPY 294.6 billion. Daiwa Next Bank deposits fell, which management frames as the flywheel working: matured time deposits were 70% retained in-group and 30% lost, with corporate bonds and JGBs absorbing the outflow. Yoshida: “This move away from savings to investment, it is definitely accelerating, and this trend has strengthened.” — Kotaro Yoshida, Executive/Management · 2026-10-30

But this is continuity, not discovery. The prior call's keyword set already carried saving-to-investment and total asset consulting, and the prior quarter's wrap discussion was the same conversation about resilient retail behaviour: “99% of the customers or more than that have the surplus or the positive unrealized gain.” — Kotaro Yoshida, Managing Executive Officer and CFO · 2026-08-03 What is new is the analyst pushback. Niwa asked directly whether base income was “kind of hitting the ceiling” — Koichi Niwa, Analyst · 2026-10-30, and Yoshida conceded Q2 absorbed a one-off valuation hit in Securities Asset Management's seed investments alongside ORIX's contribution. The stable engine still works; its slope is less certain than a year ago.

Alternative assets and a global macro echo

The softer corner was Alternative Asset Management, where capital gains thinned and Daiwa Energy & Infrastructure booked losses on renewable investments. The mechanism is a classic fixed-revenue, floating-cost squeeze: “due to the Middle East situation and global inflation, the procurement cost — procurement price is increasing. Thus, although the tariff is fixed, however, cost is increasing.” — Kotaro Yoshida, Executive/Management · 2026-10-30 Those are the same forces the global tape is already pricing — high fuel costs and Middle East conflict rank among the market's top themes this quarter, while second-order incremental inflation has been a recurring tag across two quarters. Daiwa's write-down is a downstream read on a shock everyone else is watching upstream.

Two quieter items deserve a line. The Credit Saison stake sale produced an extraordinary gain, framed as capital efficiency rather than a partnership rupture — the alliance stays. And buyback language stayed deliberately vague: no policy change, "flexibly" if no investments appear, but a 14% capital ratio is not a buyback backdrop.

What to watch

Daiwa is re-engineering itself into a deposit-funded, wealth-centric compounding machine, and this quarter proved the fee base can grow through a hostile tape. The costs are a thinner capital ratio, a rating-agency conversation, and a Global Markets division that management admits is off to a slower October start. The next data points are AT1 pricing, whether October's trading lull is a month or a quarter, and whether base income can break the ceiling an analyst — not management — was the first to name.