Nomura retreats from global equities

IFR Asia 763 - September 8, 2012
7 min read
EMEA, Asia
Mia Stubbs, Gareth Gore

Logo of Nomura Bank Switzerland Ltd. is pictured at a branch in Zurich

Source: Reuters/Michael Buholzer

Logo of Nomura Bank Switzerland Ltd. is pictured at a branch in Zurich

Nomura plans to close much of its international equities business and will shrink its investment banking presence globally as the Japanese lender responds to an industry-wide slowdown and seeks to drag its loss-making wholesale unit back into the black.

Hundreds of redundancies are likely as Nomura looks to slash US$1bn from its expense bill by April 2014. They will fall heavily on the Europe, Middle East and Africa region, where 45% of the reductions will be made. The Americas business will shoulder 21% of the cost cuts and Japan 16%.

The balance of 18% will come from the rest of Asia, a strategically important region for the bank. The reductions come on top of US$1bn of cost savings in the last year, with senior bosses accelerating cutbacks as a result of the economic slump.

Although large – Nomura will have cut 25% of its costs at the end of the process – it is the bank’s decision to close much of its equity business that is the biggest surprise. Apart from Royal Bank of Scotland and UniCredit, most other banks have chosen to trim, rather than shutter, their equity franchises.

That is despite a decline in trading volumes and increased competition from electronic-trading platforms, which have increasingly grabbed trades and eaten into brokers’ margins. Electronic platforms now attract about two-thirds of trading in Europe, up from nothing as recently as 2000.

“In investment banking, everyone is making adjustments in response to the declines in deals and volumes that is hitting everyone hard,” John Phizackerley, chief executive for EMEA at the bank, told IFR. “But, in equities, it is different: the changes are secular, not cyclical. We are one of the first movers, where many others will have to follow.”

Nomura will push current equity clients to use the group’s electronic platform, Instinet, although it will retain a physical presence in Japan, Korea and Taiwan equities. It will keep its research offerings, and fold its derivatives, convertible bonds and prime services businesses into a new unit.

Insiders said it was still unclear how the bank’s equity capital markets franchise would be affected. UniCredit earlier this year decided to outsource its equity brokerage and research to Kepler Capital Markets, using the firm to liaise with clients on ECM deals. An electronic platform will not be able to do that.

The retrenchment represents the dissolution of much of the physical international equity franchise Nomura acquired when it bought Lehman Brothers’ operations outside of the US in late 2008. Annual equities revenues trebled to ¥353bn (US$4.5bn) immediately after the purchase. Last year, the bank pulled in just ¥182bn.

Speaking in Tokyo, group CEO Koji Nagai admitted the firm had made a mistake in not buying the US part of the bankrupted Lehman. Last year, Nomura earned less from equities and investment banking than it did in the year ended April 2008 – before the acquisition – while its costs are now 50% higher than they were then.

Nothing sacred

“I can’t say the Lehman acquisition has been a success in light of our current performance,” said Nagai in response to questions from IFR. “Having said that, it was a challenge that needed to be taken. The priority in deciding on the new strategy is the firm’s survival and no business operation is sacred.”

Wholesale, which comprises the global markets and investment banking businesses, posted a loss of ¥38bn last year. In the previous two full years after the acquisitions, the bank had stayed in the black – although profits were steadily eroded as the eurozone crisis escalated and global trading slumped.

“To be fair, when Nomura bought Lehman, no one knew Europe would melt down,” said one Japanese banker in London, who works for a rival firm, in defence of the acquisition. “If anything, at the time, the old continent looked more solid than the US.”

That said, incorporating the Lehman business in Asia, a region that has taken less of a hit from the troubles that plague Europe, has not gone smoothly.

“We have failed to build an effective business linkage between Japan and Asia, although we have such a strong franchise in Japan,” said Atsushi Yoshikawa, president and COO of the group and CEO of the wholesale unit. “The biggest problem in Asia has been an absence of communication (between the two areas).”

Betting on fixed income

Within investment banking, the bank said it would allocate resources to key sectors, such as financial institutions, natural resource and consumer clients. Fixed income, which has remained resilient through the last couple of years, would remain largely unchanged and become the “driver” of earnings, Nomura said.

The EMEA region generates about a third of revenues globally and has come under criticism from analysts for its high cost base. Phizackerley, however, said his region would continue to be a big hitter, even after the cuts.

“I still expect the region to be the largest contributor to revenues outside of Japan,” he said. “It is simply not true that we are swimming in a sea of red. On top of that, our position as a bridge to Asia is really starting to pay off – the pipeline for those kinds of deals is looking great and we’ve printed some big cross-border tickets lately.”

The bank seems – in its slimmed-down form – to be keen on leveraging its Asian roots to become the region’s biggest global investment bank.

“The fee pool in Asia is increasing and we reckon the global economic recovery will begin in Asia,” Yoshikawa said. “We want to be in a position to expand market share when the recovery comes.”

For now, however, there are few concrete plans on how to do that. Analysts still remain concerned about the bank’s reliance on its domestic markets.

“The latest cost cuts are a basis to start a discussion with investors about where Nomura should be going,” said Masao Muraki, a bank analyst at Deutsche Bank in Tokyo. “Nomura remains dependent on the Japanese operations for profitability.”

Nomura retreats from global equities