Daiwa Securities Co. Ltd. -- Moody's affirms Daiwa's ratings; outlook remains negative

The ratings outlook remains negative.

RATINGS RATIONALE

The affirmation of the ratings reflects Moody's view that Daiwa's efforts at cutting costs, a reduction in risk appetite, and a shift in focus towards domestic businesses have modestly reduced its earnings sensitivity to its volatile overseas wholesale operations.

The rating affirmation also incorporates Moody's view that Daiwa is a systemically important non-bank financial institution in Japan.

Moody's views as beneficial for creditors the Bank of Japan's ability to provide support by acting as lender of last resort, including the possibility of granting special uncollateralized loans to both Daiwa Securities Group and Daiwa Securities under Article 38 (as well as liquidity support for registered securities companies, such as Daiwa Securities, under Articles 33 and 37). Given the highly supportive stance of the Bank of Japan and the systemic role of Daiwa within the domestic financial system, Moody's has incorporated a moderate probability of systemic support into the firm's ratings.

Daiwa's credit ratings benefit from this likelihood of external support, which partially offsets the negative credit impact of the intrinsic financial weakness that Daiwa has exhibited over the past few years.

Nonetheless, the rating outlook remains negative, which reflects Moody's concerns that Daiwa's core profitability is weak and its operating leverage is still high, even though cost cuts have helped lower the amount of revenues it needs to generate to break even.

Daiwa's operating performance over the last two years has been very weak, and its overseas wholesale businesses were particularly hard hit by the turmoil in the global financial markets. It has been unable to maintain a sustainable franchise outside Japan.

As a result, Daiwa reported its second consecutive annual net loss -- which stood at JPY39.4 billion -- for the fiscal year ended on 31 March 2012.

In order to generate sustainable profitability and improve its earnings, Daiwa has been implementing cost cuts at its overseas wholesale division and aims to save about JPY60 billion. It has changed its strategy to focus more on the domestic retail and asset management businesses, where it has a competitive advantage.

As a result of these initiatives, Daiwa's operating expenses have started to decline gradually, and its bottom line has shown some recovery.

The company reported net profits for 4Q FYE03/2012 as well as 1Q FYE03/2013, although it may require several additional quarters to restore the profitability of the wholesale businesses, given the sensitivity of its earnings to the turnover and sentiment in the domestic market.

Still, Daiwa has a relatively solid capital base and adequate liquidity -- a situation that is likely to continue, given the firm's efforts to reduce its risk appetite and its relatively conservative liquidity management.

Negative pressure on the ratings could emerge if Daiwa fails to improve earnings over the next several quarters.

The ratings outlook could return to stable if Daiwa records profitability for several quarters owing to sustainable improvement in its retail and wholesale businesses.

Please see ratings tab on the issuer/entity page on the Moodys website for the last rating action and the rating history.

The principal methodology used in rating Daiwa Securities Group Inc. and Daiwa Securities Co. Ltd. was the Global Securities Industry Methodology published on 30 September 2010, and available on www.moodys.co.jp.

Daiwa Securities Group Inc. is a leading securities group in Japan and a holding company. Its principal shareholdings include Daiwa Securities Co. Ltd.

Maki Hanatate VP - Senior Credit Officer Financial Institutions Group Moody's Japan K.K. Atago Green Hills Mori Tower 20fl 2-5-1 Atago, Minato-ku Tokyo 105-6220 Japan JOURNALISTS: (03) 5408-4110 SUBSCRIBERS: (03) 5408-4100 Stephen Long MD - Financial Institutions Financial Institutions Group JOURNALISTS: (852) 3758 -1350 SUBSCRIBERS: (852) 3551-3077 Releasing Office: Moody's Japan K.K. Atago Green Hills Mori Tower 20fl 2-5-1 Atago, Minato-ku Tokyo 105-6220 Japan JOURNALISTS: (03) 5408-4110 SUBSCRIBERS: (03) 5408-4100 Copyright 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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