Tokyo: Nomura Holdings, Japan’s largest brokerage, returned to profit in the last quarter thanks to a big revenue increase in its fixed income and equities businesses.
The upswing in profits still leaves Nomura vulnerable to a possible credit downgrade by Moody’s Investors Service, which put Nomura’s debt on review in November, citing losses in its overseas capital markets operations. A decision is expected within days.
A one-notch downgrade would put Nomura’s rating at Baa3, or just one level above speculative, or “junk”, grade. This could make some clients wary of trading with the bank, denting the profitability of its overseas operations, analysts have said.
Nomura booked a net profit of ¥17.82 billion ($234 million) for October-December, beating a market consensus for a ¥2.5 billion loss, according to the average estimate of six analysts polled by Reuters. Their forecasts ranged from a net loss of ¥18.3 billion to a ¥13.4 billion profit.
The ongoing debt crisis in Europe has forced Nomura to scale back an aggressive global expansion that started with its purchase of the Asian and European businesses of failed Wall Street bank Lehman Brothers in 2008.
Moody’s cited ongoing losses in Nomura’s overseas wholesale operations, which pushed the broker to a group net loss of ¥46.1 billion in July-September, as the main factor triggering its review.
Last month the head of the wholesale division and another senior ex-Lehman banker resigned abruptly, raising questions about Nomura’s overseas strategy.
Analysts have said any cut by Moody’s would likely be by one-notch, and in that case the focus would be on whether the outlook is negative, leaving the risk of a future cut to junk on the table. That could be enough to spook some counterparties and may force Nomura to further trim operations overseas.
“An investment grade rating is critical for investment banks. A one-notch cut by itself would not trigger a big outflow of funds but, depending on the outlook, counterparties could become increasingly wary,” said Deutsche Securities analyst Masao Muraki.
“Although the possibility is fairly low, a two-notch cut would prompt more counterparties to avoid dealing with it. In forming new contracts, counterparties would demand more collateral, boosting funding costs and reducing profitability.”
Nomura is confident its balance sheet is strong enough to weather a downgrade. It has built up a $70 billion liquidity pool equal to 15% of its assets, has secured funds to meet refinancing needs over the next four quarters, and the average maturity of its loans is now six years -- all making an immediate funding crunch unlikely.
At end-November, with financial markets on edge, Nomura announced it had reduced its exposure to Greece, Ireland, Italy, Portugal and Spain to $884 million, down 75% in less than two months. That move included a big cut to repo-to-maturity transactions -- off-balance sheet agreements that were central to MF Global’s late-October collapse.
On Tuesday, second-ranked investment bank Daiwa Securities Group booked a fourth straight quarterly loss - of ¥21.6 billion - after weak stock markets hit mutual fund sales and depressed brokerage commissions.
Japan’s benchmark Nikkei average fell 3% in October-December, while the daily trading average on the Tokyo Stock Exchange fell below ¥1 trillion in December for the first time in more than 8 years.
Nomura shares, valued at close to $14 billion, have risen 26% since hitting their lowest level in at least 28 years in late-November. During the same period, the Nikkei is up 8%.