EUR 850.00 For Business Accounts Only

Morningstar | Hit by DOJ Settlement and Weak Markets, Nomura Reports First Quarterly Loss in Two and a Half Years

Nomura reported an annualized return on equity of minus 1.6% for the July-September quarter, its first quarterly loss in two and a half years. Some of Nomura’s shortfall is attributable to similar factors that depressed the earnings of Nomura’s smaller rival Daiwa two days ago, namely slow performance in the domestic retail business as currency turmoil in emerging markets turned Japanese investors off from overseas bonds as well as a quiescent period for investment banking revenue opportunities.

However, even if we exclude the one-off factors that led to red ink for Nomura at the bottom line--JPY 19.8 billion in expenses from the settlement with the U.S. Department of Justice and JPY 23 billion in other losses recognized this quarter from economic hedging and the windup of a Middle East subsidiary--annualized ROE still would have been only 4.4%, worse than the 5.5% that Daiwa reported. We continue to think Nomura’s returns are likely to lag those of Daiwa unless Nomura gives up on its ambitions to compete overseas outside of its area of core competence in Japan. We note that Nomura’s core domestic unit, Nomura Securities, generated an annualized ROE of 7.2% even in this quarter of lackluster domestic opportunities, while the rest of the company would have had an ROE of less than 4% even if none of the one-time losses had occurred.

We maintain our no-moat rating on Nomura and lower our fair value estimate to JPY 588 from JPY 625, as we now project an average ROE of 6.1% over our forecast horizon compared with our previous projection of 6.5%. Our new FVE is 0.70 times book value per share as of September 2018, a multiple that we see as fair given our average ROE expectation of 6.1% and assumed cost of equity of 8.5%. Our new fair value is 7% above today’s closing price of JPY 547.5.