July 27 (Bloomberg) -- Nomura Holdings Inc.’s appointment of domestic brokerage head Koji Nagai as the new chief signals a retrenchment into its home market as Japan’s biggest investment bank reels from an insider-trading scandal and losses overseas.
Nagai, 53, will succeed Chief Executive Officer Kenichi Watanabe, 59, from Aug. 1, Tokyo-based Nomura said in a statement yesterday. Watanabe and Chief Operating Officer Takumi Shibata, architects of the 2008 purchase of Lehman Brothers Holdings Inc.’s assets, will step down to atone for instances of staff leaking information about clients’ share sales to traders.
The new CEO inherits the task of placating clients and regulators after the bank said yesterday that the leaks, which cost Nomura its top spot managing Japan bond sales, may have been more widespread than previously announced. The stock slid 82 percent during Watanabe’s tenure as operations abroad, built with the Lehman assets, posted losses for a ninth quarter.
Nagai’s appointment “will create the perception that Nomura is shifting to make the domestic business its main pillar,” said Yasuhide Yajima, chief economist at NLI Research Institute in Tokyo, pointing to the executive’s local experience. “The question remains whether reshuffling top management will be enough of a remedy to change the corporate culture.”
Nomura shares climbed 11 percent, the biggest two-day gain since October 2009, since news of Watanabe’s resignation emerged yesterday morning. The stock closed at 272 yen in Tokyo today. The benchmark Topix Index rose 2.8 percent in the same period.
Shibata, 59, will be replaced by American unit chief Atsushi Yoshikawa, who said on a conference call with analysts yesterday that additional cost reductions are needed and the company may cut more jobs.
Among other management changes, Nomura Asia CEO Philip Lynch will step down, to be replaced by Minoru Shinohara, according to the statement. Lynch joined Nomura from Lehman.
Nomura’s profit tumbled 89 percent to 1.9 billion yen ($24.3 million) in the three months ended June 30 as investment banking fees and brokerage commissions fell, the company reported yesterday. It posted a 12.1 billion yen pretax loss from overseas operations.
Nagai replaced Watanabe on April 1 as president of Nomura Securities Co. to reduce the CEO’s domestic role. Nagai has spent his entire career at the local unit since joining the company in 1981 after graduating from Chuo University.
“I want to make a new business strategy free from the past,” Nagai said at a news briefing yesterday. “I will rebuild the overseas business to a proper-sized global franchise.”
He said Nomura will “regard Japan and Asia as the mother market, and we would like to be a global bank based in Asia.”
Once the world’s biggest securities firm with a market value of $76 billion in 1987, Nomura has now slumped to a capitalization of $12.3 billion, about one-fourth that of Goldman Sachs Group Inc. Under Watanabe, the company posted a record 708 billion yen loss in the year ended March 2009, oversaw the exodus of former Lehman Brothers bankers, sold new shares twice to boost capital, and cut dividends.
“The management change shows Nomura has reversed course and is becoming realistic about the need to focus on Japan and Asia to boost profitability, rather than losing money overseas to be a global player,” said Katsunori Tanaka, a Tokyo-based analyst Goldman Sachs Group Inc. “Nomura couldn’t have changed its direction under the Watanabe-Shibata regime.”
Watanabe bowed in apology at a news conference at Nomura’s headquarters yesterday. “I take this insider issue very seriously,” he said after being asked why he resigned.
Japanese regulators this year found that Nomura employees gave tips on share sales the company managed for Mizuho Financial Group Inc., Inpex Corp. and Tokyo Electric Power Co. to traders who short-sold the stocks before the offerings were announced in 2010. Nomura said June 29 that it would cut top officials’ pay, force two managers to step down and suspend some operations after an internal probe.
There are “high possibilities” of other leaks by employees to clients, Nomura said in a status report yesterday.
Clients asked Nomura staff to provide advance notice of changes to ratings of equities, and in some instances “sell recommendations of individual stocks to hedge funds occurred at a time prior to the public offerings,” Nomura said. Some employees acted in a “suspicious” way by frequently using private mobile phones, according to the report.
