Nomura’s poor quarter is just an aberration, not a trend

Nomura Holdings Inc. may be ruing its international presence right now. It shouldn’t.
Low volatility — the bane of global investment banks — caused a slump in fixed-income trading in the three months through September, driving Japan’s biggest brokerage to its first profit decline in five quarters. Net income slid 15 percent to 51.9 billion yen ($457 million), with huge gains in Nomura’s largely domestic brokerage operations and global fund management
businesses unable to offset the
collapse in trading.
The contrast with Daiwa Securities Group Inc., Nomura’s less internationally exposed rival, couldn’t be starker. Daiwa’s second-quarter profit rose to the highest in two years on the back of booming
underwriting and brokerage commissions.
Like Daiwa, Nomura was a key arranger of the $11.6 billion share sale by Japan Post Holdings Co. last month, a transaction that completed the nation’s biggest public offering this century. While such deals helped Nomura’s investment banking fees rise 16 percent in the quarter, they weren’t enough to shield it from the global
fixed-income trading malaise.
Hold the pessimism, though. Having scaled back since its 2008 acquisition of the Asian and European rump of Lehman Brothers Holdings Inc., Nomura is on the right track.
The brokerage’s strategy of continuing to bulk up in investment banking, which requires fewer but costlier people, makes sense. Japan’s cash-rich companies need to expand overseas to grow, and Nomura is well placed to advise them. Indeed, the firm has benefited from being an acquirer itself. Nomura bought US money manager American Century
Investments in 2015; that asset helped it post higher asset management revenues last quarter.
At the same time, the brokerage, which stepped back from European cash equities last year, could do with reducing its swathe of expensive traders.
What’s kept shares of Nomura and other Japanese banks broadly underperforming has been investors’ general distaste for the country’s financial companies, which have been tainted by their exposure to a margin-eroding negative interest rate policy.
With Japan’s stock market rally now in full gear after Prime Minister Shinzo Abe’s re-election, foreigners just returning to the market are likely to favour doing business with the
country’s largest brokerage.
Nomura’s retail business, which posted its worst earnings in five years in the 12 months through March, is also firmly on the up, with net income increasing for a second consecutive quarter. The firm announced a first-half dividend of 9 yen per share and an unexpected buyback program of 50 billion yen.
This quarter was an aberration rather than the trend.

—Bloomberg

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter