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Big in Japan Hope at home for Toshibas nuclear arm after U.S. debacle

´╗┐The bankruptcy of Westinghouse Electric Co may be a blow to Toshiba Corp's international nuclear ambitions, but the Japanese conglomerate still has a profitable business at home. Toshiba, whose businesses range from memory chips to rail, is at the heart of Japan's atomic industry. While this has been moribund since the 2011 Fukushima disaster, Japan still has dozens of reactors that need to be maintained and supplied with parts and fuel once operating. Toshiba is also involved in the Fukushima clean-up. The cost of decommissioning the wrecked Fukushima Daiichi facility alone is estimated by the Japanese government at 8 trillion yen ($71 billion). Some experts have predicted the process could take as long as a century. All but three of Japan's 54 commercial nuclear reactors are currently shut down. Twelve are set for decommissioning, including the six at the Fukushima stations. Even idle, they need constant maintenance and supervision. For Toshiba, the main contractor or a major component supplier to 20 of those reactors, that's a stable business, and one of its most profitable in terms of return on sales. Fuel and servicing make up the lion's share of the group's nuclear revenue."They can come out of this (Westinghouse bankruptcy) with a very healthy nuclear business in Japan," said George Borovas, global head of nuclear at law firm Shearman & Sterling, noting this would include servicing, maintenance and decommissioning."Business lines such as nuclear fuel supply and services have a significantly different risk profile to nuclear new build projects," he added.

Toshiba was undone by its push into construction through Westinghouse, its U.S. nuclear arm that ran up billions of cost overruns as two key U.S. projects were delayed by years to meet growing safety demands post-Fukushima. Global construction is expected to have lost money in the 2016 financial year, according to provisional forecasts by Toshiba last month, but the Japanese nuclear power business is forecast to see a return on sales of 8 percent for the year. Toshiba aims to increase that to 10 percent by 2019. JAPAN SOLUTION The Westinghouse collapse could also revive consolidation in Japan's nuclear industry, which, unusually, includes two other main suppliers - Mitsubishi Heavy Industries (MHI) and Hitachi.

At a fractious Toshiba shareholders meeting on Thursday, Yoshimitsu Kobayashi, an external director who heads the group's management nomination committee, said he wanted Toshiba, Hitachi and MHI to eventually form a nuclear holding company. The three firms were in talks last year to merge their nuclear fuel operations, but the process was delayed after the Westinghouse troubles came to light."It would make sense. There's no point in having three companies chasing a dying market in Japan," said Tom O'Sullivan, founder of independent energy consultancy Mathyos Japan. Any move to consolidate, though, could come up against a government that wants to keep its nuclear options open in the aftermath of Fukushima, and, analysts note, the three companies employ different technologies.

A Hitachi spokesman said there are no discussions on merging the companies' overall nuclear operations. He noted Hitachi's nuclear business is profitable. It has forecast sales of 150 billion yen in the year ending Friday. MHI said it had no "specific plans to deepen" its nuclear cooperation with Toshiba, highlighting its use of different reactor technology. The company does not break out its nuclear business and did not say if it makes money. FUKUSHIMA FALLOUT Toshiba was the main contractor for three of the Fukushima Daiichi units and supplied the reactor vessels to two others. It's also the main contractor and equipment supplier on two units of the nearby Fukushima Daini station, which may never be restarted due to local opposition, and is lead contractor and supplier on three reactors at the Kashiwazaki Kariwa nuclear plant, the world's biggest. While servicing nuclear stations will continue to be profitable, Toshiba's Senior Executive Vice President Yasuo Naruke on Thursday offered a lament to angry shareholders."The changes in the environment for the nuclear business, including the Fukushima disaster, were the remote cause for the Westinghouse writedown," he said.

BlackRocks big funds cut commission rates for Wall Street research

´╗┐BlackRock Inc (BLK. N), the world's biggest asset manager, slashed the amount it paid out in commissions to Wall Street firms for research by more than half for its largest mutual fund over the last two years, according to filings. The cuts show the immense power large asset managers have to curb fees they pay banks and the diminishing role of sell-side research at a time when Wall Street firms are facing a slump in stock trading commissions. BlackRock's $40 billion Global Allocation Fund (MALOX. O) paid out $13.4 million in commissions in the 2016 fiscal year for trades tied to research, compared with $28.8 million two years earlier. The commissions fell even though the BlackRock fund routed roughly the same level of transactions to brokerages in exchange for access to their research notes and other related services. The same pattern is true for other big BlackRock funds, according to a Reuters analysis of U.S. Securities and Exchange Commission filings from three of BlackRock's five largest funds. Some of those funds paid out more in total commissions, but trading activity in those funds increased to a greater degree, meaning that the actual commission rate fell. A BlackRock spokeswoman declined to comment. In announcing an overhaul of its actively managed equities business last week, BlackRock said it was "harnessing the power of 'human and machine,'" relying more on computers and data-mining to pick stocks. Equities revenue, which includes executing stock trades and buying and selling derivatives related to stocks, is slumping across Wall Street. In 2016, equities revenue across the world's biggest banks declined 13 percent, to the lowest level since 2012, according to research provider Coalition. The outlook is not expected to improve.

For the first quarter of 2017, JPMorgan Chase & Co (JPM. N) predicts equities revenue across the industry fell 3 percent year-over-year, compared with gains of over 20 percent in both investment banking and bond trading. REVENUES NOT SEEN COMING BACK Structural changes to the equities business over the last several years, such as the rise of electronic trading, have knocked off around $15 billion from the equities fee pool, according to a report from Morgan Stanley and management consulting firm Oliver Wyman. Electronic trading has dramatically increased trading volumes, while making the cost of trading much cheaper. Oliver Wyman partner Christian Edelmann, who co-authored the report, does not see those revenues coming back. "Once the equities model has become technology driven, that's not going to change," he said.

Other factors are expected to strain the equities business further. Asset managers including BlackRock, which last week also said it would cut jobs and fees in its active equities business, are under enormous pressure due to weak returns and competition from low-cost options like index funds. The fee squeeze is making firms more selective about how they spend research dollars. At the same time, the long-running practice of paying for research through trading commissions is being upended by new regulations in Europe, known as the revised Markets in Financial Instruments Directive. Part of the overhaul will force investors in the European Union to pay for research directly, meaning banks will be required to put price tags on their proprietary analysis. Global asset managers are expected to "unbundle" payments in other regions as well.

Asset managers and hedge funds typically determine their research budgets through a process called broker votes in which portfolio managers rate the value of equity research analysts. The broker vote helps firms decide which research providers to keep and how to allocate their research dollars. Asset managers have gained leverage because they have an increasing variety of choices of trading venues and research providers, including independent firms unaffiliated with the big banks. And a push for high-value ideas has caused some to build up more research capabilities in-house. Banks are doing what they can to keep their research products relevant, such as employing more data scientists to support research from traditional stock analysts. Banks have already been trimming their research budgets. Spending on research at the top investment banks fell by just over half to $4 billion in 2016 from $8.2 billion in 2008, according to Frost Consulting. BlackRock has managed to keep its funds' spending on commissions for research under control. Spending on commissions by its $21 billion Equity Dividend Fund

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