Nomura retreats to faltering Japan
We’ll send you a myFT Daily Digest email rounding up the latest Credit Suisse Group AG news every morning.
When Nomura acquired the non-European businesses of Lehman Brothers four years ago, and pledged to become a global investment banking powerhouse, the news was greeted with almost universal scepticism.
A conservative Japanese securities house, which generated the bulk of its profits from its domestic retail sales business, would fail to manage the western bankers it inherited from Lehman and face insurmountable obstacles in building its franchise outside Japan, critics said.
The departure of the two main architects of Nomura’s overseas strategy – Kenichi Watanabe, chief executive, and Takumi Shibata, chief operating officer – has confirmed those doubts and shattered any lingering hopes within Nomura that it would emerge a winner in the world of global investment banking.
Mr Watanabe and Mr Shibata, who masterminded the takeover of Lehman’s European and Asian operations and spearheaded Nomura’s global expansion, will be succeeded by Koji Nagai, head of the domestic securities business, and Atsushi Yoshikawa, regional head of the bank’s tiny Americas businesses, respectively.
The new leadership gives a clear signal that Nomura is shifting direction to focus more management resources on its domestic operations.
Ironically, the resignations of Nomura’s most globally minded executives stem not from a blunder in the lossmaking overseas operations but from an insider trading scandal in the group’s core domestic market, where it is still the dominant force.
“This is 20 per cent to do with poor profitability but 80 per cent to do with insider trading,” says one executive.
Mr Watanabe and Mr Shibata are resigning, along with a sizeable list of senior officials, after a wide-ranging insider trading probe revealed that Nomura bankers had leaked sensitive, non-public, information to clients ahead of three new share issues in 2010.
However, the scandal has merely added to mounting pressure on the top duo both from shareholders and internally, as the Lehman acquisition has come unstuck.
Consequently, the overseas businesses have failed to cover the cost of maintaining the franchise it acquired with the Lehman acquisition.
“Globally, investment banks are rejigging their businesses to be able to provide a return that meets their cost of capital and clearly Nomura is nowhere near that,” says Elisabeth Rudman, banking analyst at Moody’s in London.
The problem for Nomura is that it made a large bet on Europe by taking on Lehman’s European arm, only to find revenues from the region evaporating amid the sovereign debt crisis.
Meanwhile, Nomura’s costs surged along with the Lehman acquisition, and the global wholesale division, which includes the businesses acquired from Lehman, suffered a Y37.6bn loss in the year to the end of March 2012. The division reported a further loss of Y8.6bn in the period between April and June.
The continuing loss comes despite a $1.2bn cost-cutting exercise, which Nomura implemented last year, of which $1.1bn of cuts in the global wholesale division has already been completed, according to the bank.
The newly appointed chief executive, Mr Nagai, has made it clear his priority is to return the group to profitability by pulling out of unprofitable overseas businesses and refocusing management resources on the bank’s strengths.
“Given that the business environment is changing so dramatically . . . we will remake the global franchise into an appropriate size.”
He warned that the global market downturn would hold back growth. But he said: “By reducing costs, we aim to maintain, and if possible, raise profitability.”
Nomura insiders said Mr Nagai, who has spent the bulk of his career with Nomura in the domestic retail and corporate sales operations, would pull back from equities and mergers and acquisitions advice, although he might seek to maintain the bank’s franchise in global debt markets.
With the overseas operations losing money, Nomura has become even more dependent on its domestic businesses to shore up its flagging fortunes.
However, the domestic retail business, Nomura’s most reliable profit-earner, has also started to falter in the face of the global downturn.
Sales of investment trusts, which supported the domestic retail business, began to slow significantly in May when it became apparent that global stock markets would remain stagnant, said Takehito Yamanaka, analyst at Credit Suisse in Tokyo.
To make matters worse, the insider trading scandal has damaged Nomura’s domestic investment banking business, with issuers pulling business away from the bank.
Mr Nagai and Mr Yoshikawa face the formidable task of returning Nomura to profitability overseas and revamping its franchise at home at a time when market turbulence has battered the profitability of even the most globally competitive investment banks.
The elevation of Mr Nagai, who is known to command strong loyalty among Nomura’s retail sales force, will be welcomed by those who argued the group should stick to its strengths in the Japanese market.
However, Nomura took the leap overseas precisely because the Japanese market faces dwindling prospects amid a declining population.
Nomura’s ambitious overseas push is coming to an end but its domestic woes may only just be beginning.
Additional reporting by Patrick Jenkins
Get alerts on Credit Suisse Group AG when a new story is published