Nomura's Bond-Trading Sugar Rush Won't Last

(Bloomberg Opinion) -- Like its bulge-bracket Wall Street rivals, Nomura Holdings Inc. found volatility was its friend last quarter. The surge in trading revenue that drove a return to profit is unlikely to be sustained, though. Japan’s largest brokerage needs more than tinkering at the margins to drive a post-Covid recovery.

Chief Executive Officer Kentaro Okuda, reporting his first set of quarterly results, can bask for now. Net income more than doubled to 142.5 billion yen ($1.4 billion) in the three months ended June 30, from 55.8 billion yen a year earlier, and rebounding from a loss in the March quarter. Revenue from the firm’s wholesale division, which houses its bond-trading activities, rose to a record. (A one-time gain from revaluation of Tokyo real estate also buoyed earnings.)

The trading boom has lifted profits across U.S. investment banks. Goldman Sachs Group Inc.’s revenue from its fixed-income, currencies and commodities business more than doubled to the highest in nine years in the three months through June.

These conditions won't last forever. Fixed-income trading gains reflect the U.S. Federal Reserve’s extraordinary efforts to keep credit flowing to companies during the Covid-19 pandemic. By nature, this will be a temporary fix. The current quarter has been slower for the wholesale business, Chief Financial Officer Takumi Kitamura said on a call with reporters. That echoes Goldman CEO David Solomon, who acknowledged that trading activity in June had already eased from the highs of March and April.

Behind the bonanza in bond trading, a strength for Nomura, there are troubling signs. The Tokyo-based firm is lagging behind in Japanese equities underwriting, where it should expect to lead. Nomura ranks fifth for domestic equity fundraisings in the period since April 1. (It remains first for domestic corporate and municipal bonds.)

Okuda has focused on cost-cutting to steer Nomura through the global economic slump triggered by the pandemic. The brokerage has cut dozens of investment-banking jobs in the U.S., Gillian Tan of Bloomberg News reported before the results, citing people with knowledge of the matter. Nomura is also closing its Instinet equity-research division in the U.S. Okuda, meanwhile, is reviewing the firm’s need for office space as the pandemic prompts a shift to working from home.

These efforts are showing some progress: Employee numbers fell to 6,118 as of June 30, from 6,684 a year earlier, in Asia outside Japan; to 2,164 from 2,230 in the Americas; and to 2,728 from 2,775 in Europe. Nomura is also beefing up in selected areas, such as buying boutique investment bank Greentech Capital Advisors late last year to strengthen its presence in the fast-growing environmental, social and governance area.

Okuda will have to do more and move faster, however, if he’s to please investors who have turned away from the stock. Nomura shares have underperformed the Topix this year and are trading at little more than half of book value.

For all the cost-cutting, the bank’s expenses are at their loftiest in at least five quarters. Compensation and benefits for the three months through June rose to 138.3 billion yen, from 125.1 billion yen a year earlier. While higher revenue and profit imply increased expenses (bond traders can probably expect some hefty bonuses), it’s a trend Nomura needs to watch.

Even before Covid, competition from online brokers had been intensifying at home. That’s partly what prompted the $1.3 billion cost-cutting program announced by Okuda’s predecessor in April last year. The pandemic has only increased the pressure for a bigger and bolder revamp. A bumper quarter has bought some time. Nomura’s CEO should use it wisely before the glow fades.

(Updates with bond rankings in the fifth paragraph. An earlier version of this column corrected the figure for current employees in Europe in the seventh paragraph.)

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.

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