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WIKI ANALYSIS
Nomura Holdings Inc. (NYSE: NMR) is the largest Japanese asset manager[1] with 24.3 billion Japanese Yen (JPY) ($2.48 billion U.S. Dollar (USD)) under management as of October 2008.[2] It is also Japan's largest investment bank in terms of Mergers and acquisitions (M&A) volume[3], and Nomura manages the most investments trusts in Japan.[4] The 2008 Financial Crisis hurt Nomura, as revenue decreased 60.3% in FY 2009 (ended March 31, 2009) from its 2008 levels.[5]
On September 24, 2009 Nomura announced a record $511.3 billion yen (approximately $5.7 billion USD) sale of 800 million shares of stock, equivalent to about 30% of total outstanding shares.[6] The markets did not react well to this news, as the stock fell by the 16% maximum trading limit allowed by the Tokyo Stock Exchange two consecutive days after the plan was announced. Nomura hopes to use the capital it will raise to upgrade infrastructure in Japan as well as fund expansion in the U.S., Asia, Europe as well as emerging market regions.[7] Nomura has put the funds to use, as it acquired London-based corporate financial advisory firm Tricorn Partners LLP for an undisclosed sum in December of 2009.[8]
For the second quarter of 2010 (Nomura's Fiscal Year ends March 31), Nomura reported its second straight quarterly profit, posting a net income of ¥27.72 billion yen ($304.6 million).[9] For the first time ever, Nomura earned more revenue outside of Japan than within, signaling its acquisition of the equities division Lehman Brothers may be paying off.
Overview of Japanese Economic History
Since the early 1990's, deflation and slowing economic activity in Japan were in stark contrast to the economy in the United States. Following a boom in the 1980s, the Japanese economy came to a halt in 1989. For the next 16 years, the economy had deflation, corporate defaults, and interest rates that hovered around 0%.[10] The Asian Financial Crisis, along with the internet bubble-burst, led to large bank failures, including behemoth Resona Bank.[10] The Japanese government injected close to $440 billion to recapitalize the battered industry[10], and the country has observed low single digit increases in land prices during 2006 and 2007 for the first time in nearly two decades.[11] A recovery in the domestic economy helps strengthen demand for Nomura's investment banking, asset management and asset financing services.
Company Overview
With 18,000 people working in over 30 countries,[12]Nomura is traded on the Tokyo Stock Exchange under the symbol 8604, but its ADR is available on the New York Stock Exchange under the symbol (NYSE: NMR). Nomura earns revenue in a variety of ways. As an investment bank, Nomura advises corporations on potential Mergers and acquisitions (M&A) in exchange for a fee. Nomura also offers structured debt instruments and initial public offerings (IPO) as part of its service. The Japanese bank is paid commissions to manage money and executes trades on behalf of customers. Another large contributor to Nomura's income is proprietary trading and investments in private equity. Essentially, Nomura buys public equities and ownership stakes in private companies in hopes of selling them for higher prices in the future. As an investment bank, Nomura's revenues are dependent on Mergers and acquisitions (M&A) commissions and trading activity, more so than its commercial bank counterparts like Mitsubishi UFJ Financial Group (MTU), whose income from loans account for 56.2% of revenue.[13]The Yen/USD exchange rate also impacts the price of Nomura stock. The company records earnings and assets in its local currency, so an appreciation of the Yen benefits the ADR price and increases the nominal value of dividends on its ADR shares, as it earns more in terms of US dollars.[14]
Like many Japanese banks, Nomura manages a relatively more conservative balance sheet than its European and American competitors, in part because of its experience with past financial crises.[10] The extra capital provided a cushion when asset values fell, and allowed Nomura buy stakes in oversea competitors. In September 2008, Nomura announced it would purchase Lehman Brothers' franchise in the Asia Pacific Region and the equities and investment banking operations in Europe and the Middle East for $2 billion USD.[3]
For the fiscal year ended March 31, 2009, Nomura had total net revenues of 312.6 billion Yen, a 60.3% decrease from its 2008 revenue of 787.3 billion Yen.[5] Total non interest expense was 1019.7 billion Yen, and its 2009 net loss was 708.2 billion Yen.[5]
For its first quarter of their 2010 fiscal year (Nomura's fiscal year ends in March 31), Nomura posted its first profit in six quarters, with a net income of 11.4 billion Yen ($120 million USD) from its total net revenue of 298.4 billion Yen.[15] Much of this gain was due to its Global Markets division, in which net revenues were 20 times higher than the previous quarter.[15] This dramatic gain is attributed to a substantial increase in trade volume as well as rising stock market values.[15]
Business Segments
Nomura divides its business into six segments.
