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Morningstar | Losses in Wholesale Division Drags on Nomura’s 1Q Result. See Updated Analyst Note from 26 Jul 2018

No-moat Nomura Holdings began fiscal 2019 with a subdued first-quarter result. Profits for all three divisions were lower against last quarter and the same period last year with wholesale the most disappointing. Our forecasts and fair value estimate of JPY 760 are unchanged. While our fiscal 2019 forecast may be optimistic given the weak first-quarter result, capital market conditions may be more favorable for the remainder of the year, particularly for the fixed-income market in Japan. Speculation on the sustainability of the Bank of Japan's stimulus program saw 10-year Japanese Government Bond yields spike to a one-year high. Higher volatility in the market is generally a positive for trading revenue for banks. While the wholesale division has not suffered a loss since the fourth quarter of fiscal 2016 and losses this quarter are disappointing, this is not surprising as profitability is highly dependent on capital market conditions. We remain of the view that the bank is executing on its strategy in focusing on asset management and retail, which are more stable. The underlying metrics for both divisions were stronger with assets under management increasing slightly on last quarter.

Wholesale, which encompasses global markets and investment banking, posted a loss of JPY 7.4 billion which was mainly attributable to lower trading revenue across both fixed income and equities. This is particularly weak compared with U.S. and European peers, where trading revenue in the quarter was strong across most banks.

Management noted two reasons for the underperformance with one being the bank's geographic exposure, where trading conditions in Japan were more challenging. In contrast, U.S. interest rates are normalizing and banks there were able to take advantage of the more favorable conditions while Nomura's U.S. operation also saw reasonable performance. The second reason was Nomura's lack of exposure to commodities though management noted they will not add commodities to its product lineup. This is largely in line with its earlier strategy in focusing on the bank's core competency by selectively expanding its wholesale operation. We see this as a positive given the bank's struggles historically in its U.S. and European wholesale operations. Management said resources will need to be reallocated but stopped short on providing details.

Nomura's capital position remains strong with common equity Tier 1 ratio and Tier 1 capital ratio at 16% and 17.1%, respectively. Both were 50 basis points lower than the end of last fiscal year as risk-weighted assets edged higher, mainly on higher market risk from the inclusion of mortgage-backed securities from its U.S. subsidiary and the weaker Japanese yen. Nomura has yet to initiate its share buyback program, which was announced at the fiscal 2018 result in March. At the current share prices, we believe a share buyback would be accretive for shareholders. The bank plans to acquire up to 100 million shares, or JPY 70 billion in value, representing 2.7% of outstanding shares.