Morningstar | Nomura's Huge Loss Matters Most Because It Could Prompt Management to Finally Cut Overseas Bloat. See Updated Analyst Note from 31 Jan 2019
Nomura reported its second consecutive quarterly loss, with red ink at the bottom line of JPY 95.1 billion wiping out more than 3% of the group's book value. This was driven by a JPY 81.4 billion goodwill write-down in the wholesale business, though the report included other items as well, such as a JPY 18.3 billion impairment charge on Nomura's stake in regional bank Mebuki Financial Group. In any case, we are sure that the market is now looking past the specifics of the awful results and toward the group's decision about what to do about them, to be announced in April after a strategic review is complete.The hope and expectation is that this time, Nomura will not just prune its generally loss-making overseas operations, which grew enormously when Nomura bought parts of Lehman Brothers in 2008, but finally do a more radical overhaul of its business model to eliminate the kind of losses that occurred this quarter and scare away investors. Although we rate both Nomura and its smaller rival Daiwa as having no competitive moat, we think Nomura would have one if it were to roughly follow Daiwa in terms of business model for its overseas operations, focusing only on those elements that support the Japanese franchise, rather than trying to compete in markets where it has no inherent advantage. Nomura is the undeniable market leader is retail brokerage and asset management in Japan and could be quite profitable if it were to narrow its focus to that. Even this quarter, the domestic entity Nomura Securities, or NSC, generated an annualized return on equity of 9.%. NSC's average ROE since 2012 is 12.3%, indicating the type of returns that could be available if Nomura were seriously to jettison its underperforming overseas business.
We lower our fair value estimate from JPY 588 to JPY 543 and from USD 5.22 to USD 5, which is 0.71 times book value after the write-down.
Nomura Holdings is a holding company and financial services groups in Japan and have worldwide operations. Co., through its subsidiaries, is engaged in the provision of a range of financial services including brokerage, trading, underwriting, M&A financial advisory services, merchant banking, and development and management of investment trusts and investment advisory services to clients such as individuals, corporations, financial institutions, governments and governmental agencies. Co. operates offices in countries and regions worldwide including Japan, the U.S., the U.K., Singapore and Hong Kong Special Administrative Region ("Hong Kong") through Co.'s subsidiaries.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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