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Nomura Holdings Inc. (NYSE: NMR) is the largest Japanese asset manager[2] with 24.3 billion Japanese Yen (JPY) ($2.48 billion U.S. Dollar (USD)) under management as of October 2008.[3] It is also Japan's largest investment bank in terms of Mergers and acquisitions (M&A) volume[4], and Nomura manages the most investments trusts in Japan.[5] Despite the 2008 Financial Crisis driving revenue down 51.7% in the first six months of FY 2009,[6] management sees the financial fallout as an opportunity to expand its global investment banking operations.[4] 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.[4] Barclays (BCS) purchased the U.S. capital markets and broker-dealer parts of Lehman.[7]
Like other Japanese banks, Nomura has learned from previous Japanese financial crisises and managed a more conservative balance sheet than European and American competitors.[8] The ample capital have provided a cushion from falling financial asset values and lets Nomura buy stakes in oversea competitors. 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.[9] For FY2008, asset management fees formed 20.5% of Nomura's revenue; stock brokerage commissions accounted for 33% and investment banking fees generated 11.6%.[3]
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).[10] Not only do Nomura's financial health and outlook affect the share price, but so too does the Yen/USD exchange rate. 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.[11]
[edit] 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%.[8] The Asian Financial Crisis, along with the internet bubble-burst, led to large bank failures, including behemoth Resona Bank.[8] The Japanese government injected close to $440 billion to recapitalize the battered industry[8], and the country has observed low single digit increases in land prices during 2006 and 2007 for the first time in nearly two decades.[12] A recovery in the domestic economy helps strengthen demand for Nomura's investment banking, asset management and asset financing services.
[edit] Business Overview
With about 18,000 people working in over 30 countries,[13] Nomura makes money in several ways. As an investment bank, Nomura associates advise corporations on potential Mergers and acquisitions (M&A) in exchange for a fee; Nomura will construct Initial Public Offering (IPO) and structure debt instruments as part of its service. The Japanese bank also 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. For FY 2008, equity trading added 137 billion yen to total revenue.[3] Revenue from originating and owning commercial loans have less of an impact; it accounted for -5 billion yen out of a total of 837.4 billion in net revenue for 2008.[3]
[edit] Business Segments & Financial Performance
Nomura divides its business into six segments.
[edit] Domestic Retail (48% of FY 2008 net revenue)[14]
Domestic Retail includes investment consulting and products. A low interest environment in Japan has caused clients to look for higher returning investments in Japan and overseas as opposed to Japanese government bonds. Nomura makes money by providing consulting advice and by charging administrative and brokerage fees.[15] As of September 30, 2008 domestic clients' assets were 68.6 trillion yen. Despite 1.4 trillion yen in net inflow, falling equity prices led to a overall decline of 7 trillion yen from the previous quarter. The overall decline in clients' assets year over year has led to a 29% decline in revenue generated by this segment during the first six months of FY 2009 compared to 2008. Less money being managed translates to lower administrative and consulting fees collected. During the 2Q FY 2009, Nomura launched six new investment trusts, which attracted 590 billion yen of new capital.[3]. In addition, the company has seen a substantial increase in buying orders during October 2008, suggesting its customers believe the market has oversold.[3]
[edit] Global Markets (11.4%)[14]
Global Markets is the Equity and bond sales and trading arm of Nomura. The company structures debt products and originate equity derivative products. In addition, this business segment offers real estate finance. The 2008 Financial Crisis has weighed on this sector, because of large trading losses in credit, derivatives, and equity positions. The company lost 17 billion yen in direct relation to the Lehman Brothers (LEH) bankruptcy in the 2Q of 2009. Further, Nomura expects to lose USD 425 million related to Iceland's troubles in the 3Q.[3] Nomura's real-estate investment related exposure is 190 billion yen.[3] An improvement in global liquidity and residential prices helps this division.
[edit] Global Investing Banking (7.7%)[14]
Global Investment Banking is struggling due to declining Mergers and acquisitions (M&A) activity. Net revenue declined 81.9% quarter over quarter to 5.2 billion yen. However, Nomura sees opportunities in cross-border transactions.[3] In addition, by acquiring the parts of Lehman Brothers (LEH), Nomura aims at expanded its wholesale and global investment banking operations.[16]
[edit] Global Merchant Banking (9.9%)[14]
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. For the 2Q of 2009, Nomura opened investments in two Indian firms; Real Image (a digital media company) and Moser Baer Solar.
[edit] Asset Management (10.8%)[14]
The Asset Management division of Nomura offers 33 investment products that the public can buy.[3] 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 2008 sell-off in equity markets drove down clients' assets, which have resulted in a 27% decline in revenue for the first six months of 2009 compared to 2008.[17] Public stock investment trusts account for the largest portion, 38.6%, of Nomura's AUM.[3]
[edit] Other
(12.2%)[14] Other includes economic hedging transactions.
