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

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Daiwa Securities Group Inc

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.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Michael Makdad

Senior Equity Analyst
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Michael Makdad is a senior equity analyst for Ibbotson Associates Japan, Inc., a wholly owned subsidiary of Morningstar, Inc. He covers financial and real estate firms. Makdad is a Team Leader for the Japan team.

Before joining Morningstar in 2018, Makdad worked in equity and credit research in Tokyo and Hong Kong since 2005 for Lehman Brothers, Nomura, Moody’s, and Haitong Securities. He worked as a sector analyst and in roles where he supervised the research product content and presentation for other analysts across the Asia region.

Makdad holds bachelor’s and master’s degrees in business administration from Washington University in St. Louis. He also holds the Chartered Financial Analyst® designation.

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