Nomura Profit Fall Signals End of Brokers’ Abenomics Boom

Nomura Holdings Inc.’s lowest profit in seven quarters signals the boost from Prime Minister Shinzo Abe’s economic stimulus policies for Japanese brokerages is over.

Shares of Japan’s largest securities firm sank the most in almost three weeks after the company yesterday posted a 70 percent drop in net income to 19.9 billion yen ($195 million) in the three months ended June, missing analysts’ estimates for 26 billion yen. Smaller Daiwa Securities Group Inc. also reported the second straight decrease in quarterly profit.

The results underscore the challenge facing the firms as they seek to sustain profitability amid investors’ growing wariness of Abe’s ability to revive the economy and financial markets. Investment-banking fees dropped for Nomura while the decline in Japanese stock trading caused brokerage commissions to slump for both companies.

“Abenomics has faded away, which is the reason why brokerage commissions fell,” said Takehito Yamanaka, a Tokyo-based analyst at Credit Suisse Group AG. “The question is, how much can they earn from investment-banking deals, including IPOs?”

Nomura’s shares fell 2 percent to 652.5 yen as of 10:03 a.m. local time, taking this year’s decline to 19 percent.

Revenue Slides

At the Tokyo-based company, led by Chief Executive Officer Koji Nagai, quarterly revenue fell 9 percent from a year earlier to 462.2 billion yen, yesterday’s figures showed. Brokerage commissions declined 39 percent to 96.3 billion yen. Investment-banking fees slid 22 percent to 19.8 billion yen, while trading profit rose 24 percent to 158.6 billion yen.

While Daiwa’s net income fell 40 percent to 34.4 billion yen, the company’s shares rose today after the result beat analysts’ 30 billion-yen average estimate. The stock gained 0.8 percent to 867.5 yen, paring this year’s decline to 17 percent. An index of securities firms is the worst performer among 33 industry groups on the benchmark Topix this year.

Daiwa’s underwriting fees rose and the Tokyo-based firm had its first pretax profit from overseas operations in almost five years. In contrast, Nomura’s pretax loss from abroad widened 25 percent to 17.1 billion yen.

Trading Volumes

Stock broking took a hit last quarter as the average daily trading volume on the Tokyo Stock Exchange’s first section fell 51 percent from a year earlier, when investors flocked to equities amid fiscal spending and unprecedented monetary easing to spur the world’s third-largest economy. The Nikkei 225 Stock Average has lost 4.1 percent this year after surging 57 percent in 2013, the most among major developed markets.

Daiwa’s profit surged to a record in the year ended March, and Nomura’s climbed to an eight-year high.

“The market is slowing down a bit as volatility is low,” Daiwa Chief Financial Officer Mikita Komatsu said yesterday at a news briefing. “But we’re not that pessimistic because we anticipate the market recovering in the coming quarters.”

Nomura and Daiwa aren’t the only firms that are facing profit pressure from lower trading. Macquarie Group Ltd., Australia’s biggest investment bank, said last week that earnings at its securities division will probably fall this year. UBS AG CEO Sergio Ermotti said in a Bloomberg Television interview that profit margins are being squeezed by low volumes in equity markets and a lack of foreign-exchange volatility.

Changing Focus

To reduce reliance on brokerage commissions, Nomura is focusing less on trading securities for individuals and more on managing their assets. CEO Nagai is also trying to increase loans and deposits, emulating Morgan Stanley. Loans secured by clients’ investments will more than double to 250 billion yen by 2019, Naoshi Sakai, Nomura’s executive director of banking and trust agency services, said in an interview last month.

In investment banking, Nomura’s performance has been mixed this year. Its rank among advisers on mergers and acquisitions in Japan slipped to sixth for the six months ended June 30 from fourth for all of 2013, according to data compiled by Bloomberg. It was third among arrangers of bond sales in the country, down from No. 1 last year.

“It’s true that Nomura isn’t the clear winner, unlike in the past,” CFO Shigesuke Kashiwagi told reporters yesterday. The company has a “small footprint” in the U.S. and is exploring ways to boost profitability abroad, he said.

The firm is still the top manager of Japan share sales. It underwrote offerings valued at 760 billion yen in the first half of 2014, up from 744 billion yen a year earlier, the data show.

IPO Plans

Line Corp., the operator of Japan’s most-popular mobile messaging service, is working with Nomura and Morgan Stanley to prepare for an initial public offering as soon as November that could value the Tokyo-based company at more than 1 trillion yen. Nomura is also helping mobile game developer Gumi Inc. with its plans for an IPO as soon as December, people familiar with the matter said this month.

“It looks like Nomura has more primary deals in its pipeline,” said Shinichi Ina, a Tokyo-based analyst at UBS. “Whether the brokerage will be able to generate much in fees from IPOs later this year remains to be seen as it depends on the market conditions.”

Kashiwagi declined to say whether an Italian probe into derivatives trading by Nomura will affect earnings. “We are aware of the action taken by the public prosecutor in Sicily, and we are reviewing the situation fully,” he said.

Police in Italy seized 104 million euros ($140 million) in property and cash as part of the probe into allegations that Nomura used complex financial products to defraud the regional government of Sicily before the global financial crisis.

The Japanese firm is accused of carrying out derivatives trades from 2000 to 2006 that cost the Mediterranean island about 175 million euros, police said on July 28. Four people who were Nomura employees at the time are under investigation, along with three other people, police said.

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