Nomura Holdings vows to stay course despite lingering Lehman Brothers hangover


Takumi Shibata, chief operating officer of Nomura Holdings. (Goh Seng Chong/Bloomberg)
March 3, 2012

At 8 a.m. on Jan. 10, Takumi Shibata, chief operating officer of Nomura Holdings, walked into the firm’s London boardroom overlooking the Thames to try to salvage the 2008 acquisition of the European and Asian units of bankrupt Lehman Brothers.

Shibata, who had flown in from Tokyo, assembled senior executives at Nomura’s wholesale business, which includes investment banking and sales and trading.

The unit’s head, Jesse Bhattal, Shibata’s deputy and putative successor, was on videoconference from Singapore with news: He was stepping down. And before the meeting, Shibata had told Bhattal’s lieutenant, Tarun Jotwani, the former Lehman trader running global markets from London, that his position was being eliminated, people familiar with the situation said.

The departure of the top two former Lehman executives was the culmination of a clash with Nomura’s old guard over competing visions for the future of Japan’s largest brokerage firm, the people say. Bhattal argued for an aggressive approach to businesses that weren’t generating high returns. His bosses in Tokyo wanted to stay the course to build a global investment-banking franchise.

The dispute emerged as the wholesale division suffered $1.1 billion in pretax losses for the six months ended Sept. 30. While the unit recovered late last year, Nomura Holdings had a $140 million loss for the last nine months of 2011.

For the 86-year-old firm, which is making its fourth attempt to emerge on the global financial stage, things aren’t going well: Since the Lehman deal, its shares have fallen more than 70 percent, reaching a 37-year low on Nov. 24.

To steer Nomura toward profitability, Bhattal, 55, wanted big cuts in equities, investment banking and the firm’s U.S. business — as much as $1.6 billion. At the same time, he saw opportunities to buy assets being unloaded by European banks to meet tougher capital rules. Executives in Tokyo balked, saying it would be a retreat from the firm’s global ambitions and could erode capital reserves.

After Bhattal said goodbye during the January conference call, Shibata spent 10 minutes explaining that Nomura’s strategy wouldn’t change and that he would take over the wholesale business, a job he had given to Bhattal not long before.

“Nomura remains committed to being a global, Asia-based investment bank,” Shibata, 59, says he told the group. Jotwani and Bhattal declined to comment.

Taking on Wall Street, London

The firm’s future rests largely in the hands of Shibata. If he fails to rescue the deal he championed, the Lehman acquisition will go down as yet another doomed attempt to compete with the top firms of Wall Street and London.

Nomura has had big ambitions for decades. It expanded abroad in the 1980s, only to retreat to Tokyo as Japan’s economy faltered. Attempts in the mid-1990s and in the past decade foundered as well. Calling the acquisition of Lehman’s international units a “once-in-a-generation opportunity,” Nomura Group chief Kenichi Watanabe and Shibata scooped up Lehman’s European operations for just $2 and the Asian franchise for $225 million in what was supposed to be a game-changing bid to compete with Wall Street banks hobbled by the financial crisis.

Once the world’s biggest securities firm, with a market value of $76 billion in 1987, Nomura has a market value of $17.9 billion, one-third that of Goldman Sachs. “The firm’s ambition has been to be the Japanese Morgan Stanley or Goldman Sachs — a major global player,” says William Overholt, chief regional strategist at Nomura in Hong Kong until 2001. “It has suffered from an inability to implement its strategy.”

Now, after taking on 8,000 Lehman employees and building its U.S. presence from scratch, Nomura is tinkering with its strategy rather than embarking on a radical shift. It scaled back commodities trading, real estate securities and prime brokerage services for hedge funds. It’s considering reducing Eastern European currencies trading and investment banking in Russia. On Nov. 1, the firm announced it would triple the cost cuts announced in July to $1.2 billion.

It may be too little, too late, says Ichiro Takamatsu, a Tokyo-based fund manager who helps oversee $2 billion at Bayview Asset Management. “The speed of the cost cuts has failed to catch up with the changes in the market,” says Takamatsu, who formerly held Nomura shares.

The cuts didn’t satisfy Moody’s Investors Service, which said Nov. 9 it would review whether to lower Nomura’s credit rating to one level above junk or worse.

