EUR 850.00 For Business Accounts Only

Morningstar | Nomura’s Domestic Cost-Cutting Is Positive and Important, but Big Overseas Presence Remains a Drag

CEO Koji Nagai told the institutional investors at Nomura’s Investment Forum the firm will cut costs in its Retail division by 10% over the next three years, closing more branches with overlapping coverage areas in Tokyo and urban areas. Nomura has frequently pared expenses in its Wholesale division overseas, but large-scale reductions in domestic Retail would represent a change, in our view.

We view Nomura's financial performance as likely to continue to lag that of smaller peer Daiwa unless Nomura substantially downsizes its overseas operations and retreats to a Japan-only strategy like Daiwa. Until now, strength in the domestic Retail segment has been a support for Nomura, but now even this part of the business faces secular headwinds.

Unlike the Asset Management division or even Wholesale that have flow-based, non-directional revenue sources, the domestic Retail segment has long depended on sales commissions that rise in bull markets and decline in bear markets as individuals’ appetite to buy investment products waxes and wanes. Over the long term, this serves well neither the customer nor the broker, and Nomura's strategic priority has been focusing on lifting the proportion of recurring revenue in Retail. In the past year, Retail revenue reached JPY 90 billion, or 23% of Retail net operating revenue, from JPY 54 billion, or 10.5% of segment net operating revenue in the year ended March 2014. This is all well and good, but because nonrecurring commissions have declined even faster, with costs largely fixed, Retail pretax profit has dropped to an annualized JPY 64 billion in the first half of the fiscal year ending March 2019 from JPY 192 billion in the year ended March 2014.

On the positive side, Nomura has been an aggressive repurchaser of its shares, buying and canceling more than 3% last fiscal year and having already purchased 2.3% so far this fiscal year. We maintain our no-moat rating and JPY 588 fair value estimate, 17% above the current price.