Nomura's European Retreat

Abandoning an expensive overseas foray may play to strengths in Japan.
At Closing, June 20th
193.70 GBp

Nomura is finally calling it quits on most of its equities business in Europe. Not before time. 

Investment banks are being hit from all sides, but Japan's largest brokerage, which bought out Lehman Brothers' European and Asian units at the height of the financial crisis, is almost entirely getting out of the business that is its core in Japan.

As a Japanese institution, Nomura's cost of capital is nowhere near as high as that imposed by regulators on Wall Street and European rivals. So even though fixed income, currencies and commodities trading has been battered, the company could afford to play the long game. Not so in European equities, where it faced intense competition from stronger rivals along with shrinking volumes. 

Lackluster Trade

Trading on European exchanges has slumped since the financial crisis

Daily average volumes on European exchanges

This year started badly, with investors burned after the 2015 market rout.

The surprise is perhaps that Nomura waited so long to retreat from European equities, after the two other banks that bet on overseas expansion during the financial crisis -- when Wall Street rivals were suffering -- stepped back a lot farther. Standard Chartered completely abandoned equities early in 2015 after years of losses, acknowledging that it couldn't win as the U.S. firms came back to life and electronic traders cornered chunks of stock trading. The London-based emerging markets bank is still trying to deleverage after years of aggressive expansion, this week putting $4.4 billion of its soured loans on the block. Meanwhile Barclays, which last week sold its Asian wealth-management arm to a Singapore bank, shut its equities business in the region a few months ago as it refocused on Britain and the U.S.

Lack of global scale has also been a challenge for Nomura. There are few equity operations that became profitable without heft worldwide, and especially in the U.S. Nomura missed its chance when Barclays got Lehman's American businesses, leaving the Japanese company to expand organically -- an expensive proposition.

While Nomura is a big player in European debt, it fell to 49th place in a European equity and equity-linked league table this year, from 21st last year and 13th five years ago. Including the Middle East and Africa, Nomura looks worse, ranking 54th, down from 21st in 2015 and 12th five years ago.

Past Its Heyday

Nomura ended 2011 fifth in the profitable Eastern Europe, Middle East and Africa equity league table; now it's 54th

Source: Bloomberg

Jettisoning the bulk of European equities and cutting back in the Americas won't be enough, however.

Nomura began seeing failures in its offshore ambitions soon after buying the Lehman units. Many of the transplanted Lehman staff were hard to integrate culturally: some were uneasy in a hierarchical Japanese structure, where they couldn't aggressively pitch business. Some also were costly, leaving after guaranteed bonuses expired. The former Lehman banker who drove much of Nomura's overseas expansion, Jasjit ``Jesse" Bhattal, quit in 2012, starting what was to be a death of a thousand cuts.

By February, CEO Koji Nagai was saying that plans to make 50 billion yen ($462 million) of pretax profit abroad would be pushed back, reviving memories of previous failed forays outside Japan. In the late 1990s, the firm posted $1 billion of losses in the U.S. commercial loans market, prompting a retreat. In 2007, it was burned by exposure to the U.S. subprime market.

Dead Weight

Nomura's European business has posted a pretax profit just twice in 10 years

Source: Bloomberg

While growth is slowing at home, Nomura has almost one-third of the Japanese market, which means that it benefits as Abenomics floods the system with cash. Overseas, the firm should concentrate on areas where it has an edge, such as debt underwriting, backed by the low cost of capital, or helping growth-hungry Japanese clients with acquisitions. As the investment bank has found over the years, overseas ambitions can be too expensive.

(Corrects year that Bhattal quit, in ninth paragraph.)
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

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    Nisha Gopalan in Hong Kong at

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