Nomura goes against the flow by cutting equities

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Nomura has never been afraid to stand out from the crowd. And Japan’s biggest investment bank certainly managed that feat again with its contrarian restructuring announcement on Tuesday.

While its peers are pulling back from fixed income, Nomura is wielding an axe on its equities business. While other banks talk about the need to cut their balance sheets, Nomura’s main focus is on slashing its running costs. And while most banks draw redundancies out over years, some of Nomura’s departees have already had their emails switched off.

Asia’s only standalone investment bank of scale, Nomura cemented its grip on the left field of global investment banking when it snapped up the Asian and European arms of the collapsed Lehman Brothers in 2008.

Just last year, Nomura was moving into the US bond market, a low-margin area that US banks are pulling back from, but which Nomura remains committed to even after its latest restructuring.

The bank would not speak publicly about the rationale for its impending restructuring, holding out to reveal all at its full-year results on April 27 in Tokyo. Investors seem to like what they have heard so far: “We believe they should work to make all areas profitable,” says David Herro of Harris Associates, who holds the stock. “Today’s actions give us confidence that they are working to achieve this objective.”

Shares in Nomura have jumped by as much as 9 per cent following reports it plans to cut jobs and reduce the size of its European equity business.

However, people familiar with the bank’s deliberations say there are very good reasons for Nomura’s strategy not to follow what is happening at European banks such as Credit Suisse and Deutsche Bank, or at US lenders such as Morgan Stanley, even though all banks are assailed by the same market conditions.

They say Nomura has already done the heavy-lifting in its fixed income business, the area which has been most badly hurt by everything from China’s slowing growth to persistently low interest rates and extra regulatory demands that put bank balance sheets under intense pressure.

Through “trimming” over the last 12-18 months, Nomura has already exited “80 to 90 per cent” of the items it wishes to get out of in fixed income, including exiting “significant portions” of the bank’s spread business in the US and Europe, the people say.

That means that future cuts will not be of the same magnitude of peers such as Credit Suisse, which is exiting swaths of its fixed income business, and US banks Morgan Stanley and Goldman Sachs, which have announced job cuts in the area.

They also say that it makes sense to support the US bond business, since Japanese are the largest overseas holders of US bonds, and so investing in that business is consistent with Nomura’s desire to be the “gatekeeper” of capital flows from east to west.

Other banks, in contrast, have been talking up their equities business, which were the beacon of light in a grim 2015. Nomura is quitting most of its European equities business, and shutting down its European equities research team completely. The decision has echoes of Barclays’ decision earlier this year to exit its cash equities business in Asia, a division that was as peripheral to Barclays as European equities is to Nomura.

Conspiracy theorists could point to the fact that a fondness for fixed income runs deep in Nomura’s upper echelons. Steve Ashley, the former Royal Bank of Scotland executive who is now Nomura’s joint head of wholesale, cut his teeth in fixed income. His co-head of wholesale, Kentaro Okuda, hails from the investment banking/advisory side, and so is not a natural equities man either.

Those familiar with the deliberations say the equities decision came down to a question of scale, and a realisation that after “exhausting” all avenues to improve the business, it still did not pass muster.

Nomura’s equities business is small. It is ranked just below the top three in the Asia Pacific region, according to the latest data from research group Coalition. In Emea and the Americas, Nomura does not manage to break into the top 10.

Being small in a “good” stock market is survivable; being small in a difficult one is less so. Nomura took the view that the market changes that have made equities more volatile were largely “secular” ones rather than cyclical.

Having spent the best part of three years trying to optimise the business, the bank saw two choices. “European equities either needed to get a lot bigger, or [Nomura] needed not to be in it,” says one person familiar with the discussions. “It would be an incredibly bold decision to get a lot bigger”.

Nomura‘s exit will not be a complete one — it will still do some “execution-only” equities business as well as advisory in equity capital markets and convertible bonds, and it will continue to sell Asian equities to European clients. But it will discontinue European equity derivatives and European equities underwriting.

Insiders are pained at the suggestion that the European equities withdrawal is the final nail in the coffin for the Lehman deal. They say that even after these cuts, Nomura will still have 70 per cent more people than it had pre-Lehman and they say the “DNA” of Lehman has been maintained in key areas such as structured solutions.

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