EUR 850.00 For Business Accounts Only

Morningstar | We See Daiwa Earning Better Returns Than Nomura Unless Nomura Gives Up on its Overseas Ambitions

We are transferring coverage of Japanese securities firms Nomura (8604 JP) and Daiwa (8601 JP), both of which we rate as having no moats and stable moat trend. Our fair value estimates of JPY 625 and JPY 786 are 12% above Nomura's and 16% above Daiwa's latest share prices, respectively.

Under their current strategies, we believe Daiwa likely to achieve a higher average return on equity over the cycle than Nomura, in part because Nomura insists on trying to compete in its global wholesale operations with U.S. and European investment banks. We note that even the European investment banks, which share deeper cultural similarities with their U.S. peers than Nomura does, have consistently lost share to U.S.-based banks since the global financial crisis. Nomura's global position is even weaker, so its large overseas operations end up acting as a severe drag on overall returns.

However, given its strengths in its core businesses of domestic retail brokerage and asset management, we believe Nomura would likely be well placed to generate returns above its cost of equity if it were to trim its global operations dramatically. Daiwa has already committed to such a focus and achieves decent returns, but its smaller scale compared with Nomura and its smaller balance sheet than the megabanks leave its long-term strategic viability in question, in our view.

We estimate Nomura has a market share of around 35% of client assets (stocks, bonds, funds, and so on) held in brokerage accounts in Japan, while Daiwa has around 20% and the three megabanks' securities units (SMBC Nikko, Mizuho Securities, and Mitsubishi UFJ Morgan Stanley Securities) each have 10% to 15% shares. Internet-only brokers have gradually increased their share from zero in the late 1990s to 8% now, but this has occurred amid a huge pricing differential between their offerings and those of the full-service brokers, and we view Daiwa's and especially Nomura's brand strength as essentially undiluted.