Finance

Nisha Gopalan is a Bloomberg Gadfly columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

As investment banks chant the cost-cutting mantra in unison amid withering trading volumes, not chanting loud enough is a failure. 

That's the problem facing Nomura, which Wednesday confirmed plans to cut back in European equities and some U.S. operations. It also promised that its overseas business will be profitable for the first time in at least five years thanks to those retrenchments.

Steven Ashley, who co-heads Nomura's wholesale division and heads its global markets one, noted after the results that the changes planned in Europe and the U.S. account for less than 5 percent of overall revenue, excluding Japan. It's hard to see how Japan's biggest brokerage can turn around its overseas operations and make them profitable in the promised March 2017 time frame without either making deeper cuts or taking a knife to one of the most capital-intensive areas of its business, fixed-income trading.

Unwise Investment
Nomura shares have tumbled over the past 12 months
Source: Bloomberg

The 19.2 billion yen ($176 million) fourth-quarter loss Nomura reported, its first quarterly foray into the red since 2011, was a surprise to analysts. It shouldn't have been, considering the firm's overseas businesses haven't broken even since 2010, after Nomura acquired Lehman Brothers' Asian and European operations during the global financial crisis. The numbers also disappointed because investors felt the job reductions weren't enough.

While Nomura confirmed plans to exit European cash equities, including research, sales and underwriting, and said cost savings could amount to about 80 billion yen a year over the coming two years, in the same breath it pledged a commitment to fixed income, currencies and commodities. That's the very area many of its competitors are exiting, either because it requires a lot of capital, or due to the commodities rout. 

Specifically, Nomura said it's doubling down on the areas of fixed income in which it's traditionally been strong -- rates (including local government bond trading), and currencies.

For investors, that's not good news.

In the most recent quarter ended March 31, revenue from operations either fell or were broadly stable in every region, including Japan. Nomura blamed a ``challenging quarter for fixed income'' for slashing Europe, Middle East and Africa revenues by 64 percent from a year earlier and ``slower client activity'' in emerging-market foreign currencies for reducing revenues in Asia outside Japan 46 percent.

Knocked Back
Nomura's revenues by region have been falling across the board
Source: Bloomberg, company filings

As analysts at Goldman Sachs noted, a rebound in fixed income would seem critical for Nomura's earnings to recover. And that's hard to envision any time soon amid anemic foreign-currency trading volumes and recent market turmoil in China.

Even if volatility does subside, Nomura has to contend with a cluster, albeit a shrinking one, of fixed-income rivals. Standard Chartered and Deutsche Bank both posted quarterly earnings that beat forecasts recently, thanks in part to a reduced focus on riskier businesses, and Barclays and Credit Suisse have adopted a similar approach. Additionally, Nomura doesn't have the pool of deposits Mizuho or Mitsubishi UFJ have, and its market share trails in areas such as global bond underwriting and M&A advisory.

Not Good Enough
Nomura's league-table rankings have improved since the credit crisis but still don't put it in the top 10
Source: Bloomberg
Note: The lower the ranking, the higher the lead.

Unless Nomura cuts deeper into some of its other businesses, or rethinks its fixed-income strategy, it's hard to see investors applauding any time soon.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Nisha Gopalan in Hong Kong at ngopalan3@bloomberg.net

To contact the editor responsible for this story:
Katrina Nicholas at knicholas2@bloomberg.net