Nomura Holdings Inc.’s Koji Nagai, who took over as chief executive officer last month, said he plans to make overseas operations profitable by June 2014 at Japan’s largest brokerage.
“We are not going to lower the flag as a global bank,” Nagai, 53, said in an interview in Tokyo on Sept. 7. “We want be an Asia-based global investment bank.”
The forecast may be a relief to investors, who have seen the stock drop to near a 37-year low as the 2008 purchase of Lehman Brothers Holdings Inc.’s European and Asian units swelled costs that led to nine straight quarters of losses abroad. Nagai aims to arrest the slide by paring $1 billion in expenses and improving wholesale banking operations. He is considering acquiring an investment bank in Asia to increase revenue there.
“Nomura was trying to do too much in too many places and wasn’t profitable outside Japan,” said David Marshall, an analyst at Creditsights Singapore LLC. “Adopting a more focused strategy should help to improve operational efficiencies.”
Shares of Nomura rose 1.8 percent to 283 yen as of 1:02 p.m. in Tokyo and have climbed almost 10 percent since Nagai unveiled the cost-saving plan on Aug. 31, outpacing the Nikkei 225 Stock Average’s 0.1 percent gain. The stock in November tumbled to 224 yen, the lowest since at least 1974.
The company said last week it will reduce costs by $450 million in Europe and the Middle East, $210 million in the Americas and $340 million in Asia including Japan. About 45 percent of the cuts worldwide will be from trimming staff, with the rest coming from other operational expenses. The bulk of the job losses will be in investment banking and equities, it said.
Reducing costs by $1 billion will also probably curtail revenue, said Alastair Macdonald, a Tokyo-based analyst at Macquarie Capital Securities Japan Ltd.
“The trick is to try and juggle it so that you gain more than you’re giving back,” he said. “These cost cuts are targeted at the right areas because they’re targeted at businesses which have been suffering the sharpest declines in revenues over the last couple of years or so.”
The initiative contrasts with a $1.2 billion expense-reduction program implemented last year that focused more on job cuts. About 63 percent of that money was saved by shrinking payrolls, the bank said.
Moody’s Investors Service said today that the latest plan is a “credit-positive first step.” Combined with the previous program, it will reduce the cost base by 25 percent to $6 billion by April 2014 from $8 billion in April 2011, analysts led by Elisabeth Rudman wrote in Moody’s Credit Outlook today.
Focusing on Asia and cross-border strengths “could enhance profitability as Asia’s GDP and capital markets grow, but Nomura will be challenged by a number of strong global players also looking to Asia for profit growth amid difficulties in Europe,” Moody’s said.
As part of efforts to make Asia a “mother market,” Nagai said the company may buy an investment bank or brokerage in the region to tap its economic growth and increasing number of affluent people. The firm is reviewing “a couple” of potential acquisition targets in Asia, he said in the interview.
Countries including China, India, Indonesia, Thailand and Vietnam are of interest, he said, without elaborating on how much Nomura would be willing to spend or which companies are being considered. The brokerage may buy assets or set up joint ventures with local firms to get access to facilities and operations, Nagai said.
“We want to operate fully licensed brokerage operations in Asia, including retail,” he said. “It’s not realistic to do this from scratch.”
Nagai, who became CEO after his predecessor Kenichi Watanabe resigned amid an insider-trading scandal, said it will take time to make a profit abroad as the company will first have to implement the cost savings program by March 2014. Eliminating jobs “will generate restructuring costs after that,” he said.
The bank will begin communicating the job cuts to staff on Sept. 17 in Europe, Asia and the Americas, the CEO said.
Nomura’s retrenchment isn’t across the board. The Japanese firm will expand its fixed-income business globally and reassign people from other divisions to join the unit, two people with direct knowledge of the matter said last week.
Pretax loss from businesses abroad totaled 12.1 billion yen ($155 million) in the three months ended June, the ninth in a row. Europe lost 16.4 billion yen, Asia lost 1.9 billion yen and the Americas earned a pretax profit of 6.3 billion yen.
Nagai said he wants to achieve a target of 50 yen earnings per share by March 2015, a year ahead of schedule. The company’s earnings per share totaled 3.2 yen in the year ended March.
“This initial plan is on the right track,” Macquarie’s Macdonald said of Nagai’s strategy. “Only time will tell on the execution.”
Since buying bankrupt Lehman’s assets, Nomura has increased its share of the global mergers advisory market and risen in the rankings for equity underwriting. The pie has shrunk as deal-making slumps in the wake of the financial crisis and Europe’s sovereign debt turmoil.
Nomura is ranked 10th among global managers of share sales including rights offers this year, up from 13th in all of 2007, according to data compiled by Bloomberg. It has soared to ninth in world rankings of mergers advisers from 38th five years ago, the data show.
“Like its global peers, Nomura should be patient and weather this severe winter season for the world’s financial industry,” said Takehito Yamanaka, a Tokyo-based analyst at Credit Suisse Group AG. “Nomura will still be a global investment bank in the years ahead.”