Nomura Trails Goldman in Return on Equity Amid Losses Abroad

Nomura Turns to Second-Quarter Profit as Trading Income Jumps
The earnings rebound was constrained by an insider-trading scandal that cost the company investment banking business including a lead role managing Japan Airlines Co.’s $8.3 billion initial public offering. Photographer: Kiyoshi Ota/Bloomberg

Nomura Holdings Inc. trailed the world’s biggest investment banks last quarter in generating shareholder returns, underscoring the challenge for Chief Executive Officer Koji Nagai in trimming costs without sacrificing revenue.

Return on equity, a measure of how well the firm reinvests stockholder funds, was 0.5 percent in the three months ended Sept. 30, Japan’s biggest brokerage said yesterday after posting net income of 2.8 billion yen ($35 million). That compared with Goldman Sachs Group Inc.’s 8.6 percent.

“The current levels of net income are absolutely not adequate,” Nomura’s Co-Deputy Chief Financial Officer Jonathan Lewis said in a phone interview yesterday. “Return on equity of 0.5 percent for the second quarter is not where we want to be.”

Nagai, 53, who took the post on Aug. 1, has pledged to save $1 billion and put to rest an insider-trading scandal that crimped investment banking business and prompted his predecessor to resign. Boosting return on equity is “extremely critical” for Tokyo-based Nomura and restoring confidence among clients should be a priority, said analyst Shiro Yoshioka.

“It’s inevitable for Nomura to generate such a low ROE as it’s in the middle of restructuring,” said Yoshioka, who works at Japaninvest Group Plc in Tokyo. “But they could have raised the figure if it hadn’t been for the scandal. The bond underwriting and M&A advisory businesses could have been a stabilizer.”

Fixed Income

Shares of Nomura rose 1.4 percent to 287 yen at the close of trading in Tokyo. The Nikkei 225 Stock Average fell 1 percent. Last quarter’s profit, the fourth in a row, was driven by fixed income as Nomura, like global competitors including Citigroup Inc. and Morgan Stanley, benefited from trading.

“Revenue from the fixed-income business was stronger than we expected,” said Masao Muraki, a Tokyo-based analyst at Deutsche Bank AG. “Nomura’s share performance has been low on a price-to-book basis compared with other Japanese brokerages.”

The company’s price-to-book ratio, a measure of its share price relative to net assets, is 0.5 percent, according to data compiled by Bloomberg. That’s cheaper than Daiwa Securities Group Inc.’s 0.68 percent and Matsui Securities Co.’s 1.81 percent, the data show. The Tokyo-based brokerages are Nomura’s biggest publicly traded domestic rivals by market value.

Missed Estimates

Nomura’s quarterly net income compared with a 46.1 billion yen loss a year earlier. It missed the 5 billion yen average estimate of nine analysts surveyed by Bloomberg News as brokerage commissions declined and operations abroad lost money for a 10th straight quarter.

“Fixed income will continue to be the main driver for the wholesale business,” Lewis, 44, said in Tokyo. “In investment banking, we are actually starting to see some M&A businesses recovering, and revenue rising on the back of Asia-related cross-border M&A transactions.”

Mitsubishi UFJ Financial Group Inc. and Sumitomo Mitsui Financial Group Inc., Japan’s two biggest banks, announced quarterly earnings for securities operations today. Mitsubishi UFJ Securities Holdings Co. posted net income of 8 billion yen, compared with a loss of 504 million yen a year earlier. Profit at SMBC Nikko Securities Inc. fell to 2.7 billion yen from 6.7 billion yen.

Goldman Sachs

Goldman Sachs’s return on equity widened to 8.6 percent for the third quarter, from 5.4 percent in the second, as it had a profit of $1.51 billion. New York-based Morgan Stanley posted 6 percent return on equity for the period, excluding accounting charges known as debt-valuation adjustments, following a loss of $1.01 billion.

Chief Operating Officer Atsushi Yoshikawa said the company is seeking licenses in China and India to increase revenue in Asia.

“We are actually in difficult situation in Asia in terms of profitability,” Yoshikawa, 58, said on a conference call with analysts yesterday. “There is potential for us to grab more revenue in Asia, where our market share is low,” by focusing on cross-border deals involving other regions.

Revenue rose 22 percent last quarter from a year earlier to 461.2 billion yen, Nomura said. Trading profit climbed more than threefold to 88.9 billion yen, led by fixed income. Brokerage commissions slid 16 percent to 72.3 billion yen. Investment banking fees advanced 24 percent to 17.1 billion yen.


Nomura missed out on mandates including a lead role managing Japan Airlines Co.’s $8.3 billion initial public offering following revelations that staff gave tips to traders on share sales the brokerage managed in 2010.

The firm’s share of the Japanese equity and bond underwriting businesses fell 5 percentage points each from the previous three months, according to data compiled by Bloomberg. Its portion of the mergers advisory market dropped 12 percentage points, the data show.

“I get the impression Nomura was just making ends meet” in the quarter, judging from its 2.8 billion yen profit, said Mitsushige Akino, who oversees about $626 million at Ichiyoshi Investment Management Co. in Tokyo. “The impact from the insider-trading scandal has passed its peak and will fade away as time goes by.”


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