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Nomura Holdings' (NYSE:NMR) Q2 earnings -- it reported Wed. after the Tokyo exchange closed -- show how exposed it is to domestic brokerage commissions, and how weak it remains compared to global rivals. Consider that year-to-date its shares are down about 10%, and have returned nearly 40% less than those of Merrill Lynch (MER) and about 60% less than Goldman Sachs' (NYSE:GS).

Investors knew it would be next to impossible for Nomura to put up numbers like it did in Q2 last year, when stocks were surging on optimism of a recovering Japanese economy, behind former PM Koizumi's reforms and snap election victory securing postal privatization.

Thus, despite its 29% decline in net income to 43.5 billion yen ($365m), its ordinary shares (Tokyo: 8604) only lost 3% post-earnings announcement, closing at 2,100 yen ($17.86 at Y117.6/US$1) Friday.

Nomura's President and CEO Nobuyuki Koga had the following to say in a prepared statement accompanying his firm's Q2/H1 earnings release:

"While we cannot be completely satisfied with the first half of the year, the strategic initiatives we have taken are steadily yielding results. We will strive to achieve our management targets by building a more stable earnings base both domestically and internationally, and further grow our markets-related business."

Bloomberg.com notes that brokerage fees, its largest source of revenue, fell 15% to 66.1 billion yen ($555), hurt most by stock brokerage commissions, which fell about 37% to about 31 billion yen ($260m); while its stock trading profits dropped 18%, to 12.7 billion yen ($107m).

Trading volume by domestic investors on the Tokyo Stock Exchange fell 10% in the quarter according to Bloomberg research. However, the Nikkei 225 Stock Average did rise 4% during the period, perhaps fueled by an increase in trading by overseas investors.

Two serious problems for Nomura are (1) individual investors continued apprehension towards equity investing and (2) increasing competition from Japanese banks entering (or expanding in) the stock brokerage business.

Another issue is the growing presence of hedge funds and private equity chasing deals, which should benefit Nomura if it can service them in advising, IPO underwriting and trading. But, as Bloomberg notes, this also benefits rivals such as Daiwa Securities, which was hired by Goldman Sachs (GS) for its golf business IPO valued at around $1 billion, and Cerberus Partners', which hired Nikko-Citi for its forthcoming Aozora Bank IPO valued at about $3 billion.

Click the image below to enlarge and see Nomura's current and historical market share in various primary and secondary market investment banking activities. (Source: Nomura Q2 Earnings Presentation)

Nomura-Q2-Historical-Market-Share

Click the image below to enlarge and see Nomura's year-to-date ranking in domestic league tables. A comparison to the year-ago period follows.

Nomura-Q2-YTD-League-tables

  • In "Global Equity & Equity-related" bookrunning, Nomura was also ranked first in the six months of 2005, however, its proceeds as measured in US$ and its number of deals were higher in '06 ($13.153 billion on 80 issues, versus $8.111 billion on 75 issues), while market share fell slightly by 0.3% to 28.0%.
  • In "Global & Euro Yen Bonds" bookrunning, Nomura fell to the third position with a market share of 11.7% (yen proceeds of 246 billion on 15 issues), after being ranked first in H1 2005, with a market share of 23.2% (yen proceeds of 502 billion on 25 issues).
  • In "Financial Advisory" Nomura fell to number 7 with a market share of 18.1% (US$ proceeds of $17.78 billion on 104 deals), after being ranking number 1 in H1 2005, with a market share of 51.9% (US$ proceeds of 77.67 billion on 94 deals).
  • In "Domestic Straight Bonds (excluding self-funding)" bookrunning, Nomura fell to the number 4 spot, after having been ranked number 1 in H1 2005. Its market share fell to 13.6% from 22.0%, on yen proceeds of 433.3 billion yen on 28 issues, versus H1 2005 yen proceeds of 1.108 trillion on 59 issues.

I think long-term investors in Nomura will be rewarded, but need patience over the next few quarters to give Nomura's management a chance. If anything, there is some upside via a strengthening yen -- assuming the Fed is done, whereas the BoJ is just getting started -- and Nomura's ADRs have a decent dividend yield (for brokerage stocks) of 1.40%. I expect there to be some consolidation among Japanese brokerage stocks, especially among the online brokerages. The commission price wars, although benefiting retail investors, have been brutal for brokerages, and have not done much to help buy interest in domestic equities.

Links: Nomura Q2 Earnings Conference Call Q&A Session Transcript, Nomura Q2 Earnings Presentation

In Friday trading Nomura's ADRs lost 2.17% to close at $17.59.

Nomura (NMR), Nikko Cordial (OTC:NIKOY), UBS AG (NYSE:UBS), Goldman Sachs (GS), Morgan Stanley (NYSE:MS), Merrill Lynch (MER) year-to-date comparison chart:

Nomura-YTD-comparison-chart-102706

Disclosure: The author does not own shares of any companies mentioned in this article.

Source: Nomura's Disappointing Earnings and Difficult Circumstances