Retail (93.4% of 2009 net revenue)[16]
Nomura's Domestic Retail segment includes its investment consulting services and products. Nomura earns revenue by providing consulting advice and by charging administrative and brokerage fees.[17] In 2009, income before income taxes from its Domestic Retail segment fell 85.1% from 122.3 billion Yen to just 18.2 billion Yen.[16] This was mainly due to overall market turmoil which greatly reduced Nomura's fees from commissions and bonuses.
Global Markets (-50.3%)[16]
Global Markets is the equity, bond, and sales and trading arm of Nomura as well as its real estate financing segment. In 2009, its loss before income taxes for the Global Markets segment was 574.6 billion Yen, an increase from its 2008 loss of 226.2 billion Yen.[16] This increase in loss is attributed to costs associated with the Lehman Brothers acquisition as well as losses stemming from trades related to credit, derivatives, and equities.[16]
Investing Banking (20.3%)[18]
Nomura's Investment Banking segment relies heavily on merger and acquisition (M&A) volume to earn revenues. In 2009, Nomura's Investment Banking segment had a net loss of 57.4 billion Yen, as its net revenues declined 23.6% in 2009 to 63.5 billion Yen.[18] Furthermore, costs related to the acquisition of Lehman Brothers (LEH) increased expenses 100.4% from 60.3 billion Yen in 2008 to 120.9 billion Yen in 2009, contributing to the net loss.[18] However, Nomura is actively expanding its Investment Banking segment, particularly in the United States. On July 27, 2009 Nomura announced it would expand its head count in the United States by up to 40% in an effort to become a major player in the investment banking industry.[19]
Merchant Banking (-22.3%)[18]
Global Merchant Banking is the division that invests in private equity. Nomura makes money by buying stakes in companies and later selling them at higher prices. In 2009, Nomura's Merchant Banking segment loss was 85.3 billion Yen, compared to its 2008 income before income tax of 53.3 billion Yen.[18] This loss is primarily attributed to unrealized losses related to companies they invested in.
Asset Management (19.1%)[20]
The Asset Management division of Nomura offers 33 investment products that the public can buy.[2] In exchange, investors pay Nomura a management fee. Rising financial asset prices and net inflows increase Assets Under Management (AUM), which generates more revenue for Nomura; however, the sell-off in equity markets in late 2008 drove down clients' assets, which have resulted in a 32.6% decline in net revenue in 2009 compared to 2008.[20]
Other (47.2%)[20]
Other includes economic hedging transactions.
