Nomura’s Prime Brokerage Pullback Deals Blow to Global Goals

Just weeks after Nomura Holdings Inc. vowed to push ahead with its global ambitions, unswayed by deep losses from the implosion of Archegos Capital Management, the firm is pulling the plug on a chunk of its hedge fund business.

Japan’s biggest brokerage will stop offering cash prime-brokerage services in the U.S. and Europe, and has given some clients about six months to find a new provider, according to people familiar with the matter, who asked not to be identified discussing the private information. A spokesman for Nomura declined to comment.

The pullback comes after Nomura notched up some of the biggest losses from the implosion of the U.S. family office built by Bill Hwang, taking a $2.9 billion hit. While the impact on earnings from the prime-brokerage retreat may be limited, it adds to a list of stumbles for the firm as it takes on global risk to offset slower growth at home. It also comes as a blow to Chief Executive Officer Kentaro Okuda, a company lifer who took charge a year ago and once ran the North American business.

“Nomura is shifting further into safe driving that will reduce the risk of one-off losses,” said Bloomberg Intelligence analyst Shin Tamura. “While that may make Nomura a less interesting company, I believe that’s the way the firm as a publicly traded financial institution should go.”

Nomura’s Prime Brokerage Pullback Deals Blow to Global Goals

There’s no change in Nomura’s prime-brokerage business in Asia including Japan, one person said. The bank will try to offer some cash prime-brokerage services in Europe and the U.S. by using other products and it will continue to have clients there, the person said.

Nomura, which trails only Credit Suisse Group AG among banks posting the biggest losses from the family office collapse that saw almost $20 billion vanish in two days, is grappling with how to rebuild its business in the wake of the scandal. Soon after the debacle began unfolding, Okuda publicly signaled he would stick to a plan to build up a presence in the U.S. even after the Archegos meltdown led to the Japanese firm’s biggest quarterly loss since 2009.

U.S. Probe

Investigators in the U.S. who focus on corporate collusion are examining how global banks handled multibillion-dollar trades with Archegos, people with knowledge of the matter said last month. The Justice Department’s antitrust division has been seeking information from Hwang’s biggest backers on Wall Street, who had discussed the possibility of moving in concert to unwind the portfolio and sever ties with his busted family office.

Shares of Nomura remain about 24% below this year’s peak reached in late March, when news of the Archegos saga first surfaced. They closed down 1.4% in Tokyo on Wednesday.

In the weeks after the scandal, Nomura outlined what it called “remedial measures” to bolster risk management. To help its expansion plans in the U.S., which has the world’s biggest pool of banking fees, Nomura tapped Wall Street veteran Christopher Willcox as co-head of its Americas unit and pledged to add non-Japanese outside directors.

Nomura in April suspended senior executives at its investment bank in connection with Archegos, including global prime brokerage head Dougal Brech and Joshua Kurek, head of the U.S. prime brokerage business. It now has a new global head of credit risk in Patrick McGarry.

Outside prime, Nomura is grappling with departures. The heads of equity capital markets for Asia ex-Japan and Greater China have left along with a number of junior investment bankers in Asia after bonus payouts in May.

The brokerage has also suspended coverage of dozens of companies, including Nintendo Co. and Rakuten Group Inc., following the departure of two highly ranked stock analysts in Tokyo, at a time when it’s seeking to reinforce research as part of broader growth plans.

Not all the news has been bad. Nomura this week sold $3.25 billion of dollar bonds, marking a return to the market after taking the rare step in March of scrapping a debt offering that it had already priced. Nomura managed to capitalize on a subsequent drop in market borrowing costs to pay about 20-30 basis points less interest on the notes than it had agreed to pay in March.

Nomura’s prime-brokerage revenue from the U.S. and Europe is dwarfed by what its other markets businesses earn there, so as the unit pares back in those regions the impact on earnings is likely to be muted, an executive previously told Bloomberg News.

In May, the company raised its pretax income target for the financial year ending March 2023 with the bulk of growth expected to come from the wholesale division, which houses global markets, investment banking and international wealth management. At wholesale, which took the Archegos hit, Nomura expects fee and commission revenue to increase to $1.3 billion or more, up 13% from a May 2020 goal.

Cash prime brokerage is the business of lending to hedge funds against shares of companies they hold and pledge as collateral in what is usually called a margin loan. That contrasts with swap prime brokerage where clients don’t outright own the shares and instead use derivatives such as total return swaps. Archegos used total return swaps to build up huge exposure to a small number of firms.

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