Daiwa Securities Group Inc. won the mandate to lead Japan’s biggest share sale this year, benefiting from an insider-trading scandal that prompted regulators to punish larger rival Nomura Holdings Inc.
Daiwa will coordinate Japan Airlines Co.’s $8.5 billion global initial public offering, the second biggest this year after Facebook Inc., while Nomura will play a supporting role, the carrier said yesterday. Daiwa yesterday posted net income that beat analysts’ estimates and was bigger than Nomura’s first-quarter earnings.
Managing Japan Air’s sale will provide a “significant” boost to revenue, Daiwa Chief Financial Officer Nobuyuki Iwamoto said yesterday after cost cuts helped the Tokyo-based brokerage post a profit. The Financial Services Agency ordered Nomura to improve its business for failing to prevent staff from providing tips to traders on at least three share sales in 2010.
“Nomura managers must want to end the turmoil here and now, but corporate clients, issuers and investors won’t let it go so easily,” said Shiro Yoshioka, an analyst at Japaninvest Group Plc in Tokyo. “The benefits will go to banks that haven’t been penalized.”
While regulators in June also found that a Daiwa employee leaked information before an equity offering the firm managed two years ago, the company wasn’t punished. After conducting an internal investigation, Daiwa said on July 27 that the incident was isolated.
The scandal at Nomura prompted its top two executives to resign last week. Koji Nagai took over from Kenichi Watanabe as chief executive officer on Aug. 1, a month after the firm released a report revealing that equity sales staff were “willing to do anything” to meet revenue targets. Atsushi Yoshikawa replaced Takumi Shibata as chief operating officer.
Nomura was relegated from a lead role in Japan Air’s offering, people with knowledge of the situation said on July 18. It also lost its place as Japan’s No. 1 bond underwriter last month as some issuers dropped the bank in the wake of the revelations.
State-owned Development Bank of Japan Inc. said on July 3 that it ditched Nomura as lead manager of a debt sale because it wanted to avoid “any disruption.” Japan Housing Finance Agency dropped Nomura as underwriter of residential mortgage-backed securities six days later.
Daiwa also lost at least one bond deal, as Kawasaki Heavy Industries Ltd. excluded it from managing a sale on July 2.
In equity sales, Daiwa and Goldman Sachs Group Inc. were selected by the Japanese government to lead the global offering of shares it holds in Japan Tobacco Inc., while Nomura missed out. The Finance Ministry plans to sell as much as a third of its 50 percent stake in Asia’s largest cigarette maker, which has a market value of 4.8 trillion yen ($61 billion).
“Nomura may feel the effects in this quarter and next quarter,” said Yoshioka at Japaninvest.
Daiwa’s net income was 2.7 billion yen for the three months ended June 30, compared with a loss of 9.4 billion yen a year earlier, it said yesterday. The result beat the median estimate of seven analysts for 1.4 billion yen profit.
Chief Executive Officer Takashi Hibino is trimming costs to cope with losses abroad, eliminating at least 500 positions in Europe and Asia since October.
“Daiwa had good earnings as the effect of its cost cuts emerged,” said Takehito Yamanaka, an analyst at Credit Suisse Group AG in Tokyo.
Profit at Nomura tumbled 89 percent in the quarter to 1.9 billion yen as investment banking fees and brokerage commissions fell, the Tokyo-based company reported on July 26.
Shares of Nomura have tumbled 32 percent since the first leak was revealed on March 21, more than Daiwa’s 18 percent drop and the 16 percent decline in the benchmark Topix Index.
Credit default swaps offering five-year protection to Nomura bondholders surged 105 basis points to 365 in the same period, according to data provider CMA. Contracts for Daiwa rose 81 points. An increase in the swaps signals worsening perceptions of creditworthiness.
The FSA’s order requires Nomura to implement preventive measures it set out after an internal investigation, the regulator said. Nomura must report to the agency on the status of its remedies, which include ethics training and stricter monitoring of communication with clients.
“Nomura must push ahead with reforms to restore trust in Japan’s financial markets,” Financial Services Minister Tadahiro Matsushita told reporters yesterday. Nomura said in a statement that it will continue to enhance internal controls, prevent similar incidents and regain public trust.
Nomura said in June that employees provided information on share sales it 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.
Daiwa said last week it will cut CEO Hibino’s pay by 10 percent for three months to atone for an employee giving a tip on a share sale it managed for Nippon Sheet Glass Co. in 2010. The brokerage said it didn’t “systemically” leak information on public offerings to clients.
Daiwa’s advantage over Nomura will fade over time, said Yamanaka at Credit Suisse.
“They’ll win more business like Japan Air for the time being because Nomura was penalized,” he said. “But things will return to normal in the long run.”