Staff appeared to have been “willing to do anything to meet sales targets,” lawyers hired by Nomura to examine the lapses said in an earlier report last month.
Tadahiro Matsushita, Japan’s financial services minister, today said the regulator plans to consider administrative action against Nomura based on the agency’s inspection and company’s internal review.
“I have a high expectation that the company will restart as a reborn Nomura,” Matsushita said. “We are aware that Nomura revealed the fact that it may have leaked information on more cases. We will take action if we find operational problems through our investigation.”
As part of its crackdown, the regulator this month asked Nomura, Goldman Sachs Group Inc. and 10 other brokerages to review how they handle confidential information.
The ruling Democratic Party of Japan yesterday completed proposals to tighten rules against leaks, including fines and criminal charges for brokerages and banks that leak stock offering information. Current rules only provide for fines to insider traders without penalizing tipsters, prompting criticism by politicians and investors.
“Foreign investors were expecting to see orange jumpsuits and hear rustling chains; what they are getting is the patter of teeny tiny attack rabbits,” said Nicholas Smith, a strategist at CLSA Asia-Pacific Markets Ltd. in Tokyo. “But the foreigners who haven’t abandoned the market in disgust remain angry and won’t let up.”
Nomura has lost deals in the wake of the probe. Government agencies including Development Bank of Japan Inc. dropped Nomura from debt sales. The state-owned venture said it instead assigned Mitsubishi UFJ Morgan Stanley Securities Co. to lead an offering because it wanted to avoid “any disruption.”
Japan Airlines Co. demoted Nomura from global coordinator of its initial public offering, an issuance that may raise as much as 800 billion yen, according to people with knowledge of the matter.
Scandals at banks worldwide are forcing some top executives to step down and tainting the image of others. Robert Diamond resigned as CEO of Barclays Plc on July 3 after regulators fined the lender a record 290 million pounds ($450 million) for rigging global interest rates. JPMorgan Chase & Co. CEO Jamie Dimon was grilled by U.S. lawmakers after the Wall Street firm disclosed trading losses that have spiraled to $5.8 billion.
Nomura leaders have quit over uproars in the past. President Hideo Sakamaki stepped down in 1997 after the company admitted paying bribes to corporate extortionists, known as sokaiya. In 1991, President Yoshihisa Tabuchi resigned after the bank was found to have compensated clients for losses.
Credit-default swaps tied to Nomura’s debt rose 6.7 basis points to 368.3 basis points yesterday, the highest in almost a month, according to data provider CMA, which is owned by McGraw-Hill Cos. and compiles prices quoted by dealers in the privately negotiated market. An increase signals worsening perceptions of creditworthiness, while a decrease suggests the opposite.
Moody’s Investors Service cut Nomura’s credit rating to the lowest investment grade in March, questioning the profitability of its global capital markets operations.
“Nomura and other Japanese brokerages still can’t ignore overseas business for their growth,” said Maki Hanatate, Moody’s senior credit officer in Tokyo. “We will wait to see how the new management rebuilds the franchise and how it will generate a profit.”
Fitch Ratings said yesterday that the resignations may halt Nomura’s global ambitions, a move that “could ease some of the pressure” on its credit rating.
Watanabe, who became CEO in April 2008, oversaw the purchase of Lehman’s European operations for just $2 and the Asian unit for $225 million in a drive to compete with Wall Street banks weakened by the financial crisis.
The acquisition was a “once-in-a-generation opportunity,” he said at the time. The deal has yet to pay off, with the company continuing to lose money in Asia and Europe and former Lehman executives leaving the firm, including Jesse Bhattal, who quit as Nomura’s wholesale banking chief in January. Watanabe eliminated 1,300 jobs worldwide in the six months ended March as part of a $1.2 billion cost-cutting plan.
“What might have looked like a sensible strategy at the end of the last bull market for Nomura turns out to be a pretty wrong strategy given the expected long slump in Europe,” said Tom Kirchmaier, a fellow in the in the financial-markets group at the London School of Economics. “If I would be the new CEO of Nomura, I would be thinking about selling too.”
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