Nomura narrows gap with investment bank big league

February 2, 2011

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

By John Foley
Nomura is evolving into a global investment bank, even if it doesn’t yet look like one. The Japanese financial group reported a strong increase in investment banking fees for the final quarter of 2010, and its traders have begun to prove their worth. The gap with the big league is closing, slowly.

Since Nomura bought the Asian and European businesses of Lehman Brothers in October 2008, it has been chasing the shadow of Lehman’s pre-bust greatness. One challenge was to rebuild Lehman’s U.S. trading business from scratch. The other was to muscle into the big mergers and initial public offerings that bulge bracket banks eat for breakfast.

On the first, results are starting to show. While Wall Street banks such as Goldman Sachs and Morgan Stanley reported sequential declines in the region of 30 percent in their quarterly trading revenue, Nomura managed to keep its own flat. So it should: the brokerage doubled its headcount in the United States over eighteen months, pushing up its compensation ratio to an indulgent 48 percent of revenue.

The second goal remains far away. Sure, equity underwriting revenue more than doubled over the last quarter of 2010, and Nomura bagged some neat mandates, like helping Abu Dhabi hedge its stake in Barclays. But chief executive Kenichi Watanabe has promised big mandates, not just quirky ones. Nomura scored just two of the quarter’s ten largest worldwide equity issues, and none of the top 10 debt or M&A mandates.

Things are moving in the right direction. Nomura’s dealmaking fees grew 37 percent during the quarter — faster than JPMorgan and Citi. But even that achievement paled in comparison to the previous year, when Japan’s mega-financials were pumping out new shares to bolster their balance sheets.

Therein lies Nomura’s biggest frustration: Japan still sets the pace, and the share price. The bank’s domestic business still accounts for 57 percent of revenues. Its stock tracked its Japanese peers on the way down for most of 2010, but lagged them on the way back up. Despite a 4 percent bounce on the results, the shares have lagged the DJ Financials Index by 25 percent in the past year. The thing about evolution is that it takes an age.

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