Nomura Profit Falls More Than Estimated on Broking Slump

Nomura Holdings Inc. (8604)’s profit fell more than analysts estimated to the lowest in seven quarters as a decline in Japanese stock trading caused brokerage commissions to slump.

Net income dropped 70 percent to 19.9 billion yen ($195 million) for the three months ended June 30 from 65.9 billion yen a year earlier, Japan’s biggest securities firm said in a statement in Tokyo today. The result missed the 26 billion-yen average estimate of eight analysts surveyed by Bloomberg.

Nomura’s domestic brokerage business has cooled along with the stock market this year, a turnaround from 2013, when investors flocked to equities amid unprecedented monetary easing to boost the economy. The firm led by Chief Executive Officer Koji Nagai is also grappling with increased competition in investment banking, leading to a slip in rankings for mergers and acquisitions advisers and debt underwriters.

“The declining profit is mainly due to the backlash from the market environment a year earlier, which was enormously active,” said Shinichi Ina, a Tokyo-based analyst at UBS AG. “We’re paying close attention to money flows in the Japan market.”

Nomura’s quarterly revenue fell 9 percent from a year earlier to 462.2 billion yen, today’s report showed. Brokerage commissions declined 39 percent to 96.3 billion yen. Investment banking fees slid 22 percent to 19.8 billion yen. Trading profit rose 24 percent to 158.6 billion yen.

Photographer: Tomohiro Ohsumi/Bloomberg

Nomura, led by Chief Executive Officer Koji Nagai, is grappling with increased competition in investment banking, leading to a slip in rankings for mergers and acquisitions advisers and debt underwriters. Close

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Photographer: Tomohiro Ohsumi/Bloomberg

Nomura, led by Chief Executive Officer Koji Nagai, is grappling with increased competition in investment banking, leading to a slip in rankings for mergers and acquisitions advisers and debt underwriters.

Daiwa Profit

Profit at Tokyo-based Nomura and Daiwa Securities Group Inc. (8601) is declining after surging last year, when Prime Minister Shinzo Abe’s economic stimulus measures helped Japanese stocks rise the most among developed markets.

Daiwa, Japan’s second-largest brokerage, earlier today reported net income fell 40 percent from a year earlier, a second straight decline, to 34.4 billion yen as brokerage commissions and trading profit dropped. The result beat the 30 billion-yen average estimate of analysts as underwriting fees advanced and the Tokyo-based firm posted its first pretax profit from overseas operations in almost five years.

In contrast, Nomura’s pretax loss from abroad widened 25 percent to 17.1 billion yen.

Brokerage commissions took a hit as the average daily trading volume on the Tokyo Stock Exchange’s first section fell 51 percent last quarter from a year earlier. Japan’s benchmark Topix index rose 5 percent in the three months, compared with a 10 percent advance a year earlier.

Slowing Markets

The Topix (TPX) rose 0.3 percent today. Nomura shares closed 0.7 percent lower before the report, taking this year’s slide to 18 percent. Daiwa gained 1 percent and is down 18 percent in 2014.

“The market is slowing down a bit as volatility is low,” Daiwa Chief Financial Officer Mikita Komatsu said at a news briefing in Tokyo. “But we’re not that pessimistic because we anticipate the market recovering in the coming quarters.”

Nomura and Daiwa aren’t the only firms that are facing profit pressure from lower trading. Macquarie Group Ltd. (MQG), Australia’s biggest investment bank, said last week that earnings at its securities division will probably fall this year. UBS AG CEO Sergio Ermotti said in a Bloomberg Television interview that profit margins are being squeezed by low volumes in equity markets and a lack of foreign-exchange volatility.

To reduce reliance on brokerage commissions, Nomura is focusing less on trading securities for individuals and more on managing their assets. CEO Nagai is also trying to increase loans and deposits, emulating Morgan Stanley. Loans secured by clients’ investments will more than double to 250 billion yen by 2019, Naoshi Sakai, executive director of banking and trust agency services, said in an interview last month.

Investment Banking

In investment banking, Nomura’s performance has been mixed this year. Its rank among advisers on mergers and acquisitions in Japan slipped to sixth for the six months ended June 30 from fourth for all of 2013, according to data compiled by Bloomberg. It was third among arrangers of bond sales in the country, down from No. 1 last year.

“It’s true that Nomura isn’t the clear winner, unlike in the past,” CFO Shigesuke Kashiwagi told reporters in Tokyo. The company has a “small footprint” in the U.S. and is exploring ways to boost profitability abroad, he said.

The firm is still the top manager of Japan share sales. It underwrote offerings valued at 760 billion yen in the first half of 2014, up from 744 billion yen a year earlier, the data show.

Line IPO

Line Corp., the operator of Japan’s most-popular mobile messaging service, is working with Nomura and Morgan Stanley to prepare for an initial public offering as soon as November that could value the Tokyo-based company at more than 1 trillion yen. Nomura is also helping mobile game developer Gumi Inc. with its plans for an IPO as soon as December, people familiar with the matter said this month.

“It looks like Nomura has more primary deals in its pipeline,” UBS’s Ina said. “Whether the brokerage will be able to generate much in fees from IPOs later this year remains to be seen as it depends on the market conditions.”

Kashiwagi declined to say whether an Italian probe into derivatives trading by Nomura will affect earnings.

“We are aware of the action taken by the public prosecutor in Sicily, and we are reviewing the situation fully,” he said.

Police in Italy seized 104 million euros ($140 million) in property and cash as part of the probe into allegations that Nomura used complex financial products to defraud the regional government of Sicily before the global financial crisis.

The Japanese firm is accused of carrying out derivatives trades from 2000 to 2006 that cost the Mediterranean island about 175 million euros, police said on July 28. Four Nomura employees at the time are under investigation, along with three other people, police said.

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, Paul Panckhurst

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