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Nomura’s Woes

Ichiro Suzuki In late April, shares of Nomura Holdings fell sharply, in response to an earnings announcement for the year through March 2023. Earnings fell a whopping 35% from the previous fiscal year, undershooting a consensus forecast. The last 12 months have not been kind to investment banks in general around the world. Inflation overshot expectations and the world’s leading central banks acted against it fiercely. Aggressive interest rake hikes brought down prices not only of stocks but also of bonds, forcing financial institutions to suffer huge unrealized losses. For Nomura, however, unexpectedly large write-downs on their balance sheets have become somewhat common, rather than one-off, since the late 20th century. Nomura has never been satisfied with being the largest securities house in Japan, and always eyed on global markets with an ambition to compete with Wall Street power houses. For a brief moment in its history, Nomura found themselves at where they wanted to be, being the largest investment bank on earth by far. That was in the 1980s when the future of the Japanese economy seemed limitless, and then it fell off precipitously. As it turned out, it came to light that the future of Japan was much less bright than anyone had thought in the 1980s. After the burst of what proved to be a massive Japan bubble, Nomura went through a long period of retrenchment, along with other Japanese financial institutions. On top of it, population has already peaked out in Japan where Nomura has a dominant position. Worse, competition for high net worth Japanese households has become intense with foreign firms’ entries. For Japanese financial institutions, either commercial or investment banks, an obvious course of international businesses had been following Japanese manufactures to overseas markets, providing them with financing. Nomura always wanted more than that, with hopes to expand businesses beyond relationships with Corporate Japan. Such a global ambition was also seen among European banks. They moved into the U.S., only to learn how tough it was to compete in the largest market. In the 1990s, Nomura aggressively expanded real estate lending exposure in the U.S. under a man named Ethan Penner. As an interest rate environment had shifted, however, Mr. Penner’s bets had imploded, resulting in huge $1.7 billion losses in 1998. Ten years later, in the middle of the Global Financial Crisis, Nomura not surprisingly was dragged down by mega losses incurred on mortgage backed securities, this time along with other banks. Losses of 150 billion yen for the six months period through September 2008 was comparable to losses suffered ten years earlier, and the market kept deteriorating for another six months. Right before the GFC, Nomura started expanding into prime broking, a service that caters to hedge funds. In this process the firm acquired Instinet, a trading platform that offered trading and data analytic services for institutional investors. At a time when it was thought that prime broking was making serious contribution to Nomura’s North America businesses, the firm suffered a huge $2.9 billion losses in 2021 on an implosion of an investment company named Archegos. Bankruptcy of Lehman Brothers was an event that characterized the GFC. After the bankruptcy, Nomura acquired the defunct bank’s Europe and Asian businesses while the North American division went to Barclays. At the outset, The Financial Times reacted to the move favorably commenting that it was worth a try for Nomura to fulfill the firm’s global ambition. Though the remnants of Lehman were bought for literally nothing, running former Lehman businesses proved to be immensely expensive. Nomura guaranteed salaries of all the former Lehman bankers for two years. Immediately after the crisis, compensations for finance professionals came down substantially, but Nomura still had to pay the pre-crisis salaries to ex-Lehman people. After two years, many of them simply left. The Lehman acquisition cost Nomura’s shareholders dearly. They suffered severe dilutions of their stakes through Issuance of new shares that paid for the acquisition. Nomura’s share price today isn’t much higher than the ones seen in the aftermath of the GFC. Its equity market capitalization at $10.8 billion is only one tenth of Goldman Sachs. Nomura remains in an unenviable position. Sitting still in the domestic market that has little growth can’t be a choice. Expansion into the markets outside the country, especially the U.S., forces the firm to face fierce and ruthless competition. Business needs to be done differently from the way the firm has enjoyed in the home market. This is a problem faced by not only many of other major Japanese financial institutions but also by European counterparts as well. They all want to thrive outside of their home market but have found it a great deal tougher than they thought. Asia is a region of growth, as widely known, and draws everyone who wants to be big there. Though Nomura tends to consider the region as an extension of its home field, the firm is outdone by U.S. rivals that deploy greater resources. Being pushed into a tough competitive position, Nomura is always forced to take extra risks that wouldn’t have been taken by competitors who are less hard pressed. Nonetheless, there was a bet that worked. In the mid-1990s, Nomura in London bought out a chain of pubs with borrowed money, restructured the business and resold it with huge profits, before such an operation was not called private equity yet. Such a success, however, didn’t last very long for Nomura. Its management chose not to expand risks in the business when Guy Hands requested for a greater amount of capital for the division he was heading. Mr. Hands went onto form his own firm, Terra Firma Capital Partners in 2002 and thrived. At the outset of the 21st century, the field of private equity was not terribly competitive yet. Had Nomura stayed in private equity, it might have become an immensely profitable division. The price for taking extra risks is stepping on a land mine once in a while. Other aggressive European banks suffered the same kind of ordeal, especially since the GFC. Deutsche Bank and Credit Suisse are cases in point. Before these two, Royal Bank of Scotland had totally imploded during the crisis. Credit Suisse has been mired in a series of problems since the last decade, suffering a bigger loss than Nomura in the Archegoes debacle. Last month, the troubled Swiss bank has agreed to be bought by UBS, another Swiss giant that also has weakened materially after the GFC. The road ahead in the global market remains hard for non-U.S. financial institutions. One day, Chinese banks may find themselves in this position, since they may not be satisfied with serving only Chinese companies. Before that, however, they have to sort out their own problems in the domestic real estate market and BRI lending to developing countries.  About the author: Mr. Suzuki once worked for Nomura Co. in Tokyo, Japan.


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