Nomura set to cheer investors

When Koji Nagai unveils Nomura's third-quarter results this week he will give investors something they have not heard from the scandal-tarnished Japanese bank in a long time: positive news.

The chief executive who took over in August is expected to announce improving profits on the back of cost-cuts, market tailwinds and some one-off gains, while underlining a new strategy of curbing overseas ambitions to concentrate on domestic strengths.

Much like UBS, its larger Swiss rival, Nomura has given up on its ambitions of vaulting into the bulge bracket by becoming a full-service global investment bank. Instead, it is aiming to preserve its domestic strengths in retail broking and asset management while picking just a handful of areas in which to compete in worldwide wholesale banking.

In the new, subdued world of investment banking, investors have rewarded this kind of approach. Shares in the Tokyo-listed bank have risen more than 80 per cent since Mr Nagai replaced Kenichi Watanabe after an insider-trading scandal, while the price of protecting Nomura's debt against default has more than halved. However, analysts note that a recent doubling in Tokyo trading volumes, prompted by the government's commitment to stimulus, has put a rocket under all the listed brokers.

Compared with its peers, Nomura under Mr Nagai, who spent the bulk of his career in the bank's retail brokerage in Japan, has outperformed by just 7 percentage points. And at Y490, the share price is still only a third of its level five years ago, the year in which it embarked on global expansion with the takeover of Lehman Brothers' Asian and European operations.

Analysts wonder whether Nomura's path to recovery can continue. "We need more time to see if the strategy of retreating to Japan is the right one and that the momentum of improving profits can be sustained," says Azuma Ohno, an analyst at Barclays in Tokyo.

Analysts are expecting earnings of Y16 per share for the full year to March. While that is a big improvement on the Y8 and Y3 of the previous two years, it is far short of Mr Nagai's target of Y50 by March 2016.

And despite big cutbacks in headcount, Nomura's overseas investment bank is still a potential stumbling block. Since the division's 2008 Lehman Brothers acquisition, it has never turned a steady profit.

Nomura has reined in ambitions by focusing on selected areas such as fixed income trading, cross-border M&A, restructuring advice and leveraged finance.

The fixed income unit has frequently achieved returns on equity of about 20 per cent - about 10 times Nomura's overall RoE - and more than doubled its market share in the past two years. It is being merged with the poor-performing equities trading division into a global markets unit, based in London, headed by Steve Ashley, a well-respected banker. In the next few weeks, Nomura will also decide to significantly downsize its proprietary trading business, called Angel Lane Principal Strategies.

However, analysts and rival bankers are sceptical of whether Nomura's 4.3 per cent global market share in fixed income is enough to withstand an end of a market rally at a time when regulatory capital demands and technological changes reward only dominant market operators.

Nomura's cutbacks have also triggered a fresh round of departures in Europe, where staff levels are expected to fall from almost 4,000 to fewer than 3,600.

Last year's shift in strategy has prompted well-known dealmakers such as Piero Novelli, William Barter and William Vereker to either jump ship or to prepare for their departure.

While Nomura insiders say some bankers did not bring in enough revenues to justify their pay, the loss of key staff raises questions over the bank's strategy to become the "Asian house of choice", harnessing flows of capital between Asia and the rest of the world.

"It is like a football team. The minute you decide you want to spend less money and that you are happy to move from the first to the third division you will lose the top players," one former Nomura manager says.

Domestically, too, Nomura needs to shore up its reputation. After admitting its role in various cases of insider trading, the bank received a business improvement order from the financial regulator last year and a record penalty from the Tokyo Stock Exchange. It also lost its place as the top adviser on Japanese M&A deals to Mizuho, according to Dealogic.

Mr Nagai told staff in a new year address that he wanted to "rebuild Nomura from the ground up".

So far at least, investors like what they are seeing. However, what the new chief will have to prove in the quarters and years to come is that he is building on strong foundations.

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