(Bloomberg Opinion) -- Nomura Holdings Inc.’s overseas operations are at last solidly in the black after years of flip-flopping between expansion and retrenchment. After a fourth straight quarterly profit, the Japanese brokerage is primed for its biggest international test: building a wealth management business in China. This time, it has a real chance of success.
On Thursday, Nomura reported net income of 57.1 billion yen ($524 million) for the three months ended Dec. 31, led by bond trading and sales of mutual funds to Japanese investors. That compared with a loss of 95.3 billion yen a year earlier. The wholesale unit, mainly comprising international investment-banking and trading activities, stayed in profit for a third quarter.
A year ago, Nomura booked large writedowns on legacy acquisitions including the ill-fated 2008 purchase of Lehman Brothers Holdings Inc.’s Asian and European businesses, which caused costs to balloon. Those issues look to be in the past, after outgoing Chief Executive Officer Koji Nagai axed more than $1 billion of expenses last year. That leaves Nomura clear to focus on its latest overseas prize.
The Tokyo-based firm is among a clutch of global banks eyeing China’s ultra-rich as Beijing opens the country’s financial markets to foreign participation this year. Nomura is at the forefront, having received received a license in November to set up a majority-owned venture, a privilege shared by JPMorgan Chase & Co. and UBS Group AG. China will officially remove foreign ownership caps on securities ventures on April 1.
The hurdles are considerable, and not just because of the Wuhan virus outbreak that is sure to take a toll on China’s economy in the coming months. The promise is also significant, though. The country now has almost 4.5 million adults with wealth in excess of $1 million, according to Credit Suisse Group AG.
That potential is reflected in the scale of Nomura’s plans for its mainland operation: an expansion to 500 people by 2023, from the current 100. By then, Japan’s biggest brokerage expects to move into investment banking. For now, its Chinese ambitions are confined to wealth management. Nomura already caters to rich Asian clients from its Hong Kong and Singapore hubs, where it’s also adding employees.
Wealth makes sense as a starting point. The quickest route to expansion is to poach experienced private bankers from other houses, who tend to bring clients with them. In theory, at least, this should be cheaper than building out investment banking, where experienced staff are in short supply. Besides, fees and commissions for trading stocks and bonds have been declining for years, as any hard-pressed Chinese broker will testify.
Nomura has expertise to offer. Wealth management is a core part of the firm’s retail brokerage operations in Japan, where it is a leader. Japan’s aging demographics mean that its executives have long experience in challenges such as structuring the handover of assets from one generation to another. China is also graying fast, so this may be a selling point. Its status as Japan’s top investment bank and skills in cross-border M&A may also be attractive to China’s growing ranks of young tech entrepreneurs.
A look at Nomura’s home market underlines the allure of China. Despite the Tokyo stock market’s relatively buoyant performance, including a rally of about 70% in Nomura shares since June, trading volumes are declining. A boom in mutual fund sales to Japanese investors during the third quarter may be hard to replicate.
Progress in China won’t be quick. Nomura faces entrenched local rivals, as well as global heavyweights such as UBS. That may be just as well, though, given the Japanese brokerage’s tendency to switch direction suddenly. Investors should hope that Nomura has the stamina to stick at it this time.
To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.
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