Asia escapes worst of $1 billion Nomura cuts

Koji Nagai, who has been Nomura’s chief executive since July 26, gave investors more details yesterday about how he plans to steer the bank back to profitability.

The main point of interest was the $1 billion of cuts to the investment banking business, first announced last week. Speaking at an investor presentation in Tokyo yesterday, Nagai and chief operating officer Atsushi Yoshikawa revealed that two-thirds of those savings will come from outside Asia. Within the region, the cuts will be split evenly between Japan and the rest of Asia.

The bank said that it would complete the cost reductions by around March 2014, as part of a plan to return to sustainable profitability in time for its 90th anniversary in 2016.

Nomura’s problems stem mostly from its acquisition of Lehman in October 2008 and subsequent expansion of its global investment banking business, particularly in equities. That investment in expensive bankers has coincided with a slump in primary market activity, with the global investment banking fee pool falling back to 2005 levels according to Nomura.

The bank said that 45% of the overall cost-savings would come from personnel expenses. It is expected that equities will bear the brunt of those cuts as the bank restructures the business, but senior executives reiterated Nomura’s commitment to the region and announced a plan to re-focus on Asia as a home market and use its global network to service business flowing in and out of the region.

Although most of the cost-savings will affect Europe and the US, the bank did not give details of how the personnel cuts would break down by region. At the end of June, Nomura employed 3,975 people in Europe, 2,423 people in the Americas and 6,454 people in Asia-Pacific, including its global services office in India. The firm provides no further break-down between divisions. Nomura has already cut about 460 jobs in Europe in the 12 months to June as part of an earlier announced $1.2 billion cost cut programme, while layoffs in Asia-Pacific and the Americas have been more selective. In fact, the headcount in Asia-Pacific between June 2011 and June 2012 was unchanged.

Outside Japan, the bank is quitting execution services for equities and migrating its clients to Instinet, an agency-only broker that Nomura bought in 2007 but which operates as an independent subsidiary. Execution services clients will continue to have access to the bank’s research product, to which the bank remains fully committed.

The new investor and corporate solutions unit will include flow and structured derivatives, delta one, convertibles, prime services, futures and options, equity capital markets and syndication. There will be no change for clients using these products and services, the bank said.

“Equity markets are being dramatically reshaped globally as a result of the current environment and the accompanying demand for transparent, agency-driven execution,” said Benoit Savoret, co-head of global equities. “With this innovative new model, we are combining the best of our superior technology platforms under Instinet to provide our clients with a truly independent, agency-only execution offering.”

Nomura booked an ¥8.6 billion ($110 million) loss for the second quarter of 2012, even after its aggressive first round of cost-cutting, which started out as a $400 million plan and grew to $1 billion six months later. Now, after an insider trading scandal has further dented the bank’s reputation and investment banking losses have worsened, it is hoping that a further round of cuts will lower its cost base enough to help it return to profitability.

The bank is aiming to earn ¥125 billion for the financial year ending in 2016, with investment banking projected to comprise roughly half of that.