Nomura Holdings Inc. (8604) and Daiwa Securities Group Inc. (8601), Japan’s largest brokerages, plan to cut costs as the faltering local economy, Europe’s sovereign credit crisis and U.S. debt impasse weigh on earnings.
Nomura plans to trim expenses annually at its wholesale unit by about $400 million, the Tokyo-based company said July 29 after reporting that a one-time gain boosted first-quarter profit more than sevenfold. Daiwa, whose loss for the three months ended June 30 widened from a year earlier, said it plans to merge two units and reassign staff to curb outlays.
The securities firms’ overseas units posted their biggest pretax loss in at least five quarters, driven by higher salaries abroad as they seek to compete with Goldman Sachs Group Inc. and Citigroup Inc. (C) Nomura, which bought some Lehman Brothers Holdings Inc. units in 2008, plans to reallocate employees or trim jobs in its wholesale business.
“Starting cost cutting means Nomura is finally impinging on what has been Lehman’s untouchable legacy,” said Fumiyuki Nakanishi, senior strategist at SMBC Friend Securities Co. in Tokyo. “Japan’s leaders are now restructuring their businesses, signaling that they couldn’t obtain good results overseas despite expectations and they’re even struggling with retail businesses at home.”
Nomura’s net income advanced to 17.8 billion yen ($230 million) for the three months ended June 30 from 2.3 billion yen a year earlier, the Tokyo-based brokerage said last week. That compared with a 13.7 billion yen average estimate of 11 analysts surveyed by Bloomberg News. Daiwa’s loss widened to 9.4 billion yen from 1.2 billion yen.
Shares of the two firms climbed today along with Japanese stocks after U.S. lawmakers agreed to raise the federal debt limit and cut the deficit. Nomura rose 1.1 percent to 380 yen at the close in Tokyo, paring its loss this year to 26 percent. Daiwa gained 1.5 percent to 341 yen, trimming its 2011 decline to 18 percent, compared with a 20 percent drop in Goldman Sachs and 18 percent for Morgan Stanley.
Nomura’s overseas businesses posted a pretax loss of 32.8 billion yen in the quarter, the biggest in at least five quarters. At Daiwa, the loss was 8.2 billion yen, the most in seven quarters.
Investment banks around the world are struggling to boost earnings as equity markets tumble on increased concern about government debt in Europe and the U.S.
Credit Suisse Group AG plans to cut about 2,000 jobs after second-quarter profit fell 52 percent on lower earnings from trading. Goldman Sachs said last month it will cut about 1,000 jobs as fixed-income revenue dropped. UBS AG (UBSN) scrapped its 2014 profit target and announced cost cuts after second-quarter profit at Switzerland’s largest bank slid 49 percent.
Daiwa plans to integrate an investment banking unit with a brokerage division by March 31 to contain expenses that have climbed as it expands in Asia. Personnel costs rose 13 percent last quarter from a year earlier.
“With Japan’s earthquake, power issues and rise in the yen, as well as the European sovereign-debt crisis and inflation in emerging markets, Daiwa is in an environment that requires caution,” Chief Executive Officer Takashi Hibino said in a statement on its website July 29. “We will ensure a strong business platform by continuing with the restructuring.”
Hibino said in May he plans to move staff from support positions to the sales force to control headcount and boost revenue. About 250 employees out of 2,050 in planning, treasury and system operations have joined Daiwa’s sales force, the company said last week. About 200 investment bankers have shifted to retail sales.
Nomura benefited from a 24.3 billion yen accounting gain after increasing its stake in Nomura Real Estate Holdings Inc. (3231) to 51 percent, last week’s results showed. Revenue climbed 36 percent to 427 billion yen in the three-month period.
“In some respects this is a creditable result but Nomura still faces an uphill struggle to expand revenues while controlling costs to improve its returns,” said David Marshall, an analyst at research firm CreditSights Inc. in Singapore. “The $400 million of cost saving they plan will help but only to a limited extent and the key is to strengthen their franchise and build revenues.”
Investment Banking Slump
Investment banking fees dropped 32 percent from a year earlier to 13.8 billion yen, the lowest in five quarters. Brokerage commissions slipped 18 percent while trading profit rose 13 percent. Staffing expenses climbed 12 percent.
Nomura’s U.S. operations had a pretax profit of 501 million yen, the firm reported. In Europe, the company lost 31.7 billion yen, and in Asia it lost 1.5 billion yen.
The brokerage will continue to hire in the Americas “in a focused manner,” Jesse Bhattal, chief executive officer of Nomura’s wholesale division, said in an interview on July 29. “We will continue to invest a disproportionate share of investment dollars in the U.S.”
The securities firm was No. 23 among managers of global equity transactions last quarter, arranging $1.2 billion in sales, data compiled by Bloomberg show.
The plans to cut costs “shows they couldn’t be globally competitive enough to rival Goldman or UBS three years after acquiring Lehman,” SMBC’s Nakanishi said. “It also illustrates its domestic business is not getting profitable enough to cover a decline in investment banking and overseas businesses.”
Operations in Japan, which account for more than half of Nomura’s revenue, have suffered as equity underwriting declined following the record earthquake that struck in March.
Domestically, Nomura was selected as a lead underwriter on July 15 for Japan Airlines Co.’s initial public offering. It will compete with Goldman Sachs, Citigroup, Daiwa and SMBC Nikko Securities Inc. to arrange Nikko Asset Management Co.’s initial public offering, the first debut share sale by a major Japanese asset manager in a decade.
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