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Nomura may need to ditch pruning shears and get out axe

Nomura is still limping its way to post-crisis normality. Buoyant fixed-income trading revenue and a better performance in the United States in the latest quarter challenge the notion that the Japanese group is retreating to its domestic stock-broking roots. However, as the investment banking industry reshapes, new chief executive officer Koji Nagai still has to prove he can prune his way to better returns.

When Nomura replaced its top management in July, and then announced plans to slash another $1-billion (U.S.) from its cost base, its ambitions to build a global investment bank seemed at an end. Results for the three months to the end of September suggest a more complex picture. Despite one-off charges, the investment bank, which Nomura refers to as its wholesale division, broke even on a pre-tax basis. That was almost entirely down to a jump in fixed income, which generated 24 per cent more revenue than in the previous three months and accounted for two-thirds of the investment bank's total. Meanwhile, income in the investment bank's U.S. operations was up 27 per cent. Even the European division – the main target for cost-cutting – was up 8 per cent, quarter on quarter.

However, it's far too early for Nomura to even think about declaring its new strategy a success. To begin with, investment banking revenue has proved highly volatile. The continuing slump in its equities division hardly engenders confidence. And even if Nomura can slash costs without harming income, being consistently profitable is what counts.

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In the meantime, Nomura is relying on its domestic broking and asset management arms – both of which reported quarter-on-quarter declines in pre-tax profit – for support. The group's annualized return on equity of just 0.5 per cent in the quarter will have to show substantial improvement before unhappy shareholders are placated.

Given his recent elevation, Mr. Nagai has some time to show that the new strategy can pay off. But with rivals like UBS taking radical steps to slash their investment banking balance sheets, Nomura may yet find that further-reaching restructuring is necessary.

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