Message from Management

Takashi Hibino; President and CEO of Daiwa Securities Group Inc.

April 2018 marked the start of our new three-year medium-term management plan. Dubbed "Passion for the Best" 2020, this plan presents our vision for taking the next major leap forward. To this end, we aim to be "a financial and capital market pioneer that creates the future". I would like to provide a rough overview of our initiatives and earnings performance in FY2017, as well as go over the details of this new management plan. I will also provide more insight into the type of securities house we aspire to become going forward.

FY2017 in review: Main initiatives
FY2017 was an important year for the Daiwa Securities Group, marking the 115th anniversary of our founding. Against this backdrop, we set out to tackle two sets of initiatives. The first focused on ensuring that we have the highest quality to offer products and services in the industry. The second involved transforming Daiwa into an integrated securities group with hybrid business model that harnesses the strengths of an unaffiliated brokerage.

As part of the first set of initiatives, the Retail Division adopted a new sales promotion strategy in April 2017, espousing a bottom-up sales approach with greater emphasis on the customer's perspective. Under the new strategy, our sales representatives maintain close personal contact with customers, devoting more time to putting together proposals that best fit their needs and capitalize on market trends. This approach has already reaped meaningful dividends, fueling an increase in the value of foreign equities traded by our customers amid the advances made across major stock markets in Europe and the US. In the second half of the year, the Retail Division took new steps to ensure that sales channels are carefully tailored to the various attributes and life stages of our customers. This involved not only optimizing sales channels, but also creating new ones better able to serve specific needs. One example of this is a new class of consultants at branches who are dedicated to assisting elderly customers with their financial planning needs. The Retail Division also created a group of financial consultants who serve customers looking to purchase and build their own portfolio of assets. These specialists provide guidance that helps customers stably manage their assets over the medium and long term. In addition to these new channels, the division worked to bolster its lineup of products and services designed from the customer's perspective, and introduced a system of indicators for assessing customer satisfaction levels.

The second set of initiatives involved transforming Daiwa into an integrated securities group with hybrid business model. Going forward, we see competition further intensifying in domestic securities operations. Against this backdrop, we look for these initiatives to fully leverage the Daiwa Securities Group's strengths as an unaffiliated brokerage. Over the course of the fiscal year, we strove to enrich the synergies between new areas and traditional securities businesses, as well as cultivate a diverse range of earnings sources. To this end, we actively worked to diversify our business portfolio, broadening the scope of our real estate asset management business and entering new business fields, such as those that employ FinTech solutions.

FY2017 in review: Operating environment and earnings performance
In 1H FY2017, the Japanese stock market experienced a series of pullbacks sparked by geopolitical risks and turmoil in US politics. That said, overall the market environment was solid, with concerns receding over the political climate in Europe and optimism growing over economic policies in Japan and the US. Looking at 2H, the Nikkei Stock Average hit the 24,000 mark in January 2018, buoyed by expectations for healthy earnings growth at Japanese firms. However, the release of US employment data in February brought an abrupt end to this bull run. The data revealed greater-than-expected wage growth, triggering a sharp rise in US long-term interest rates that caused Japanese shares to tumble.

Against this backdrop, Daiwa Securities Group reported net operating revenue of Y505.3bil and ordinary income of Y155.6bil on a consolidated basis for FY2017, along with profit attributable to owners of the parent of Y110.5bil. We also announced an annual dividend of Y28 per share (Y13 interim dividend, Y15 year-end dividend). In line with our efforts to deliver more generous shareholder returns, we implemented a share repurchase program for 52mil shares (3.12% of total shares outstanding, excluding treasury stock).

In addition, from FY2018 we have adopted a new policy on shareholder payouts. Under this new policy, we have lifted our target dividend payout ratio from approximately 40% to at least 50%.

New Medium-Term Management Plan: "Passion for the Best" 2020
We foresee major changes in the operating environment surrounding our group over the long term. Japan is entering a time when more people will live to age of 100. A digital transformation within business and society is also under way. Our new medium-term management plan (FY2018-2020) lays out the blueprint for building on the two sets of initiatives described earlier. The first of these focuses on ensuring we consistently provide high-value-added solutions through the use of our "Quality No.1" consulting capabilities. The second involves providing new value as an integrated securities group with hybrid business model to generate new forms of value. Following this road map, we aim to be a financial and capital market pioneer that creates the future.

Our medium-term management plan also lays out new numerical targets for the group, which consist of three types of key performance indicators (KPIs): (1) customer-oriented, (2)performance, and (3) financial. In hitting these targets, we ensure sustainable growth fueled by healthy profits from operations that place customers first and foremost.

The first of these are customer-oriented KPIs. One is customer satisfaction, which we will work to lift over the next three years. Another KPI is assets under custody, which evidence customer trust in our stewardship. We look to increase the value of such assets to Y80tri or more by FY2020.

The second type is performance KPIs. We aim to deliver an ROE of 10% or higher and increase ordinary income to Y200bil or more by FY2020.

Finally we have financial KPI, which are designed to ensure our finances remain solid going forward. To this end, we look to achieve consolidated capital adequacy ratio of 18% or higher.

As people live longer, investment in securities and other assets will become more important in Japan for a wider spectrum of age groups. I believe this will provide us with great business opportunities going forward. We also need to step up our efforts to make greater use of rapidly evolving technology to broaden our range of services and improve operational efficiency.

However, the most important thing is to consistently offer the best quality in high value-added services in areas where AI and robots will never be able to replace people. Driven by this commitment to quality, we look to build a new future in which both our customers and the broader financial market can discover the value they seek. This can only be achieved by breaking away from conventional modes of thinking and harnessing the free-thinking power of innovation. Daiwa Securities Group will continue doing our part to create an affluent society in which people can lead fulfilling and prosperous lives. To this end, we will work to generate value for both the economy and society through our efforts to tackle the social issues.

I would like to express my deepest appreciation to our shareholders for your continued support.

May 2018
Daiwa Securities Group Inc.
President and CEO,
Seiji Nakata

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