Nomura Shares Sink 7% After Provision Hit, Plunge in Profit

(Bloomberg) -- Nomura Holdings Inc. shares fell after earnings plunged and Japan’s largest brokerage took a $341 million provision for an ongoing legal case. 

The stock declined 7.1% as of 12:28 p.m. in Tokyo Monday. The firm on Friday said it’s set aside 39 billion yen for the transaction in the U.S. that dates back to before the global financial crisis, after reporting a 95% slide in net income.

What Bloomberg Intelligence Says:

“Their earnings overall pale by comparison” with competitors, he said, noting “weak” revenue from bond trading and a slower recovery in its equity business.

-- Shin Tamura, banking analyst

The latest blow adds to a tough year that’s already seen the broker take a $2.9 billion hit from its dealings with Archegos Capital Management LP, a firm set up to manage the fortune of trader Bill Hwang. Nomura has taken steps to bolster risk management, suspended senior executives and has stopped offering cash prime-brokerage services in the U.S. and Europe.   

While Nomura didn’t give details on the nature of the litigation that led to the provision or whether more would be needed, the firm has long been grappling with the legacy of sales of residential mortgage-backed securities before the 2008 crisis. 

Recent court filings suggest Nomura has more than $2.5 billion in RMBS repurchase claims, which could have a settlement value of up to $1 billion, according to Bloomberg Intelligence. It also faces potential litigation related to Archegos following reports that the U.S. Justice Department investigation includes an anti-trust angle, according to BI analysts Elliott Stein and Jennifer Rie. 

Nomura’s results stand in stark contrast to a stellar quarter from Wall Street’s largest banks, after the pandemic gave a massive boost to firms’ trading and dealmaking units. 

Improve Controls 

“We are ashamed,” Chief Financial Officer Takumi Kitamura said during an earnings briefing Friday. “It is very disappointing.” 

To help improve controls following the Archegos saga, Nomura said it’s creating a new risk management division to strengthen international cooperation among relevant departments, while assessing how the brokerage is managing risks globally. It will also set up a board risk committee comprising outside directors and a non-executive director to boost risk management. 

“If this can lower the earnings volatility of the wholesale business, the market could regain confidence in a steady recovery of its profits,” said Hideyasu Ban, an analyst at Jefferies Financial Group Inc. “But the market may not be easily convinced.” 

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