Nomura Holdings Inc., Japan's biggest brokerage, will make cuts in its equities and investment banking businesses as it looks to chop $1-billion in costs, with its loss-making European operations taking the biggest hit.
Unveiling details of a restructuring it outlined last week, Nomura said the combined European, Middle East and Africa region would account for 45 per cent of the cost savings target, with the Americas accounting for 21 per cent, Asia ex-Japan 18 per cent and Japan 16 per cent.
This is Nomura's second major restructuring in less than a year and is the first move by new chief executive Koji Nagai and chief operating officer Atsushi Yoshikawa to retrench from an expansion built on the 2008 acquisition of the Asian and European operations of Lehman Brothers.
"To win in this business we have to cut costs now as the first step," Mr. Yoshikawa told a briefing to investors and analysts on Thursday in Tokyo, acknowledging the cuts would slice into revenues. "We are not pulling our flag from global markets."
The previous pruning, launch ed last year and completed in June, also sought to cut $1-billion in costs from the wholesale division, which handles equities, fixed-income and investment banking, and eliminated about 1,000 jobs across the group.
Nomura did not say how many jobs would go in the latest round of cuts.
It said it would streamline its investment banking operations to focus on advising clients on deals in sectors such as retail and financial institutions – leading to cuts in others – and migrate most of its equities execution outside Japan to its Instinet electronic brokerage unit.
Mr. Nagai replaced Kenichi Watanabe last month in the wake of an insider trading scandal that rattled the 86-year-old firm. Mr. Nagai had promised to launch a new strategy after a one-month review and to rebuild the bank from the "ground up."
Nomura is far from alone in paring costs. Across the industry, banks are cutting staff and scaling down businesses to cope with a shaky global economy, dwindling stock market volumes and tighter regulations that have crimped profitability.
"There were very few options left to Nomura. A complete withdrawal or further investment were not going to happen. So this 'partial retrenchment' was the only logical thing left," said Mac Salman, head of Japan financials research at Jefferies in Tokyo.
The consolidation of equities execution services at Instinet will eliminate overlap between the so-called agency broker and the traditional cash equities operations at Nomura which had been competing against each other for years.
Along with rivals such as Morgan Stanley and UBS, these units make money by finding the best share deals available on behalf of pension and hedge fund clients, but have struggled for profits as trading has dried up, particularly with the uncertainty linked to the euro zone debt crisis.
The move is expected to trigger sizable layoffs in the equities division in London. Instinet, bought for $1.2-billion from a private equity firm in 2006, employs 180 people in Europe, while some 4,000 staff are employed by Nomura International in the region.
Nomura said it would continue to provide its research product to clients moving to Instinet for execution. Other services such as prime brokerage, futures and options and fundraising advice will be handled by Nomura.
In investment banking in Europe and the United States, it will whittle its focus to financial institutions, natural resources, private equity and consumer and retail. That means bankers in other sectors such as technology and pharmaceuticals are likely to be cut.
Nomura said it would keep wider coverage in Asia, where the fee pool is still relatively small but there is potential for growth. Among its targets is the growing need for advisory services for Asian companies looking to buy firms overseas.
"We will reposition our focus on Asia and sharpen our claws for the business opportunities there," Mr. Yoshikawa said.
Nomura faces a tough balancing act in trying to trim costs without losing the top talent needed to generate revenue. This week, prominent deal maker William Vereker stepped down as joint head of investment banking and became vice-chairman, a move seen as a precursor to his eventual departure from the bank.
Mr. Vereker was one of the last senior legacy Lehman executives left at Nomura, a reflection of the extent of the shakeup to its overseas staffing in recent years. A number of Nomura's senior executives, such as fixed-income head Steve Ashley who joined from Royal Bank of Scotland Group in 2010, have been brought in from other firms.
Nomura says it will complete the latest round of restructuring by March 2014. It is aiming for pre-tax profits of ¥250-billion ($3.1-billion) from its wholesale, retail and asset management divisions by March 2016. Those divisions generated a combined profit of ¥46-billion in the past business year.
Ahead of the briefing, Nomura shares closed up 2.3 per cent at 266 yen, while the benchmark Nikkei stock average ended barely changed. Nomura's stock has lost roughly three-quarters of its value since the Lehman deal.
Asked if he thought the Lehman acquisition was a failure, Mr. Nagai said that given the state of their earnings he could not call it a success, but he understood the logic behind the move, adding that in hindsight, Nomura should have bought the U.S. operations, too.
"That decision was made four years ago when as a local brokerage we were faced with dwindling opportunities. As a management decision made at that time, I don't think it was a mistake," he said.