Industry Updates

Nomura’s profits dampen by more focus on hedge funds

Thursday, February 04, 2010

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Opalesque Industry Update - Nomura, one of the major financial groups of Japan and country’s leading brokerage saw net revenue of Y274.5bn ($2.95bn), and net income of 10.2bn yen ($110m) for the third-quarter of FY ending 31-March 2010 (see Nomura’s release here).

Revenue from its capital-markets business fell 6.1% to Y163.9bn ($1.8bn) from Y174.5bn ($1.92bn) in the second quarter as investors such as hedge funds booked profits following a lucrative year, the WSJ reported yesterday. A slowdown in client trading also affected results.

Nomura’s hedge fund-centric approach may have impacted the financial performance. In 2008, Nomura bought the European and Asian arms of Lehman Brothers Holdings Inc to mould its business model in similar way to that of American and European brokerages, that is, to give a greater focus on hedge fund clients.

Although this strategy helped in mid-2009 when bid-offer spreads that banks earn on trades widened, and helped Nomura recover from a loss in the fiscal year ended Mar-09, analysts believe that bid-offer spreads will not widen again to the same extent, even when trading activity pick up again as hedge funds start reopening trading positions.

As the financial crisis had created room for new players to serve hedge funds, Siggi Thorkelsson, Nomura's head of equities Asia-Pacific, told Reuters in an interview on July-09 : "We think prime brokerage is a very interesting opportunity because of what happened in the industry this past year."

The Nomura group is quite keen on US expansions as the chief executive of Nomura America Holding, Shigesuke Kashiwagi told the WSJ: "The U.S. market has been our missing part of the puzzle, and we are determined to fill that gap." In Jan-10, the company appointed a US head of investment banking.

The group has ambitious targets. Speaking to Global Pensions, senior investment officer and managing director of fixed income Yoshihiro Namura said: "We'd like to develop our own capabilities in all key areas. We are an equity house, a fixed income house and we'd like to build out global credit, global equity, and emerging market equity.”

A strong performance in investment-banking, helped the brokerage to post a net profit in Q3, compared with a loss of Y342.9bn ($3.77bn) a year earlier, during the financial crisis.

Investment Banking booked net revenue of Y44.5bn ($500m) in this quarter. Nomura advised on many of the high-profile equity finance deals in Japan during the quarter. In addition to its dominant position in Japan, Nomura acted as Joint book-runner on the IPO of Maxis, Malaysia's leading mobile communications service provider, and sole book-runner for a convertible bond issue by Tata Power, the largest domestic private utility player in India, the news release said.

However, for this Q3 of FY ending 31-March 2010, profit fell below the profit forecast of Y26.1bn ($0.28bn).

Nomura sprung into action by cutting costs by Y24.5bn ($0.27bn) in the quarter through compensation costs reduction to 46% of net revenue from 49% in the second quarter of the same fiscal year. – written by SC –

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