July 29 (Bloomberg) -- Nomura Holdings Inc., Japan's largest brokerage, posted an unexpected first-quarter loss after setting aside 63.1 billion yen ($586 million) for potential costs related to bond insurers.

The net loss of 76.6 billion yen for the three months ended June 30 compared with a profit of 75.9 billion yen a year earlier. The median estimate among five analysts surveyed by Bloomberg News was for net income of 30 billion yen.

Chief Executive Officer Kenichi Watanabe, who took the helm in April, reported the company's first back-to-back quarterly loss in at least six years. Nomura's trading profit almost vanished in the period and the firm wrote down 37.3 billion yen of private-equity investments in Japan as valuations fell.

``To some extent, this was inevitable that Nomura had to take such losses,'' said Kiyoshi Ishigane, a Tokyo-based senior strategist at Mitsubishi UFJ Asset Management Co., which oversees the equivalent of $61 billion. ``The knee-jerk reaction may be to sell, given that they posted an unexpected loss.''

The announcement was made after markets closed. Nomura fell 2.9 percent to 1,543 yen in Tokyo trading today.

Nomura is ``almost finished'' with provisions related to bond insurers, the company said in a stock exchange statement. Trading profit tumbled almost 90 percent to 10.5 billion yen on 22.7 billion yen of bond-trading losses, the company said.

`Tough Quarter'

MBIA Inc. and Ambac Financial Corp. have been stripped of their top credit ratings this year, hampering their ability to insure buyers of corporate bonds against possible defaults. The downgrades span more than $2 trillion of debt.

The Tokyo-based firm also reduced the value of its stake in Fortress Investment Group LLC by 21 billion yen. Nomura agreed in 2006 to pay $888 million for 15 percent of the New York-based hedge fund and private-equity manager. Fortress has dropped 36 percent this year in New York trading.

Revenue at Nomura fell 60 percent to 257.9 billion yen.

``It was a tough quarter, and it went beyond just the monoline provisions,'' Chief Financial Officer Masafumi Nakada said at a press briefing in Tokyo today. ``We have to expect a severe market environment for the time being.''

It is the first time Nomura has reported consecutive quarterly losses since a switch to U.S. accounting standards in 2002, said spokesman Michiyori Fujiwara. Nomura had a record loss of 153.9 billion yen in the three months to March 31, after putting about 132 billion yen in reserves in case bond insurers can't cover losses on securities.

Nomura has declined 19 percent in Tokyo trading this year, compared with a 16 percent drop in the 18-company Topix index of securities firms.

Overseas Expansion

Watanabe, 55, aims to quadruple annual revenue from Asia outside Japan to 100 billion yen in five years. Nomura's overseas expansion has been curtailed in the past year as U.S. subprime mortgage delinquencies infected global financial markets, leading to more than $468 billion of writedowns and credit losses at banks and brokerages worldwide.

``Nomura knows it won't go anywhere this year because of the aftermath of the U.S. subprime loan crisis, and it's waiting for the shakeout to run its course,'' said Azuma Ohno, a Tokyo- based analyst at Credit Suisse Group. ``Going to Asian emerging markets is a prescribed course.''

The company lost business from Japanese asset managers after a former employee in its mergers and acquisitions department was arrested in April on insider trading charges. The Government Pension Investment Fund, manager of more than $1 trillion of retirement assets, was among customers that suspended bond-trading orders through Nomura.

Subprime Losses

Fees from advising on mergers and underwriting sales of stocks and bonds declined to 13.4 billion yen from 29.9 billion yen. Nomura's brokerage commissions for stocks, investment trusts and other securities totaled 82.2 billion yen for the quarter, down from 113 billion yen a year earlier.

Nomura has reported about $2.4 billion in subprime-related credit losses and writedowns, compared with more than $54 billion at Citigroup Inc. and $38 billion at UBS AG, according to data compiled by Bloomberg.

``In the long run, it's worth noting that Nomura is speeding to clean up the subprime loan-related securities,'' said Ishigane of Mitsubishi UFJ.

Nomura stopped buying U.S. subprime mortgage loans and repackaging them as securities after losing 31.2 billion yen on the business in the quarter ended June 2007. It said the following month it would shut its U.S. residential mortgage business after defaults caused a 73 billion yen loss at the unit.

Top M&A Adviser

The firm underwrote three share sales totaling 80.5 billion yen in the quarter ended June 30, down from 19 deals valued at 301.3 billion yen a year earlier, according to data compiled by Bloomberg. It arranged 34 bond sales totaling 528.6 billion yen, down from 50 transactions totaling 576.1 billion yen, Bloomberg data show.

Nomura ranked as the top adviser for Japanese mergers and acquisitions during the three-month period, working on deals valued at about $11 billion in total, up from $8 billion a year earlier, according to Bloomberg data.

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

Last Updated: July 29, 2008 06:31 EDT