Oct. 28 (Bloomberg) -- Nomura Holdings Inc. posted a wider- than-expected 72.9 billion yen ($770 million) second-quarter loss, putting it on course for a record full-year deficit as costs rise and tumbling stock markets drive down revenue.

Japan's biggest brokerage may spend about $2 billion to take over 8,000 employees from Lehman Brothers Holdings Inc., it said in a statement today. Nomura may also take a loss of as much as $425 million on Icelandic bank bonds, the Tokyo-based firm said.

Nomura's first-half loss swelled to 149.5 billion yen, exceeding its record 67.8 billion yen annual loss last year and prompting Standard & Poor's and Moody's Investors Service to say they may downgrade the company's credit ratings. Chief Executive Officer Kenichi Watanabe is betting on the acquisition of Lehman's Europe, Middle East and Asia businesses to boost revenue, even as investors flee markets amid a global credit crisis.

``Nomura's second-quarter results were disappointing,'' said Wataru Kasatani, an analyst at Meiji Dresdner Asset Management Co. in Tokyo. ``The loss will probably increase further as the financial-market turmoil worsens and costs for the Lehman acquisition emerge.''

Nomura said it may take a loss after the Icelandic government seized control of the nation's three largest banks, causing the lenders' notes to lose almost all their value. The company posted 17 billion yen in second-quarter losses related to Lehman's bankruptcy, it said in today's statement.

`Extremely Regrettable'

The Japanese brokerage rose 0.2 percent to close at 906 yen in Tokyo trading before the earnings announcement. The stock has declined 52 percent this year.

Nomura's shortfall widened in the second quarter from 11.7 billion yen a year earlier, the company said in the statement. That compares with a median estimate of a 9 billion yen loss by five analysts surveyed by Bloomberg News.

The loss marks the first time Tokyo-based Nomura has posted three consecutive quarterly deficits.

``It's extremely regrettable,'' Chief Financial Officer Masafumi Nakada said in a press briefing in Tokyo today. ``We are trying to turn things around.''

S&P and Moody's both revised their outlooks on Nomura to negative from stable. S&P rates Nomura's long-term debt A-, the seventh-highest investment grade, while Moody's rates the firm an equivalent A3.

`Prolonged Stagnation'

``Considering the ongoing turmoil in the global financial markets, it is possible that the value of Nomura group's trading assets and the credit quality of various counterparties could further deteriorate, leading to additional losses,'' S&P said in a statement today. ``Nomura's investment banking and retail operations may also be faced with prolonged stagnation.''

Revenue fell 39 percent to 257.7 billion yen for the three months as Nomura arranged fewer stock and bond sales and as the Nikkei 225 Stock Average slumped 50 percent this year, discouraging investors from buying shares. Brokerage commissions declined 21 percent to 84.9 billion yen.

Nomura posted a 21 billion yen trading loss, compared with an 8.7 billion yen profit a year earlier.

``Nomura is like any securities company, where when the market goes south, earnings get dragged along,'' said Shoichi Arisawa, an Osaka-based manager at Iwai Securities Co. ``The problem is that forex, stocks, bonds, all of these had a rough quarter, so there's nothing to support their earnings.''

`Once in a Generation'

The Lehman acquisition, which Nomura's Watanabe has called a ``once in a generation opportunity,'' may cause a loss of as much as $2 billion for the full year ending March 31 as Nomura absorbs the cost of benefits and compensation for the new employees, according to the five analysts surveyed before today's earnings announcement. That would be the biggest deficit since Nomura transformed itself into a holding company in 2001.

Employee compensation and benefits averaged $332,000 per person in the year ended Nov. 30, 2007, according to Lehman reports.

A full-year loss would mark the first time Nomura has posted shortfalls in two consecutive years. Nomura also may have to cut its dividend from 34 yen a share, the analysts said.

While Nomura's expenses will increase, Lehman had $3.1 billion of revenue in Asia during fiscal 2007, and $6.3 billion in Europe and the Middle East, according to data compiled by Bloomberg.

``The Lehman purchase will weigh on their earnings for a while,'' said Kiyoshi Ishigane, a senior strategist at Mitsubishi UFJ Asset Management Co., which oversees about $61 billion in Tokyo. ``Although it will hinge on a market recovery, getting access to Lehman's branch and sales network will be a plus for Nomura in the mid-to-long term.''

`Severe Situation'

The Nikkei 225 has plunged this year amid the credit crisis that's forced governments from Washington to Berlin to bail out financial companies. The benchmark has dropped to less than one- fifth of its record level in the late 1980s, when Nomura briefly reigned as the world's largest financial firm by market value.

The credit crisis sparked by the collapse of the U.S. subprime market has remade investment banking, causing Lehman to file for bankruptcy while Merrill Lynch & Co. sold itself to Bank of America Corp. and Morgan Stanley and Goldman Sachs Group Inc. converted themselves into banks.

The average daily value of shares traded on the Tokyo Stock Exchange during the quarter declined 27 percent from a year earlier, Bloomberg data show.

``Nomura can't expect revenue to rise any time soon,'' said Meiji Dresdner's Kasatani. ``It faces an extremely severe situation.''

To contact the reporter on this story: Takahiko Hyuga in Tokyo at thyuga@bloomberg.net

Last Updated: October 28, 2008 06:24 EDT