Nomura Holdings Inc. (NYSE: NMR) is the largest Japanese asset manager with 23.4 trillion Japanese Yen (JPY) in assets under management (AUM). It is also Japan's largest investment bank in terms of mergers and acquisitions (M&A) volume, and Nomura manages the most investments trusts in Japan. In FY 2010 Nomura rebounded, as revenues jumped from ¥665 billion in 2009 to ¥1.4 trillion in 2010.
Nomura hopes to upgrade infrastructure in Japan as well as fund expansion in the U.S., Asia, Europe as well as emerging market regions. Nomura has put the funds to use, as it acquired London-based corporate financial advisory firm Tricorn Partners LLP for an undisclosed sum. As a further sign of its commitment to becoming a global bank, Nomura announced it was electing two foreigners to its Board of Directors, the first foreigners on the board since the company shifted to a holding company structure.
With 18,000 people working in over 30 countries, Nomura's 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 earns advisory fees on merger and acquisition (M&A) deals, initial public offering (IPO) deals, as well as raising funds through issuing debt for corporations. It also earns commission 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.
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.
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. The extra capital provided a cushion when asset values fell, and allowed Nomura to buy stakes in oversea competitors. Nomura purchased 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 in an effort to expand its international presence.
For the fiscal year ended March 31, 2010, Nomura had total net revenues of ¥1.14 trillion, a significant increase from its 2009 net revenues of ¥312.6 billion. Total non interest expenses declined slightly from ¥1.09 trillion in 2009 to ¥1.05 trillion in 2010. Combined, this led Nomura's 2010 net income to increase to ¥95.7 billion in 2010, compared to its net loss in 2009 of ¥757 billion yen.
Nomura reported a net profit of 2.32 billion yen ($26.9 million) in the period ended in June, a decline from ¥11.42 billion for the same period one year ago. The company attributed the decline in profitability in large part to the European debt crisis.
Nomura divides its business into six segments: i) Retail, ii) Global Markets, iii) Investment Banking iv) Merchant Banking v) Asset Management, and vi) Other.
Nomura's Investment Banking segment relies heavily on merger and acquisition (M&A) volume to earn revenues. After acquiring the European division of Lehman Brothers (LEH), Nomura has actively expanded its Investment Banking segment, particularly in the United States. 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.
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.
The Asset Management division of Nomura offers 33 investment products that the public can buy. In exchange, investors pay Nomura a management fee.
Nomura's other segment includes economic hedging transactions and other miscellaneous non operating segments.
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. That said, the poor economic environment has led to less competition and the industry consolidated since 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. The conversion into bank holding companies restricts their financial activity, limiting what they can do. Nomura began a major push to become a much more international bank, expanding extensively into the United States and Europe. Whether these investments into global expansion lead to increased profits for Nomura remains unclear, as many of the remaining banks such as Citigroup (C), Goldman Sachs Group (GS), and Morgan Stanley (MS) have made strong recoveries.
Management hopes to develop and grow in Emerging Markets, aiming to bridge the Asian, European, and American markets. 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. Nomura also plans to focus heavily on expansion in the United States, hoping to become a major investment banking player. Nomura has demonstrated its commitment to expanding its presence in the America region by hiring 135 employees, and is continuing to hire in the U.S. Furthermore, it acquired London-based corporate finance advisory firm Tricorn Partners LLP for an undisclosed amount, greatly expanding its presence in the U.K. and Europe region.
Nomura has hired a team of natural resource bankers, and is opening offices in both Houston and Toronto as part of its continuing efforts to become a top international bank. In fact, Nomura has hired a significant amount of former Lehman Brothers bankers for its Wall Street Office. Evidence of this can be seen by its 1,900 headcount in New York City, up from just 650 two years ago. Nomura has continued its trend of international expansion, as it hired a managing director for Mergers and acquisitions (M&A), a head of fixed income securities, and a head of equities for Australia.
A strengthening Yen supports a higher ADR share price and increases Japanese companies ability to make overseas acquisitions. As Nomura expands global operations, it aims to increase cross-border Mergers and acquisitions (M&A) activity. Also, its yen reserves can purchase more assets overseas. The value of the Yen compared to the US dollar impacts the value of ADR shares of NMR also. Nomura's stock is listed on the NYSE. An increase in the value of the Yen translates to higher share price and dividend payments in the ADR shares all else constant. An appreciating Yen can purchase more US dollars. The unwinding of the carry-trade has resulted in a strong Japanese currency. Investors, especially hedge funds borrowed low interest Yen and purchased securities in other countries that offered higher potential returns. With the collapsing financial markets, these investors have been scrambling to "unwind" the trade and buy back the Yen they were short.
Nomura has begun to aim its focus towards international operations since historically roughly two thirds of its revenue is generated domestically. Domestic Mergers and acquisitions (M&A) activity impacts gross income as do movements in the Tokyo Stock Exchange. Also, 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. Similarly, Nomura's investment trusts are tilted toward Japanese equities, so a decline in the TSE translates in lower AUM fee revenue. As a result, poor performance in the domestic economy usually means Nomura's earnings are hurt. However, with its goal of becoming an international investment bank, Nomura hopes to become less reliant on its domestic market for earnings.
Japan has 5 major "city banks" (aka money-center banks that have global operations), 110 regional banks, and 15 local banks. Nomura competes with the investment banking division of Mitsubishi, which is the largest of the city banks in terms of assets with ¥190 trillion in total assets. 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 Financial Crisis resulted in trading losses for Nomura and lower investment banking fees collected, 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. Nomura's management sees this turmoil as an opportunity to play catch-up and grow its global operations.