It is usually bad news when the chief executive feels the need to appear on stage and elaborate on his company’s annual results presentation.
So when Kenichi Watanabe showed up at Nomura’s results announcement, it was not surprising that he had more than a few words to say about the bank’s disappointing overseas performance.
More than two years after Nomura decided its future was on the global stage and acquired Lehman Brothers’ operations in Europe, the Middle East and Asia, Mr Watanabe acknowledged that the bank was still struggling to deliver profits from outside Japan to justify its huge gamble.
“The issue for Nomura Holdings from this year onwards is clear,” Mr Watanabe said. “We have to make further efforts to turn the overseas operations profitable.”
Jesse Bhattal, chief executive of the wholesale division, who is responsible for the bulk of Nomura’s overseas operations in investment banking, including mergers and acquisitions and equity and debt underwriting, and capital markets trading activity, also conceded the need to boost the division’s performance.
“The wholesale results …were admittedly challenging,” Mr Bhattal said, referring to the division’s 16 per cent year-on-year decline in the fourth quarter.
For the full year, the wholesale division suffered a 20 per cent decline in revenues to Y630.5bn ($7.7bn).
Meanwhile pre-tax profits plunged 96 per cent to Y6.7bn, largely because of a Y41bn loss in the first quarter stemming from high volatility related to the European sovereign debt crisis and a drop in liquidity.
Although Nomura dominates the Japanese market for investment banking business, overseas it has yet to make its mark. However, It has made some strides and last fiscal year it was involved in about half of the capital raising exercises of European companies, including Sweden’s €2.3bn ($3.4bn) sale of shares in Nordea Bank in March this year and the €5.1bn rights issue for BBVA of Spain in November last year. In the US, it was co-lead manager on MetLife’s $6.4bn equity offering in March.
Nevertheless, the bank ranked 23rd in investment banking revenues in Europe last calendar year and 42nd in the US, while in Asia it ranked 31st, according to Dealogic.
Mr Watanabe admitted on Thursday that the situation was not quite what Nomura management had in mind when they defied sceptics and swooped on the failed Lehman European, Middle Eastern and Asian businesses in late 2008.
Referring to a graphic showing the envisioned growth trajectory, in which Nomura was supposed to be making profits from its investments by the year just ended, Mr Watanabe says, “It hasn’t been exactly as the arrows (pointing upwards to indicate profits from investments) show.”
Nomura’s management emphasise that the conditions are already in place for the overseas businesses to deliver on their promises.
“Last fiscal year was about making sure we had the right structure, shuffling the portfolio, putting the right management in place and having the right cost discipline,” according to Mr Bhattal.
He added that it was a year of transition, from an investment phase to a period when the focus would be on making profits in the division.
The bank “rigorously analysed underperforming businesses”, and is redirecting resources to areas where it has competitiveness, such as securitised products and derivatives.
It is more closely integrating its global fixed income and equities businesses to realise cost efficiencies.
“In the next 18 months to two years we will start to see the benefits of investment,” Mr Bhattal said.
With these measures in place, Mr Bhattal pledged to achieve a cumulative average growth rate in revenues of 15 per cent and pre-tax margins of 10 to 15 per cent.
However, some market participants remain sceptical. “Mr Watanabe did not provide any concrete plans for what they are going to do [to address the lack of overseas profitability],” said Shigeru Oshita, chief fund manager of the Japanese equities group at Chuo Mitsui Trust and Banking.
“[Based on the bank’s performance so far] if you were to ask whether Nomura has been able to achieve its objective in buying Lehman, that is not so,” he said.
The benefits of the investments in the US in particular will take some time to show through, said one analyst at a US investment bank.
If they fail to make a positive showing from their US investments by the second quarter, then people will say Nomura could not succeed overseas after all, he added.
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