Daiwa Securities Group Annual Report 2012 Corporate Summary Executive Messages Business Strategy Financial Section Management Systems & CSR Other Information 16 Fixed Cost Coverage Ratio Establish robust business structure by reducing fixed costs and growing stable revenues  Q4  The first basic policy of the new plan is to “Return to profitability by pursuing management  efficiencies.” Specifically, how do you plan to accomplish this? A.  By placing top priority on the introduction of more efficient methods and policies, we aim to return operations to  the black in FY2012, the first year of the new medium-term plan. At the start of FY2011, we calculated that the level of Base SG&A expenses—that is, the level at which ordinary  income would be zero—was around ¥380 billion on a consolidated basis. The new medium-term management plan  calls for us to reduce that break-even level to ¥320 billion or less by the end of FY2014. After breaking SG&A costs  down by category, we believe that we can cut IT-related expenses by ¥19 billion and trim a further ¥33.5 billion from  costs by rationalizing overseas operations. The remaining ¥7.5 billion savings will be achieved by reducing real  estate expenses and other costs at Group subsidiaries. We expect to implement nearly 80% of these cost cuts  during FY2012, reducing consolidated SG&A expenses by almost ¥50 billion. Meanwhile, we are making progress in the effort to restructure our workforce. Plans for transferring personnel  to front-office positions were announced last February. We initially intended to complete the transfer of middle- and  back-office staff within three years, reducing the workforce in these sections to around 1,500. However, under a  new plan we accelerated the process in order to complete most of the transfers by this April. Looking ahead, we  hope to introduce multitasking and enhance the skills of our workforce further, creating a slimmer and more efficient  operating structure. We learned the hard way—during the financial crisis that followed the Lehman Shock—that when a severe  shock occurs, it can be very difficult to change directions quickly. Therefore, we will continue working to cut  costs and revive earnings even if the markets do start to recover. The Daiwa Securities Group has tried to  cultivate a business philosophy of steadily expanding stable income sources, rather than just trying to cash in on  short-term profits. At present, the Daiwa Securities Group has a fixed cost coverage ratio of 32%. By reducing fixed expenses and  working to expand stable sources of income, we aim to increase that figure to over 50% by the end of FY2014.  We  view this ratio as a key performance indicator and we intend to monitor it closely since it tells us to what  extent we have achieved the management objective of “establishing a robust business structure.” Stable Revenues: Calculation based on market conditions at the end of FY2011 300 250 200 150 100 50 0 60 50 40 30 20 10 0 (¥ billion) (%) FY2009 FY2010 FY2011 FY2012 FY2013 FY2014 Fixed Costs Stable Revenues Fixed Cost Coverage Ratio ¥b ¥ b illi ) on) Stable Revenues: Asset management fees (include investment advisory fees), investment trust agency commissions,  Daiwa Next Bank profit margin on interest, Daiwa Real Estate asset management fees, SMA*$^{1}$/  FW*$^{2}$ fees, interest from credit transactions, and LMS*$^{3}$ interest * 1 Separately Managed  Account *$^{2}$ Fund Wrap *$^{3}$ Loan Management Service