[edit] Main Revenue Items
With collapsing financial transactions and asset prices, Nomura's brokerage and asset management commissions and fees have proven more resilient than revenue sources from investing banking operations and trading. Fees from investment banking have collapsed to 10 billion yen in the 2Q of 2009 from 16.2 billion a year ago and trading in the 2Q led a 23.7 billion decline in revenue, whereas, it had added 86.3 billion a year earlier. Commissions from brokerage services and asset management fees decrease was a more modest 15.7% in the 2Q of 2009 compared to the 2Q of 2008.[3]
| COMMISSIONS[3] | FY 2004 | FY 2005 | FY 2006 | FY 2007 | FY 2008 | 1Q FY 2009 | 2Q FY 2009 |
| Stock brokerage commissions (Domestic Retail) | 92.1 | 103 | 153.6 | 98.3 | 75.1 | 14.8 | 10.7 |
| Stock brokerage commissions (other) | 45.4 | 40.2 | 79.5 | 73.2 | 166.6 | 32.7 | 41.3 |
| Other brokerage commissions | 12.2 | 13 | 14.3 | 6.8 | 9.3 | 1.7 | 1.9 |
| Commissions for distribution of investment trusts | 37.3 | 41.7 | 85.1 | 120.5 | 121.2 | 25.8 | 24.2 |
| Other | 23.2 | 24.1 | 23.8 | 38.6 | 32.4 | 7.1 | 6.9 |
| Total | 210.2 | 222 | 356.3 | 337.5 | 404.7 | 82.2 | 84.9 |
| FEES FROM INVESTMENT BANKING[3] | FY 2004 | FY 2005 | FY 2006 | FY 2007 | FY 2008 | 1Q FY 2009 | 2Q FY 2009 |
| Equity underwritting and distribution | 44.7 | 49.1 | 57.3 | 56.6 | 32.1 | 2.3 | 0.6 |
| Bond underwriting and distribution | 26.4 | 20.5 | 21.2 | 15.3 | 13.4 | 4.4 | 2.8 |
| M&A/Financial advisory fees | 15.8 | 22.6 | 30.3 | 26.7 | 37.8 | 4.6 | 6.2 |
| Other | 0.1 | 0.1 | 0.1 | 0.7 | 1.8 | 2.1 | 0.4 |
| Total | 87 | 92.3 | 108.8 | 99.3 | 85.1 | 13.4 | 10 |
| ASSET MANAGEMENT FEES[3] | FY 2004 | FY 2005 | FY 2006 | FY 2007 | FY 2008 | 1Q FY 2009 | 2Q FY 2009 |
| Asset management fees | 44.2 | 51.1 | 68.5 | 106.3 | 150.3 | 33.5 | 31 |
| Administration fees | 12.1 | 16.1 | 20.6 | 24 | 21.7 | 5 | 7.4 |
| Custodial fees | 9.9 | 11.3 | 13.6 | 15.7 | 17.7 | 4.3 | 4.1 |
| Total | 66.2 | 78.5 | 102.7 | 146 | 189.7 | 42.8 | 42.4 |
| NET GAIN ON TRADING[3] | FY 2004 | FY 2005 | FY 2006 | FY 2007 | FY 2008 | 1Q FY 2009 | 2Q FY 2009 |
| Bonds and other | 152.3 | 120.9 | 150.9 | 154.9 | -70.3 | -22.7 | -22.3 |
| Equity | 75.2 | 76.8 | 148.1 | 137.6 | 137 | 33.3 | 1.7 |
| Merchant banking | 1.5 | 4 | 5.2 | -2.5 | -5 | -0.1 | -0.5 |
| Net interest revenue | 100.4 | 74.3 | 46.6 | 23.3 | -9.9 | -4.8 | -2.7 |
| Total | 329.4 | 276 | 350.8 | 313.4 | 51.8 | 5.7 | -23.7 |
[edit] Nomura's Strategy & Acquisition of Lehman Brothers (LEH)
Management aims at contributing to the development and growth in Emerging Markets.[16] Nomura also hopes to act as a link between Asia, Europe, and the US markets. The Japanese investment bank sees the global financial crisis as an opportunity to prepare for future growth and expansion. The bank issued 120 billion yen worth of subordinated loans in March of 2008 and plans to offer another 200 billion yen. It plans to continue expanding international operations after already buying Instinet, a stake in FORTRESS INVESTMENT GROUP (FIG), and the Asian, European, and Middle Eastern operations of former Lehman Brothers (LEH).[16] The purchase of parts of Lehman Brothers (LEH) for $2 billion USD, nearly doubles Nomura's associates and builds Nomura's client base.[16] The management sees the combination as a solid synergy. Whereas Nomura had focused on traditional and Japanese equity and fixed income, the purchase of part of Lehman increases hedge fund and overseas exposure. Further, Nomura only had a niche Investment Banking operations, but Lehman offerings are more expansive.[16]
[edit] Key Trends and Forces
[edit] 2008 Financial Crisis
