It is widely held that Japan’s retail brokerage model is under great pressure – perhaps irredeemably broken.
Nomura is the biggest name in the sector. It still has a peerless distribution network, but there is a nagging sense that it is more exposed than anyone to the challenges facing brokerage.
Nomura has had a difficult few years. It reported its first annual loss in a decade in April, and its last annual general meeting was sobering, with chief executive Koji Nagai having to fight down an attempt by proxy advisory firm Institutional Shareholder Services to stop his reappointment.
He survived, but shareholder support for his reappointment fell from 96% to 61.7% in a year.
But Nomura’s international operations finally turned profitable in the first quarter – the first profitable quarter in six for the business – and by the second-half results in October, the only region in which Nomura was not growing revenue was Japan.
Nomura has accepted it needs to make some changes and has set about them with conviction. It announced what it calls a “radical simplification” in March, with branch closures and a commitment to cut $1.3 billion in costs ($1 billion from wholesale, the remainder in retail; 70% of this one-to-two-year project has been achieved so far).
It will reduce its presence in secondary trading of G10 forex, emerging markets and flow credit in EMEA and the Americas, although there will be more investment in the US in other areas and a new joint venture in China.
The changes will also affect the corporate structure, replacing a matrix management system with several regional divisions under a global structure.
“When I went to the US, there were roughly 3,000 people in [the office in] New York and I felt some duplication between that business and regional management,” says Kentaro Okuda, who was group co-COO and deputy president of Nomura when he spoke to Euromoney, but was promoted to be the firm’s new CEO on December 2.
“In the past, we had 10 functions in the corporate structure. We studied our peers, and clearly US firms are very lean, so I made it with just five functions.”
Asked what investors want, he says: “When I show investors, they are always interested in how our Japan retail business is going. In the past, just after the Lehman operations where we made losses on the international side, they asked how we would change that.
“But they understand now we are profitable. How to continuously make profit on the international side – that’s a challenge for us.”
At home, Nomura is making efforts in digitalization and is also building cooperation with regional banks. In August it signed a memorandum of understanding with The San-in Godo Bank, a strong regional player, to access its branch network and retail clients.
“These are the sort of things we are looking for,” says Okuda. “In the past, we tried to do everything alone, but now we are trying to increase the group.” It has become increasingly commonplace to speculate about the long-term independence of Nomura and Daiwa, although Nomura is by far the bigger of the two.
“Nomura is a potential target for megabanks,” says one leading Japanese banker. “And if you can choose between Daiwa and Nomura, you go for Nomura.” Received wisdom has it that MUFG would be the most likely buyer, but even for a bank of that size it would be an enormous acquisition.
“How to continuously make profit on the international side – that’s our challenge”
– Kentaro Okuda
Another banker thinks Nomura would give up its independence only if it absolutely had to.
“There was a time earlier this year when they were in real trouble,” says another banker, referring to shareholder attitudes, stock market performance and a penalty over a market information leak. “But they really enjoy the luxury of being the only independent giant in this market. Even though their retail brokerage franchise is decreasing day by day, I don’t think they would give that up.”
What is Nomura’s view – will it always be independent? “That’s a fixed answer,” says Okuda with a smile. “We are always open to discuss.”
It has to be a possibility. Everywhere else in the world, leading wealth managers and investment banks – such as Merrill Lynch and Smith Barney – have been absorbed into consumer banks. Is the biggest risk that consumer banks become so good at wealth management that the same thing happens in Japan?
“I think you are right,” says Okuda. “Also, what we are feeling, the same as any other industry, is that because of digitalization and technology, the players may not be the same.
Yahoo and Amazon might be the largest banks in 30 years. That’s the largest risk for Nomura and other banks.” How will Nomura look in five years’ time? “I think we will be a good global financial institution, hopefully very profitable and changing based on the market,” says Okuda.
“Nomura is a unique financial institution: we are not a bank structure, we are independent and we are in Asia, Europe and the US.” Nomura may be the biggest independent non-bank in global financial services – certainly it is the biggest in the US, ahead of Jefferies.
Asked about lessons he has learned along the way, Okuda says: “The best advice is from senior clients, not from senior people in the organization. I have learned more from people outside.”
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