Nomura is planning to cut costs by another $1 billion as part of a three-year plan to equip the firm for new industry challenges and ensure that it will be profitable on a sustainable basis by the time it reaches its 90th anniversary in 2016.
The cost cuts, which were communicated to management at a meeting in Tokyo on Friday morning and relayed to the Japanese media by the head of corporate communications later in the day, will involve both personnel and non-personnel expenses. The equities and investment banking business outside Japan will bear the brunt of the reductions, group CEO Koji Nagai and president and chief operating officer Atsushi Yoshikawa told the assembled executives.
At the end of June, Nomura employed 3,975 people in Europe, 2,423 people in the Americas and 6,454 people in Asia-Pacific, including its global services office in India. The firm provides no further break-down between divisions. Nomura has already cut about 460 jobs in Europe in the 12 months to June as part of an earlier announced $1.2 billion cost cut programme, while layoffs in Asia-Pacific and the Americas have been more selective. In fact, the headcount in Asia-Pacific between June 2011 and June 2012 was unchanged.
Despite the additional cost cuts, Nagai and Yoshikawa stressed that Nomura remains firmly committed to its international wholesale business — essentially fixed-income, equities and investment banking outside Japan — and has no plans to retreat. The management was also told that the bank’s commitment to consolidating its position as “Asia’s global investment bank” remains unchanged.
This may come as a relief to those employed by Nomura’s wholesale division in Asia. Some had feared that Nagai would be a lot more ruthless with regard to the loss-making business as he doesn’t have same attachment to it as former CEO Kenichi Watanabe, who was closely involved with Nomura’s 2008 takeover of Lehman Brothers’ businesses in Asia and Europe. However, a decision to pull back from Asia after essentially pouring money into the business for the past four years wouldn’t have been that easy to explain to shareholders either, so it makes sense that the bank tries to ride this one out.
Nagai and Yoshikawa took over the leadership of the firm on August 1 after Watanabe and former chief operating officer Takumi Shibata stepped down following an insider trading scandal. Yoshikawa is also CEO of the wholesale division.
At Friday’s meeting, Nagai and Yoshikawa said that declining fee pools and a tighter regulatory environment have forced Nomura, and many of its competitors, to re-evaluate its business model “in ways that we had not anticipated even at the beginning of this calendar year”.
To achieve the new target, Nomura will become more disciplined in what it does and will specialise in businesses with high relevance to Asia and Japan, which the bank views as its home market. These regional businesses will be supported by a global platform that is set at “an appropriate scale” for the revenue opportunities, they said.
The aim is to achieve a group pre-tax income of ¥250 billion ($3.2 billion) for the fiscal year to March 2016, of which half will come from the wholesale business in Japan and elsewhere, and the other half from the retail and asset management businesses.
Even on a pre-tax basis, those are pretty big numbers. In the latest fiscal year to March 2012, Nomura posted a 9% decline in pre-tax profit to ¥85 billion and the wholesale division racked up a loss of ¥37.6 billion, compared with profit of ¥6.7 billion the year before. All of the losses for the wholesale division came in the first two quarters and were followed by a rebound in the second half of the year, but as Nagai and Yoshikawa noted, the market environment remains difficult and investment banks are facing another set of challenges this year.
In the three months to June, pre-tax profit at the group level dropped 68% from the previous quarter to ¥19.7 billion and was down 43% from the same period last year. Again, the wholesale division — mainly equities and investment banking as the fixed-income business remained profitable — dragged down the total with a pre-tax loss of ¥8.6 billion. And that was despite the fact that the bank said it had completed the earlier announced $1 billion cost reductions in the wholesale division ahead of schedule. “By lowering our cost base, we were able to limit the impact from a decline in market liquidity and revenue opportunities,” chief financial officer Junko Nakagawa noted in the results presentation.
The new leadership provided no details of how it plans to achieve the profit target, but promised more information at an investor presentation to be held on Thursday. The lack of detail may explain the rather muted response in the market where Nomura’s share price finished Friday’s trading just 0.4% higher at ¥258, after gaining as much as 2.7% intraday. The benchmark Nikkei 225 index rose 1.6%.