EUR 850.00 For Business Accounts Only

Morningstar | Nomura Changes to Simplify its Global Business are Overdue but Welcome Nonetheless

We are tweaking our forecasts for Nomura in response to the cost-cutting measures it announced yesterday. We are lowering our pretax profit expectation for the current fiscal year ending March 2020 to JPY 131 billion from 205 billion to reflect one-time costs associated with employee departures and other structural changes, such as reducing the number of main corporate functions from 10 to five and replacing its complicated regional and segment matrix of reporting lines with a simpler global structure following segments alone. Our profit expectations for the subsequent fiscal years are now slightly higher than before as we assume that the positive effect from additional cost reductions will be larger than the negative effect to the top line from businesses Nomura is newly downsizing or optimizing (flow credit and foreign exchange in Europe and the Americas, cash equities in Asia, and so on). Our DCF-based fair value estimate remains USD 5 or JPY 543, which is 0.7 times book value per share as of December 2018 and 29% above yesterday’s closing price.

In our view, the most positive new information announced yesterday is Nomura’s expectation that the changes will reduce risk-weighted assets, or RWA, by around 10%. Nomura has already reduced RWAs to JPY 13.8 trillion in December 2018 from JPY 18.9 trillion as of March 2015, but its RWA density (ratio of RWAs to total assets) of 30.6% as of December 2018 is still higher than the 25.0% reported by its smaller rival Daiwa Securities. Partly reflecting its lower RWA density, Daiwa has higher capital ratios than Nomura and has committed to a more aggressive dividend policy of paying out at least 50% of earnings, compared with Nomura’s current policy of paying out 30% in dividends and at least 50% in total payout combining dividends and share buybacks. We believe that a further reduction in RWAs by Nomura should help it to increase buybacks and/or dividends from the current level.

Strategically, we do not think the changes announced yesterday are sufficient for Nomura to generate a return sustainably above its cost of capital, because its overly large overseas operations still drag too much on its moaty retail and asset management businesses in Japan. We think Nomura would be well served to reduce its overseas footprint further and adopt a model closer to that of its smaller rival Daiwa, which is focused on exporting its core strength in Japan and eschews challenging global rivals in the U.S. and Europe on their home turf. However, anything larger than what was announced yesterday would probably have involved too much operational risk to do at once, so we positively view the changes and only wish they had been done earlier.

Once this round of restructuring has settled and Nomura can confirm that its new simpler global management structure is able to manage its business risks, we hope that Nomura can undertake further steps to reduce businesses where it lacks competitive advantages, particularly overseas, and focus on the core businesses in Japan where we think it continues to enjoy an economic moat.