Nomura outlines fixed income ambitions

Steve Ashley, the head of global markets at Nomura in London, outlines the firm’s strategy for competing in fixed income, the move away from basic market share discussions and how Asia needs to be more than just a source of capital.
Steve Ashley
Steve Ashley

Until recently, Nomura had not been a fixed-income powerhouse, preferring to mould itself around the needs of its retail clients. With more than $800 billion in assets in its wealth management division, the bank has access to a huge pool of capital.

During the past year, it has de-emphasised its equities business and rapidly developed its fixed-income business, which is a key part of its strategy after the acquisition of the European and Asian parts of Lehman Brothers' business in 2008.

Steve Ashley was brought in from RBS in 2010 to spearhead this charge into fixed income. He has had such an impact internally that in late December he was promoted to head of global markets, combining fixed income and equity. Here he talks exclusively to FinanceAsia about Nomura’s strategy for competing against the flow monsters.


Fixed income was a key driver of revenues for investment banks in 2012, despite the low interest rate environment. Are you happy with where you are?
The fixed-income environment is relatively strong for the majority of firms. We have had our successes and we are steadily taking market share in our target areas as the established houses find the markets trickier to navigate than they have in the past, particularly in terms of dealing with their legacy issues. There is definitely room for houses like Nomura to take more market share.

Your market share is just over 4%. UBS pulled out from fixed income with a 4% share. How much of the market do you need to be able to operate in this business?
It is not so much about scale, but being relevant in the areas you are active in. Just being large does not equal success, which is a reflection of the changing regulatory and market environment. The corporate and personnel costs of running a one-stop shop are significant. In a world of declining industry wallet, that breakeven point becomes ever more tenuous. So if you are uncertain about future industry revenues, then for most firms their operating leverage is likely to diminish.

What costs do the larger banks have that smaller players like Nomura do not and which thus allow you to compete?
The infrastructure within banks is a problem for many larger houses. Technology has been built on technology over the course of 20 years. More broadly, they have been run as very siloed businesses, which in the new environment has disadvantages. In terms of our fixed-income operation, Nomura is essentially a new organisation. We don’t have the breadth of exposure or the breadth of product that other banks have, but equally we can be very flexible and targeted on where we want to be and compete effectively. That does not involve chasing after everything: clients are very understanding of our ability to be competitive in specific products, and also understand there are other areas where we are not active.

What are those target areas for you?
Interestingly, there are some regional nuances — there isn’t a generic approach. For example, we’ve established a strong Emea [Europe, the Middle East and Africa] rates business, while our securitised products trading business in the Americas has also performed strongly. But, of course, we have a dominant market share for anything involving Japan or Asia Pacific. So in FX, we have to be the go-to house for anything yen related. We are also very focused on anywhere where we see a unique kind of flow from our Japanese retail base — emerging market currencies like Turkish lira or South African rand are very popular. Through our retail network, we have a lens into one of the biggest pools of private capital in the world, which is worth around $19 trillion. Nomura brings a unique proposition to the global capital markets.

If we are going back to a market where you have diffuse pockets of specialisation, then is it wrong to look at overall market share numbers? Should we be more discerning?
I have always believed that trying to aim for a generic top five is a pointless exercise. I would rather be number one in our chosen areas of expertise. Clients and intermediaries will deal with firms who bring something unique and valued to them. Some of that is around a natural pocket of demand or expertise that you might have. Moreover, clients already have concentration risk with European and US firms. Having a relationship with an Asian-headquartered investment bank offers a way to address that issue.

And is that enough to move clients away from their natural inclination to just go with the biggest names on the street, which have the best ratings?
Size is not everything. And on the ratings front, Citi is only one notch above where we are. One thing that is not well understood is that we did not have a solvency or liquidity issue but a profitability issue in the past. And that is being addressed by the cost reductions that were announced a few months ago.

You do have strong capital, good liquidity, falling leverage ratios and access to deep pools of liquidity, yet your rating is teetering on the edge of non-investment grade. This doesn’t make much sense.
It doesn’t. JCRA rates us AA- because they understand that we don’t have a solvency issue. Nomura is the dominant brand in Japan, with good access to funding. It is also important to recognise that we are a pure mark-to-market organisation: all our assets we have — liquid and illiquid — gets marked on our books every quarter. That gives real visibility about the state of our balance sheet, which distinguishes Nomura from a lot of our competitors, many of whom haven’t taken the mark-to-market pain that we have already done. Any legacy issues are visible and marked.

Has fixed income moved away from being a global business dominated by the flow monsters, to being a regional, targeted relationship business? Is it all about having niche expertise?
It is a bit of both. There are some moves towards the equitisation of flow products — meaning more electronic trading — which is what we have seen in the equity markets where it is mostly high frequency and low touch. But the truth is that fixed income has many different facets and has always been more of a relationship business. It is about finding funding solutions, structured solutions, capital and liquidity solutions. Some of the flow businesses are already very electronic, but the overall relationship with clients remains paramount.

Is that affected by the large amount of liquidity in the world at the moment? How does a smaller firm like Nomura stay relevant in the face of all this QE money that is flowing about?
There is still a huge inflow of funds into fixed-income funds. So fixed income is still continuing to grow and although at some stage that will reverse, it doesn’t feel like that will happen any time soon. Additionally, pension funds still need help with this 15 to 20-year trend of shifting away from growth and equity strategies to more fixed-income liability-driven investing strategies. And if interest rates start to go up, clients will need solutions to help them hedge those exposures.

In the global fixed-income world, Asia is seen mainly as just a source of capital. All the new rules, all the new technologies, all the new systems are being decided outside of the region. How does Asia as a region increase its relevance within a global fixed-income market?
By 2050, Asia will represent more than 50% of global GDP. Capital markets will evolve — I am convinced — to be much more centred on Asia than they are today. Yes it is true that the capital markets today are not as advanced in some Asian markets as they are elsewhere, but I am convinced that will change over the course of time.

What gives you that comfort? Asia is still only about 15% to 20% of the global fixed-income market, a similar proportion to 15 years ago, despite the huge build-up of reserves in the region.
It is going up slowly. Asia does have one drawback, compared to Europe and the US, in that it is very fragmented. That is an issue in terms of creating an intra-regional capital market. There are several centres, all with different currencies, all with different rules and regulations. It is very difficult to build a hub and that is what has held the capital markets back. So there are some structural issues as to why Asia has not fully come to the party.

There is a similarity between Asia’s large GDP and small capital markets presence, and Nomura, which has a much larger business in the US and Europe than you do in non-Japan Asia.
It is a function of what we inherited from the Lehman acquisition. We acquired a large footprint in Europe and a decent sized business in Asia ex-Japan and built one in the US. Since then there has been a rightsizing of the European business due to the sovereign debt crisis we have had locally. We understand exactly how we can bring the synergies between Japan and the rest of Asia together, because previously they have been two independently operated businesses. To that end, we now have an APAC structure, where we are bringing two previously independent firms much closer together. There is a lot of value in that for us.

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