Nomura has been hurt by the global credit crunch, which raises the cost-of-borrowing, increases defaults, and led to poor investment performance. For an investment bank, Nomura is especially sensitive to financial transaction volume. Slow Mergers and acquisitions (M&A) activity weigh on Nomura's operating revenue, and it generates less advising and underwriting fees. Similarly, exposure to credit derivatives led to quarterly trading losses as large as 141.2 billion yen.[3] The company lost 17 billion yen related to Lehman's collapse and expects to lose USD 425 million related to Iceland's credit crunch.[3] 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.[18] Nomura believes this is a time to catch up to competitors by making investments in global markets.[16]
[edit] International Expansion
Nomura plans to expand as an investment bank and trading firm by bridging across Asia, Europe, and US markets.[16] While Japanese business accounted for 80% of total revenue in 2007, in 2008 it declined to 70%.[5] Acquiring parts of Lehman Brothers (LEH) added approximately 2,650 associates to Europe and the Middle East, 1,500 to Asia ex-Japan, and 2,900 in India.[16] 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.[19]
[edit] Japanese Yen (JPY)/U.S. Dollar (USD) Exchange Rate
[edit] Japanese Economy
While NMR aims at expanding its international operations, 70% of 2008 revenue was generated domestically.[3] 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.[3]
[edit] Competition
[edit] 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.[8] Today, Japan has 5 major "city banks" (aka money-center banks that have global operations), 110 regional banks, and 15 local banks.[22] 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.[23] 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[3], 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.[18] Nomura's management sees this turmoil as an opportunity to play catch-up and grow its global operations.[16]
[edit] Market Share
Completing the most Mergers and acquisitions (M&A) in Japan makes Nomura the largest Japanese Investment Bank.[4] The bank was responsible for 44% of all Japanese IPOs during FY 2008.[24] Further, Nomura manages more assets than any other domestic bank.[2] 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.[24]
| Primary Market Share Data[24] | 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[24] | 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% |
[edit] References
- ↑ Nomura Company Website
- ↑ 2.0 2.1 Nomura Company Website "Asset Management"
- ↑ 3.00 3.01 3.02 3.03 3.04 3.05 3.06 3.07 3.08 3.09 3.10 3.11 3.12 3.13 3.14 3.15 3.16 3.17 3.18 3.19 3.20 3.21 Nomura (NMR) FY 2009, 2Q Financial Data Presentation
- ↑ 4.0 4.1 4.2 4.3 Nomura's Note on the Acquisition of Former Lehman Brothers Operations, October 2008
- ↑ 5.0 5.1 Zacks.com Nomura (NMR) Ann H. Heffron
- ↑ Nomura (NMR) Financial Highlights Ended September 30, 2008
- ↑ NY Sun "Barclays Acquires $2b of Lehman Assets" By: Julie Satow, September 16, 2008
- ↑ 8.0 8.1 8.2 8.3 8.4 Barrons Online "Japan's Banks: a Tasty Opportunity" Author: Leslie P. Norton, October 20, 2008
- ↑ (MTU) Form 10-K, FY 2008, Item 5. Operating and Financial Review and Prospects, Pages 42-97
- ↑ Yahoo! Stock Quote (MTU)
- ↑ (MTU) Form 10-K, FY 2008, Item 3, Section D, Pages 7-18
- ↑ (MTU) Form 10-K, FY 2008, "Economic Environment in Japan", Page 49-51
- ↑ Nomura Company Website Homepage
- ↑ 14.0 14.1 14.2 14.3 14.4 14.5 14.6 14.7 Nomura (NMR) Consolidated Results of Operations (US GAAP) FY 2008
- ↑ Nomura Company Website "Domestic Retail Page"
- ↑ 16.0 16.1 16.2 16.3 16.4 16.5 16.6 16.7 16.8 16.9
- ↑ Nomura Holdings, Financial Highlights Ended Sep 30, 2008 GAAP
- ↑ 18.0 18.1 Seeking Alpha, "U.S. Financial Crisis a Boon For Japanese Banks", Author Daniel Harrison, Sept 24, 2008"
- ↑ 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
- ↑ 24.0 24.1 24.2 24.3 Nomura Company Website "Business Information -> Market Share Data"
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