Japan Securities Firms’ Earnings: Nomura ROE Lags Most Peers Amid Industry Upturn

We are maintaining our fair value estimates of JPY 590 for Nomura Holdings, equivalent to 0.55 times book value and 0.4% below the current share price, and JPY 650 for Daiwa Securities 8601, 0.64 times book value and 18% below its share price, after June quarter results.

We estimate that the return on equity for the Japanese securities industry as a whole was around 6%, below the average cost of equity for the firms and the historical average over the past decade of around 7% but still the best quarter in the past six. While profitability for the industry was still slightly below average, this was due to inflating costs rather than revenue. The top line was actually quite good, with industrywide retail revenue 5% above their post-Abenomics average (and 19% above the average of the past five quarters) and industrywide wholesale revenue at their highest level since at least 2015 and up 9% quarter on quarter (up 17% year on year).

With the upturn in individual investor activity, retail segment cost/income ratios improved to 75% at Nomura from 87% a quarter earlier and to 73% at Daiwa from 85% in the prior quarter. Nomura’s underperformance was due to its wholesale segment, whose cost/income ratio came in at 99%, better than 108% in the previous quarter when Nomura’s wholesale segment was loss-making but nevertheless barely profitable. This was due to costs outside of Japan, with Nomura’s Americas operations notably recording a JPY 20 billion pretax loss in what should have been a good quarter. In contrast, Mizuho Securities’ Americas operations had a more than JPY 30 billion profit, powering that firm to a 15.4% ROE. Daiwa, Mitsubishi UFJ Securities, and even Nikko Securities (which is struggling with the impact from a trading scandal) also all did well in the U.S., led by fixed income. Nomura’s revenue in the U.S. was up, but its costs rose even faster, and we think that a new round of cost-cutting will be essential, especially if the upturn in Japan retail fades.