Key Trends and Forces
2008 Financial Crisis
Nomura has been hurt by the global credit crunch, which has raised the cost-of-borrowing, increased defaults, and led to poor investment performance. As an investment bank, Nomura is especially sensitive to financial transaction volume. Slow mergers and acquisitions (M&A) activity weigh on Nomura's operating revenue as it generates less advising and underwriting fees. Similarly, exposure to credit derivatives led to quarterly trading losses as large as 141.2 billion yen.[2] The company lost 17 billion yen related to Lehman's collapse and expects to lose $425 million USD related to Iceland's credit crunch.[2] That said, the poor economic environment has stifled competition, as Bear Stearns Companies (BSC), Merrill Lynch (MER), and Lehman Brothers (LEH) all failed, and Goldman Sachs Group (GS) and Morgan Stanley (MS) converted into bank holding companies, which restricts their financial activity.[21]
Nomura's Acquisition of Lehman Brothers (LEH) and International Strategy
Management hopes to develop and grow in Emerging Markets, aiming to bridge the Asian, European, and American markets.[22] The Japanese investment bank sees the global financial crisis as an opportunity to prepare for future growth and expansion. The purchase of parts of Lehman Brothers (LEH) for $2 billion USD added approximately 2,650 associates to Europe and the Middle East, 1,500 to Asia ex-Japan, and 2,900 in India.[22] Nomura also plans to focus heavily on expansion in the United States, hoping to become a major investment banking player. Despite cutting 2,100 jobs between October 2008 and March 2009, Nomura has demonstrated its commitment to expanding its presence in the America region by hiring 135 employees since October 2008, and is continuing to hire in the U.S.[23] Furthermore, it acquired London-based corporate finance advisory firm Tricorn Partners LLP for an undisclosed amount in December of 2009, greatly expanding its presence in the U.K. and Europe region.[8]
Japanese Yen (JPY)/U.S. Dollar (USD) Exchange Rate
Japanese Economy
While NMR aims at expanding its international operations, 70% of 2008 revenue was generated domestically.[2] Domestic Mergers and acquisitions (M&A) activity impacts gross income as do movements in the Tokyo Stock Exchange. Business confidence and credit conditions affect company's decisions to buy or merge with other firms, so a deterioration in these two means less investment banking fees collected. Similar, Nomura's investment trusts are tilted toward Japanese equities, so a decline in the TSE translates in lower AUM fee revenue.[2]
Competition
Competitive Landscape
The past two decades of dismal growth in Japan, mixed with Asian Financial Crisis and the Internet bubble burst led to the collapse of 3 major Japanese banks over the past ten years. It also resulted in the Japanese government infusing capital into the system and pressing for consolidation.[10] Today, Japan has 5 major "city banks" (aka money-center banks that have global operations), 110 regional banks, and 15 local banks.[26] Nomura competes with the investment banking division of Mitsubishi, which is the largest of the city banks in terms of assets with Y190 trillion (USD 2 trillion) in total assets.[27] Other city banks include Mitsui (MITSY), and Mizuho Financial Group (MFG).
In addition to Japanese banks, Nomura competes with global Investment Banks, such as Goldman Sachs Group (GS) and Morgan Stanley (MS). While the 2008 Financial Crisis resulted in trading losses for Nomura and lower investment banking fees collected[2], it also led to the collapse of several large competitors and weakened others. Merrill Lynch (MER), Lehman Brothers (LEH), Bear Stearns Companies (BSC) failed, while Goldman Sachs Group (GS) and Morgan Stanley (MS) were converted to more restrictive bank holding companies.[21] Nomura's management sees this turmoil as an opportunity to play catch-up and grow its global operations.[22]