Shares were down 25 percent to 375 yen in the past 12 months, compared with a 7.6 percent drop for the Nikkei-225 index. They have gained 40 percent since the Jan. 10 management shake-up, and Nomura reported Feb. 1 an unexpected fourth-quarter profit of 17.8 billion-yen (about $219.5 million).

While Europe’s prospects look bleak for the next two to three years, Nomura isn’t retreating, Shibata says in an interview at Zurich Airport in January after attending the World Economic Forum in Davos, Switzerland. The firm remains committed to equities and investment banking, including the U.S. business. “We have no intention of going into hibernation,” he says. “We cut out the fat without much of a strategic change.”

He says he expects to remain chief executive of the wholesale business for one to three years and hopes to find his successor from within Nomura’s ranks. “We are still going for dominance in Japan, no question,” he says. “Outside of Japan, we will focus on a narrower range of activities. But where we are active, we want to be very deep.”

When Lehman went bust, Shibata was banking on an opening for a broker-dealer such as Nomura. With Bear Stearns acquired by J.P. Morgan Chase and other banks hobbled by government bailouts, he figured Nomura could make headway.

“I was wrong,” Shibata says. “I thought in 2008 we were going to a world where European banks would go back to being commercial banks. If they were to receive taxpayers’ money, taxpayers would demand the money be used for transactions in that country.”

Shibata isn’t the only one trying to steer an investment bank through the newly slimmed-down financial world, where capital requirements are rising, trading volumes have collapsed and banks are de-leveraging. After raising $9 billion in two share offerings in 2009, Nomura is ahead of rivals in meeting capital rules that take effect in 2015. It has a Tier 1 capital ratio of 12.9 percent of risk-weighted assets, more than the 8.5 percent required under Basel III rules.

Shibata and Watanabe, 59, worried that focusing on fixed income would undermine their goal of building a global client-based franchise. Reducing the equities division also might look like a retreat after buying Lehman.

The Lehman acquisition was transformative. Within three months, Nomura’s trading volumes had swelled tenfold. In 2007, Lehman made $1.3 billion in pretax profit in Asia and $2.1 billion in Europe and the Middle East — more than half of its total profit before taxes.

The deal helped Nomura strengthen its hold on Japan’s financial markets. It also enabled Nomura to win fees from Japanese companies doing deals overseas, Shibata says. While the largest share of Nomura’s revenue — 38 percent of 1 trillion yen (about $12.3 billion) of revenue in nine months ended Dec. 31 — now comes from wholesale banking, the firm earns more from retail brokerage services and asset management in Japan.

Long-held global ambitions

The firm has had international ambitions since it was founded by Tokushichi Nomura II in 1925. Two years later, it was the first Japanese securities house to open a New York branch, which it shut in 1936 in the run-up to World War II. The family lost control afterward, and since then Nomura’s fortunes largely have tracked those of the Nikkei index.

To gain a presence on Wall Street in the 1980s, Nomura lured top bond traders with the excitement of working for the world’s largest securities firm and selling U.S. Treasuries to hungry Japanese investors. The 1987 stock market crash and the 1989 bursting of the Japanese bubble led Nomura to scale back its ambitions. In 1990, its stock fell almost 50 percent.

In the middle of the past decade, Nomura expanded in the United States again, this time building a $5.5 billion portfolio of residential mortgage securities. Nomura began liquidating it in 2007, earlier than rivals and before the worst of the subprime crisis hit. The firm reported $2.4 billion in credit losses and write-downs by mid-2008, modest compared with other Wall Street banks.

In his first year as president, Bhattal brought order to the fragmented house of Nomura. He created an executive committee that met weekly to review costs, revenue and positions. In April, Shibata promoted Bhattal to chief executive of the division. Jotwani was named head of global markets, merging equities and fixed income. By July, with the European debt crisis intensifying, Nomura said it would trim $400 million in costs from the wholesale unit.

Overholt wonders whether history is repeating itself. “They’ve been on a three-year cycle in London, New York and Hong Kong,” he says. “They put in a huge amount of money, and the first year there’s a celebration about how successful they’re going to be. The second year it’s okay, and the third year they crash.”

With 4,100 staff members in Europe, most of them in a glass building in London overlooking St. Paul’s Cathedral, Nomura executives aren’t packing their bags and heading back to Tokyo. This time, Nomura may be too big to contemplate failure.

The full version of this Bloomberg Markets article appears in the magazine’s April issue.

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