Nomura CEO’s Next Task Is Avoiding a Cut to Firm’s Credit Rating

(Bloomberg) -- Nomura Holdings Inc. Chief Executive Officer Koji Nagai, who narrowly escaped an attempt to oust him last week, now faces the challenge of demonstrating to credit-rating companies that his latest turnaround plan will succeed where two previous efforts failed.

S&P Global Ratings said it’s monitoring Nagai’s effort to cut about $1 billion of costs for any signs of falling behind schedule, while Moody’s Investors Service said a failure to improve profitability would put downward pressure on Nomura’s credit rating. Both have negative outlooks on the firm.

While they stopped short of signaling imminent action, any downgrade could undermine Nagai’s efforts to revive Nomura’s money-losing operations abroad because his plans hinge in part on deepening ties with corporate clients and institutional investors.

“Lower credit ratings would raise Nomura’s funding costs, reduce the number of counterparties willing to deal with it and make it harder to attract the quality of customers and staff they need to succeed overseas,” said David Marshall, co-head of Asian bank research at CreditSights Inc. in Singapore.

S&P may cut Nomura’s credit score from A-, four levels above junk territory, if its overhaul stalls, analyst Toshihiro Matsuo said in an interview. Moody’s rates the Tokyo-based bank Baa1, the third-lowest investment grade.

Nomura’s rating could improve if its overhaul, including the $1 billion cut to wholesale business costs and the reduction of branches in Japan, stays on track, Matsuo added.

“Our client base remains strong, and we have a high level of core capital and liquidity,” Nomura said. “We remain committed to prudently managing risk, while transforming our business model and reviewing our cost base to further improve profitability.”

Nagai, 60, was re-elected to the board last week with only 61.7% of shareholders’ votes, after an influential proxy adviser urged his ouster over an information leak. In past years since taking the post in 2012, he obtained more than 90% support even after cost-cutting plans failed to sustain a profit recovery overseas.

S&P “needs to look critically” at Nomura’s overhauls after the previous unsuccessful rounds of restructuring, said Matsuo, who became the ratings firm’s main analyst covering the brokerage in April. “If it becomes clear to us that they won’t be able to achieve the goals they have set themselves, that could naturally work negatively to their creditworthiness.”

Despite its challenges, Nomura’s credit rating at S&P is one grade higher than Deutsche Bank AG’s and the same as that of domestic rival Daiwa Securities Group Inc.

Moody’s changed its outlook on Nomura’s credit rating to negative from stable last November, citing the firm’s “weaker and increasingly more volatile profitability.”

The rating would face downward pressure if Nomura can’t improve its return on assets without increasing balance-sheet risk, Moody’s analyst Shunsaku Sato said in an emailed response to questions.

Conversely, the outlook could return to stable if the firm improves the profitability of its domestic wholesale and retail businesses and limits losses abroad -- all without increasing its risk profile, Sato said.

To contact the reporters on this story: Takashi Nakamichi in Tokyo at tnakamichi1@bloomberg.net;Takako Taniguchi in Tokyo at ttaniguchi4@bloomberg.net

To contact the editors responsible for this story: Marcus Wright at mwright115@bloomberg.net, Russell Ward

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