Nomura ‘ashamed’ after legal costs spark 95% slump in net income

Nomura Holdings Inc’s profit slumped as a $343mn provision for an ongoing legal case dealt yet another blow to the brokerage that’s just recovering from staggering losses linked to the collapse of Archegos Capital Management LP.
Net income dropped 95% to ¥3.21bn ($28.2mn) in the three months ending September 30 after the firm set aside more than ¥30bn for the transaction in the US that dates back to before the global financial crisis.
“We are ashamed,” chief financial officer Takumi Kitamura said during an earnings briefing on Friday. “It is very disappointing.”
The results continue a tough year for Japan’s biggest brokerage that’s already taken a $2.9bn hit from its dealings with Archegos, an investment firm set up to manage the fortune of trader Bill Hwang. Since then, the firm has been taking steps to bolster risk management, suspended senior executives and has stopped offering cash prime-brokerage services in the US and Europe, Bloomberg has reported.
While Kitamura didn’t specify the nature of the litigation that led to the provision or whether more would be needed, Nomura has long been grappling with the legacy of sales of residential mortgage-backed securities before the 2008 crisis.
According to Bloomberg Intelligence, recent court filings suggest Nomura has more than $2.5bn in RMBS repurchase claims, which could have a settlement value of up to $1bn. What’s more, it now faces potential litigation related to Archegos following reports that the US Justice Department investigation includes an anti-trust angle, according to BI analysts Elliott Stein and Jennifer Rie.
As recently as 2018 Nomura agreed to pay a $480mn penalty to resolve federal civil claims that it misled investors in connection with the marketing, sale and issuance of mortgage-backed securities between 2006 and 2007.
A representative for the brokerage declined to comment on whether the litigation was linked to the RMBS repurchase claims. “It is difficult to fully remove the risk of legal litigation if you are doing business abroad, but key in risk management is lessening such possibilities,” Kitamura said. “There is nothing more to say than that we ought to do business in an appropriate manner so there won’t be any problems like this happening five or 10 years later.”
The quarterly provision “isn’t small - it had a relatively large impact on their quarterly earnings,” said Toshihiro Matsuo, an analyst at S&P Global Ratings. “People may wonder how many potentially costly legal cases Nomura is currently carrying.”
“It’s an unspectacular result compared with rivals. Its fundamental business was weak. The impact from the US case wasn’t the only thing to blame,” says Shin Tamura, banking analyst at Bloomberg.
Elsewhere, Nomura wasn’t able to avoid a slowdown in the fixed-income trading with net revenue for that business down 32%. Revenue was down particularly in Europe and the US. The brokerage also reported a 26% jump in investment banking year-on-year.
In its retail business, traditionally a cash cow for Nomura, pre-tax income dropped 26% as market uncertainty kept clients on the sidelines in July and August. To help improve controls following the Archegos saga, Nomura said it will create a new risk management division to strengthen international cooperation among relevant departments, while keeping tabs on how the brokerage is managing risks globally. It’s also setting up a board risk committee comprising of outside directors and a non-executive director to enhance risk management and conduct “rigorous” controls and business oversight.
The brokerage also announced plans to buy back ¥50bn, or as much as 2.5% of its outstanding shares, after “disappointing some investors last year by foregoing it despite good core business performance,” Kitamura said.
Nomura’s results contrast a stellar quarter from Wall Street’s biggest banks after the Covid-19 pandemic gave a massive boost to firms’ trading and dealmaking operations, evidence of which is showing up in markets. Shares in Nomura are up just 1% on the year, trailing a 5% gain in Japan’s Nikkei index and a 57% jump in Goldman Sachs Group Inc. over the same period.
Still, the firm will be able to take a small amount of comfort from the progress it’s made on wealth management - one of chief executive officer Kentaro Okuda’s the key focuses, along with private markets and advisory. Its recurring revenue from assets like wealth management contracts climbed to a record ¥27.2bn, while recurring revenue assets were also at a high of ¥19.5tn. The brokerage also reported a 14% rise in income from investment management.