Nomura back to black

Nomura returned to the black at its wholesale bank in the final three months of 2011, surprising the market with its most profitable quarter in two years and bringing to a close a difficult period for the bank that saw the departure of some of its most senior staff.

The wholesale division made a profit of ¥37.8bn (US$497m) during the Japanese third quarter, its best performance since 2009. Net revenues came in at ¥176.2bn, up slightly on a year earlier and more than double those of the previous quarter, when eurozone worries hit trading and deals.

“The most important thing is that we’ve returned to profit,” wholesale CFO Jonathan Lewis told IFR. “Given the challenges the industry has faced in the last few months, I think that’s a real achievement. We’re seeing some real improvement in Europe, where the backdrop has stabilised.”

Top-line income was boosted by a one-off gain from the sale of its stake in Japanese restaurant chain Skylark to Bain Capital. Excluding that, investment banking revenues were down 35% from a year ago, while global markets income was down 16% on 2011 numbers.

Still, the quarter-on-quarter rebound reflects well on the firm alongside some of its larger US peers, which reported last month. The fixed income macro franchise had a record quarter in Asia outside of Japan, while the rates and credit business in Europe, Middle East and Africa rebounded strongly.

According to Lewis, the firm aims to capitalise on its relative financial health to eat into the market share of its ailing rivals in the West. Many banks are shedding assets and cutting lending as a way to meet new capital rules. European banks alone have to fill a €115bn capital hole by June.

“We are in a very comfortable position relative to many of our peers”

Many rivals also remain shut out of private wholesale funding markets and have become increasingly reliant on central bank funding. Nomura, by contrast, has built up a US$72bn liquidity cushion and continues to issue bank paper in its home market of Japan.

“The balance sheet remains strong and clean, and we are absolutely prepared to use it to gain market share. We are in a very comfortable position relative to many of our peers,” said Lewis. “We can issue debt in Japan at very favourable rates compared with the international markets.”

Questions for Tokyo

But one big question that still hovers over the wholesale business is how much support it still has from its Japanese parent. The unit’s funding is decided by group chiefs in Tokyo, and the departure of wholesale president Jasjit “Jesse” Bhattal last month hints at tension between the two.

Bhattal made few inroads globally during his tenure, raising questions about Nomura’s global expansion that began with the acquisition of Lehman Brothers’ non-US business in late 2008. The lion’s share of wholesale revenues – some 45% – is still generated out of Japan.

Capital markets also languish behind, bringing in only a fraction of the revenues of most US and European rivals. In the third quarter, equity underwriting fees were down 81% from a year earlier at ¥4.2bn, while debt underwriting fees were 6.3% off at ¥4.8bn.

A global downturn in deals – and the firm’s failure to grab a big share from rivals – has prompted a US$1.2bn effort to cut costs. The Japanese bank went on a hiring binge after the Lehman purchase, and saw personnel costs rise 40% between the 2007–08 and 2010–11 financial years. That is now changing, and in the third quarter Nomura managed to shave 14% off expenses.

“It is no surprise that it is tough out there and that there are challenges in the market,” said Lewis, who added that 80% of cost savings should be done by March – ahead of plans. “We will look at what we need to fine-tune, but the overall strategy remains unchanged.”