Daiwa's Profit Slide and Strategic Buyback: Navigating Uncertainty in Japan's Markets

Daiwa Securities Group Inc. reported a significant 24% year-on-year drop in Q1 2025 net profit to ¥29.9 billion, marking its second consecutive quarterly decline. Despite this stumble, the firm announced a ¥50 billion share buyback program, signaling confidence in its long-term strategy. This article dissects the profit slump, evaluates the buyback’s merits, and weighs Daiwa’s prospects in a shifting financial landscape.

Profit Decline: A Closer Look

The Q1 downturn was driven by two key factors:
1. Alternative Assets Division Losses: A ¥1.99 billion loss in energy and infrastructure investments dragged down asset management profits by 41%. This reflects broader market volatility, particularly in global energy markets and infrastructure valuations.
2. Weak Global Markets Revenue: Fixed-income trading revenue plummeted over 50% year-on-year to ¥6.3 billion, linked to U.S. interest rate uncertainty and geopolitical risks like tariffs under the Trump administration.

However, Daiwa’s wealth management division remains a bright spot. Annual asset inflows nearly doubled to ¥1.57 trillion in FY2024, underscoring the success of its shift toward recurring revenue streams. CFO Kotaro Yoshida emphasized that Daiwa’s focus on converting Japanese savings into investments—fueled by resurgent inflation—remains intact, even as short-term headwinds persist.

While Nomura reported record annual earnings in the same period, Daiwa’s stock has underperformed, dropping nearly 15% year-to-date—a key driver for the buyback announcement.

Share Buyback: Strategy or Distraction?

The ¥50 billion buyback program aims to repurchase up to 3.53% of outstanding shares, with purchases restricted to avoid market-sensitive periods. This move aligns with Daiwa’s 1.9% annual share buyback ratio over the past year, outperforming 87.9% of Capital Markets peers.

Critically, the buyback’s success hinges on valuation. Reuters notes that repurchases are beneficial only if shares are undervalued. Daiwa’s price-to-book (P/B) ratio of 0.6x—below its five-year average of 0.8x—suggests the stock may indeed be attractively priced. However, investors must weigh this against ongoing risks, such as further declines in alternative assets or prolonged weakness in fixed-income trading.

The Bigger Picture: Long-Term Growth

Despite Q1’s stumble, Daiwa’s full FY2024 net profit rose 27% to ¥120.5 billion, reflecting its strategic pivot to stable revenue streams. Wealth management’s growth, which accounted for nearly half of FY2024’s total inflows, signals a resilient foundation.

Moreover, Japan’s return to inflation (CPI at 3.2% in March 2025) supports Daiwa’s core thesis: shifting households from savings to investments. With ¥1,000 trillion in household deposits, there’s ample room for growth.

Conclusion: Navigating a Balance

Daiwa’s Q1 profit decline is undeniably concerning, particularly given its weakest quarterly results since 2023. Yet, the buyback program and wealth management’s strength suggest a path forward. Key takeaways:
1. Near-Term Risks: Alternative assets and global markets face headwinds, but these divisions are smaller relative to wealth management.
2. Valuation Support: A P/B of 0.6x and a buyback ratio outperforming 87% of peers indicate undervaluation.
3. Long-Term Momentum: FY2024’s 27% profit growth and doubling of asset inflows highlight strategic execution.

Investors should monitor whether Daiwa’s buyback stabilizes its stock and whether wealth management can offset cyclical divisions’ volatility. While caution is warranted, the ¥1.57 trillion asset inflow milestone and Japan’s inflation-driven investment shift suggest Daiwa’s story is far from over.

In sum, Daiwa’s stumble is a speed bump in a longer journey toward capital efficiency and shareholder returns. The buyback may prove timely—if markets recognize its undervalued stock—and the wealth management engine remains its best bet for sustained growth.