Market Share
Completing the most Mergers and acquisitions (M&A) in Japan makes Nomura the largest Japanese Investment Bank.[3] The bank was responsible for 44% of all Japanese IPOs during FY 2008.[28] Further, Nomura manages more assets than any other domestic bank.[1] It also commands a significant portion of the Japanese trading activity; Nomura did 42% of all global equity trading on exchanges and 21% of the off-floor/exchange equity trading during its FY 2008.[28]
| Primary Market Share Data[28] | FY 2005 | FY 2006 | FY 2007 | FY 2008 | 1Q FY2009 | 2Q FY 2008 |
| Global Equity and Equity - related Japan | 25% | 26% | 33% | 42% | 35% | 20% |
| Japanese IPO | 32% | 20% | 21% | 44% | - | 6% |
| Japanese PO | 25% | 27% | 40% | 42% | 30% | 13% |
| Convertible Bonds | 19% | 34% | 34% | 38% | 39% | 30% |
| Global and Euro-Yen Bonds | 23% | 23% | 7% | 5% | - | 1% |
| Straight Bonds, Lead Manager (excl. self-funding) | 17% | 18% | 14% | 16% | 11% | 12% |
| Secondary Market Share Data[28] | FY 2005 | FY 2006 | FY 2007 | FY 2008 | 1Q FY2009 | 2Q FY 2008 |
| Off-floor/Off-exchange Equity Trading Share | 17% | 21% | 21% | 21% | 14% | 17% |
| JGB Auction Share | 18% | 11% | 11% | 11% | 10% | 11% |
| Bond Secondary Trading | 15% | 13% | 11% | 10% | 8% | 9% |
References
- ↑ 1.0 1.1 Nomura Company Website "Asset Management"
- ↑ 2.0 2.1 2.2 2.3 2.4 2.5 2.6 2.7 Nomura (NMR) FY 2009, 2Q Financial Data Presentation
- ↑ 3.0 3.1 3.2 Nomura's Note on the Acquisition of Former Lehman Brothers Operations, October 2008
- ↑ Zacks.com Nomura (NMR) Ann H. Heffron
- ↑ 5.0 5.1 5.2 NMR 2009 Investor Relations. US GAAP Financial Results Pg. 3
- ↑ Takahiko Hyuga. Nomura Falls for Second Day After Share Sale Plan. Bloomberg.
- ↑ Alison Tudor. Nomura Plans $5.6 Billion Share Sale. The Wall Street Journal.
- ↑ 8.0 8.1 Nomura announces acquisition of UKs Tricorn Partners. Yahoo.
- ↑ Nomura Announces Profit. The Associated Press. The New York Times.
- ↑ 10.0 10.1 10.2 10.3 10.4 Barrons Online "Japan's Banks: a Tasty Opportunity" Author: Leslie P. Norton, October 20, 2008
- ↑ (MTU) Form 10-K, FY 2008, "Economic Environment in Japan", Page 49-51
- ↑ Nomura Company Website Homepage
- ↑ (MTU) Form 10-K, FY 2008, Item 5. Operating and Financial Review and Prospects, Pages 42-97
- ↑ (MTU) Form 10-K, FY 2008, Item 3, Section D, Pages 7-18
- ↑ 15.0 15.1 15.2 Trading restores Nomura to Q1 profit. Robin Harding. The Financial Times.
- ↑ 16.0 16.1 16.2 16.3 16.4 NMR 2009 Investor Relations. US GAAP Financial Results Pg. 4
- ↑ Nomura Company Website "Domestic Retail Page"
- ↑ 18.0 18.1 18.2 18.3 18.4 NMR 2009 Investor Relations. US GAAP Financial Results Pg. 5
- ↑ Nomura To Build Up US Staff Levels. The Wall Street Journal. The Financial Times.
- ↑ 20.0 20.1 20.2 NMR 2009 Investor Relations. US GAAP Financial Results Pg. 6
- ↑ 21.0 21.1 Seeking Alpha, "U.S. Financial Crisis a Boon For Japanese Banks", Author Daniel Harrison, Sept 24, 2008"
- ↑ 22.0 22.1 22.2 22.3
- ↑ Nomura Launches Big U.S. Push. Alison Tudor. The Wall Street Journal.
- ↑ (MTU) Form 10-K, FY 2008, Item 3, Section D, Pages 7-18
- ↑ BullionVault.com "Yen Carry Trade Unwinds", October 16, 2008
- ↑ (MTU) Form 10-K, FY 2008, Competition Pages 26-35
- ↑ (MTU) Form 10-K, FY 2008, Item 4, Section B, Page 21-26
- ↑ 28.0 28.1 28.2 28.3 Nomura Company Website "Business Information -> Market Share Data"
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