Nomura’s Return to Profit Leaves Questions Over Sustainability

Nomura Profit Rises 33%
Pedestrians walk past the Nomura Holdings Inc. headquarters in Tokyo, Japan. Photographer: Kiyoshi Ota/Bloomberg

Nomura Holdings Inc.’s return to profit last quarter, driven by the sale of a restaurant chain, may not be enough to reassure investors that it will sustain an earnings rebound.

Japan’s biggest securities firm yesterday posted net income of 17.8 billion yen ($234 million) for the three months ended Dec. 31, even as brokerage commissions, investment banking fees and trading profit fell. That followed a 46.1 billion yen net loss the previous quarter.

Chief Financial Officer Junko Nakagawa said the company has no plans to deepen its $1.2 billion cost-cutting plan after trimming staff in the quarter. Nomura may be downgraded by Moody’s Investors Service, which began a review in November, citing overseas losses and a failure to generate returns from Lehman Brothers Holdings Inc. assets bought in 2008.

“The question remains whether the profit Nomura made this time is sustainable, and whether it will be able to boost revenue in future,” said Katsunori Tanaka, an analyst at Goldman Sachs Group Inc. in Tokyo with a neutral rating on Nomura. He said it was “positive” to see that the company pared personnel expenses.

Daiwa Securities Group Inc., Nomura’s closest domestic rival, and Mizuho Financial Group Inc. said this week that they are eliminating more jobs as Europe’s debt crisis roils markets. Mitsubishi UFJ Financial Group Inc., Japan’s biggest publicly traded bank, yesterday joined Mizuho and Sumitomo Mitsui Financial Group Inc. in posting lower lending income for the quarter as Japan’s sluggish economy hampered borrowing demand.

Higher Revenue

Nomura’s net income rose 33 percent last quarter from a year earlier. Revenue climbed 25 percent to 481.5 billion yen, the Tokyo-based bank said. Gains from private-equity investments totaled 34.6 billion yen, spurred by the 128 billion yen sale of Japanese family restaurant chain Skylark Co.

Brokerage commissions fell 26 percent from a year earlier to 74 billion yen, the bank said. Investment-banking fees dropped 49 percent to 17.2 billion yen. Trading profit declined 24 percent to 80.1 billion yen.

Shares of Nomura rose 0.4 percent to 280 yen in Tokyo yesterday before the earnings were released. They have tumbled 80 percent since the company bought bankrupt Lehman’s European and Asian operations more than three years ago, and reached 224 yen on Nov. 24, the lowest in at least 37 years.

European Turbulence

“Nomura bounced back after being caught by turbulence in Europe in the previous quarter,” said Masao Muraki, a Tokyo-based analyst at Deutsche Bank AG. “Visibility is still cloudy, and the bank may struggle to raise revenue, including at its retail and asset management businesses.”

Chief Executive Officer Kenichi Watanabe is trimming payroll costs that surged after his company took over the Lehman businesses, inheriting 8,000 employees of the U.S. firm. Personnel costs fell 11 percent last quarter from a year earlier to 127.8 billion yen. Nomura’s global headcount dropped to 34,933 employees as of Dec. 31 from 35,697 three months earlier.

“We have made solid progress towards achieving the targets” of the expense-reduction program, the bank said in a statement yesterday.

Nomura continued to lose money abroad. Pretax losses from overseas operations widened to 19.4 billion yen from 3 billion yen a year earlier.

Two of the highest-ranking former Lehman employees stepped down in January. Jesse Bhattal, who was chief of wholesale banking, left Nomura after his division bore the brunt of the losses. Tarun Jotwani’s global markets division was split into equities and fixed income after he resigned.

‘Cut Too Much’

“The problem for investment banks as a whole is if you cut too much, you don’t have enough capacity to do a proper job,” said Ralph Silva, a strategist at Silva Research Network in London. Nomura is “committed to sticking with it until economic conditions improve,” he said.

Moody’s said in November that it may cut Nomura’s credit rating from the current Baa2, the second-lowest investment grade. The review will consider the firm’s cost-reduction plans as well as its “failure to generate synergies and returns from the Lehman acquisition,” the rating company said on Nov. 9.

Maki Hanatate, senior credit officer at Moody’s in Tokyo, declined to comment on Nomura’s earnings.

Nomura got a smaller piece of a shrinking market for equity underwriting last year. The Japanese firm managed 1.7 percent of global equity, equity-linked and rights offerings in 2011, down from 3.3 percent a year earlier, according to data compiled by Bloomberg. Worldwide offerings fell 25 percent to $618 billion.

Mergers Advice

The bank fared better in mergers advisory, where its global rank improved to 12th last year from 13th, as Japanese companies sought to capitalize on a stronger yen to make acquisitions abroad, the data show.

Daiwa posted on Jan. 31 a fourth straight quarterly loss and said it will cut a further 200 jobs overseas, taking total dismissals for the current fiscal year to 500. Mizuho, Japan’s third-biggest bank by market value, said it will eliminate 300 more positions at its brokerage arm by March 31, bringing total cuts to 1,000.

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