Nomura Profit Outlook Dims as Stock Rally Turns Into Slump

Nomura Holdings Inc. (8604), whose earnings doubled last year, faces tougher prospects now as the Japanese stock rally that pushed profit to an eight-year high gives way to a slump.

While net income for the 12 months ended March 31 climbed 99 percent to 213.6 billion yen ($2.1 billion), earnings for the fourth quarter fell for the first time since June 2012, Japan’s biggest securities firm said yesterday. A decline in brokerage commissions overshadowed gains in income from investment-banking fees and trading, its statement showed.

Japan went from being the best-performing major stock market in 2013 to the worst this year, weakening the domestic brokerage operations that made up more than half of Nomura’s pretax profit last year. Investors’ interest in new shares of companies from Japan Display Inc. (6740) to Seibu Holdings Inc. is waning as the effect of Prime Minister Shinzo Abe’s economic stimulus measures fades.

“Nomura and its rivals face grim earnings prospects unless the government announces additional growth measures that attract foreign investors,” Makoto Kikuchi, Tokyo-based chief executive officer for Myojo Asset Management Co., said by phone yesterday. “The lower risk appetite of individual investors will make it difficult for Nomura to sell products from deals, including IPOs, and that could reduce deal flows.”

Net income dropped 26 percent from a year earlier to 61.3 billion yen in the three months ended March, Nomura reported. That beat the the 41 billion-yen average estimate of 11 analysts surveyed by Bloomberg.

Profit Estimate

Shares of Nomura rose after the company announced plans to reward shareholders for last year’s results by buying back shares and increasing dividends. The firm led by Chief Executive Officer Koji Nagai will spend as much as 70 billion yen to repurchase up to 2.6 percent of outstanding stock, it said. It will also pay a 17 yen-a-share dividend for the year, up from 8 yen a year earlier.

The stock climbed 5.3 percent, the biggest intraday gain this year, to 619 yen at 9:36 a.m. in Tokyo, paring this year’s decline to 23 percent. Daiwa Securities Group Inc. (8601), Japan’s second-biggest securities firm, which also reported results after the trading close yesterday, gained 3.1 percent and is down 25 percent in 2014. The Topix (TPX) index rose 1.2 percent, easing this year’s drop to 9.7 percent.

Daiwa posted its first profit decline in nine quarters as underwriting, trading and brokerage commissions fell. Net income slid 32 percent to 33.2 billion yen, in line with analysts’ estimates. Profit more than doubled to 169.5 billion yen for the year ended March.

Slowing Recovery

Nomura’s earnings may decline to 178.8 billion yen this fiscal year, Masao Muraki, an analyst at Deutsche Securities Inc. in Tokyo, wrote in a note dated yesterday. Nomura and Daiwa don’t publish profit forecasts.

Japan’s economic recovery is losing momentum as a sales-tax increase dents consumer confidence and benefits of a weaker yen fade for exporters including Honda Motor Co. The Bank of Japan’s policy board yesterday cut its economic growth forecast for the year ending March 2015 to 1.1 percent from 1.4 percent.

Signs are emerging that the stock slump is affecting initial public offerings. Seibu Holdings, operator of Japan’s biggest hotel chain, pared its debut share sale last month. Japan Display has tumbled 30 percent since its IPO in March. Nomura worked on both offerings.

Nomura’s revenue fell 37 percent last quarter from a year earlier to 450.8 billion yen, yesterday’s report showed. Brokerage commissions declined 29 percent to 89.9 billion yen. Investment banking fee income climbed 24 percent to 27.2 billion yen, and trading profit rose 21 percent to 129.2 billion yen.

Deal Pipeline

Investment banking was strong because a large number of transactions were completed in the quarter, and it may be difficult to maintain the momentum, Nomura Chief Financial Officer Shigesuke Kashiwagi told analysts on a conference call yesterday. “We still have many equity capital markets deals in our pipeline and some cross-border deals,” he said.

Fixed-income and equity trading operations began the current quarter “in low gear,” Kashiwagi said. For the retail brokerage business, last quarter was “very tough” and the company has to be patient before seeing a pickup, he said.

CEO Nagai is shifting the focus of the retail brokerage away from commissions based on transaction volumes and toward fees generated by managing clients’ investments. He wants to increase assets under management to 100 trillion yen by March 2016, having achieved an earlier target of 90 trillion yen last year.

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

To contact the editors responsible for this story: Chitra Somayaji at csomayaji@bloomberg.net Russell Ward

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