Nomura’s 40% Surge Gives CEO Room to Address Woes at Home

(Bloomberg) -- Nomura Holdings Inc.’s investors are cheering the firm’s early progress in cutting $1 billion of costs at its global trading and investment banking business. Reviving the domestic retail operation may prove more of a challenge.

Japan’s biggest brokerage has jumped 40% from this year’s low in early June, buoyed by a return to profit at its wholesale arm, where Chief Executive Officer Koji Nagai has been focusing the cutbacks. A revival in fixed income -- which made up 25% of net revenue last quarter -- helped shareholders shrug off a sixth straight year-on-year decline in pretax income at its retail business.

The wholesale rebound gives Nagai room to fix a consumer operation plagued by weak individual investor sentiment, an aging client base and intensifying competition with cheaper online rivals. That represents a reversal after retail for years made up for persistent losses abroad, particularly when costs swelled following the disastrous Lehman Brothers Holdings Inc. acquisition in 2008.

Nomura’s latest earnings show “it’s doing well in areas it’s opted to focus on, including in the overseas wholesale business,” said Toshihiro Matsuo, an analyst at S&P Global Ratings in Tokyo. It will probably take more time to strengthen profitability in its operations serving individual investors at home, he added.

When Nagai, 60, unveiled his turnaround plan in April, he pledged to scale back businesses such as emerging-markets trading and exit areas including U.S. high-yield bonds. Progress has been fast: the firm had achieved half of the targeted cost cuts by the end of July, Chief Financial Officer Takumi Kitamura said at the time.

Still, though Nomura has turned in the best performance on the Nikkei 225 Stock Average since the earnings update, its valuation relative to global financial shares remains low after reaching a record discount earlier this year, according to data compiled by Bloomberg. It is trading at about 0.58 times book value, cheaper than Daiwa Securities Group Inc.’s 0.64.

Shares of Nomura closed 2.5% lower on Wednesday.

A Nomura spokesman declined to comment.

As part of his retail overhaul, Nagai is trying to woo younger customers by teaming up with Line Corp. -- Japan’s biggest mobile messaging operator. He wants to close branches and focus costly face-to-face services more on wealthier clients.

Nagai has described Nomura’s own online broking services as “uncool,” and there’s debate over whether the latest effort, launched in August, will succeed.

“Nomura needs to do something about the generational issue eroding its core customer base, but it doesn’t seem like the Line joint venture in its current setup can really do that,” said Michael Makdad, an analyst at Morningstar Inc. in Tokyo.

The joint chiefs of Line Securities Corp. Yoshikazu Yonenaga and Noritaka Ochiai suggested in a recent interview that the venture may bring little direct benefit to Nomura, at least in the short term, other than returns on its investment in the company. “Ultimately it is up to users to decide” whether to use Nomura’s services, co-CEO Ochiai said last week.

What Bloomberg Intelligence Says

Wholesale profit may rebound on a lower cost base and large exposure to recovering overseas bond trading income. Yet retail product sales may stagnate on a gloomy stock market outlook, driven by a U.S.-China trade war and global recession fears.

--Francis Chan, bank analyst

Click here to read the research

Regardless of whether they’re chasing customers online or in person, Nomura and its Japanese rivals all face another problem: the reluctance of households to invest more of their savings.

“We need to see whether investors’ risk appetite is strong enough to support sufficient recurring income for Nomura,” said David Marshall, co-head of Asian bank research at CreditSights Inc.

As for the global advisory and trading business, it’s still too early to say whether the rebound will last. Nomura remains reliant on fixed-income trading -- a tough area for securities firms worldwide. And with central banks now firmly back in easing mode, there is a risk that bond market activity will decline further.

“Nomura’s profitability has picked up from its previously very weak levels, which is encouraging,” Marshall said. “But given the challenging outlook for global economies and financial markets it remains to be seen whether this can be sustained.”

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, Candice Zachariahs

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