Analyst Note| Michael Makdad |
We lift our fair value estimate for Nomura Holdings to JPY 570 from JPY 520 per share and to $5.45 from $5 per ADR, equivalent to 0.66 times book value, after Japan's largest broker reported annualized ROE of 14% for October-December. For the cumulative three quarters of the fiscal year ending March 2021, ROE was 15%, the highest for Nomura since the early 2000s. We think our fair value of 0.66 times book would be too low if Nomura were able to generate ROE of 15% sustainably, but Nomura has benefited this year from a kind of "Goldilocks" situation in its environment with generally rising asset prices, high but not too high volatility, and demand for investment-banking services and M&A advice from corporates adjusting to the flood of sudden changes in consumer habits since the start of the coronavirus pandemic. Going forward, even if markets remain in a bull phase, we wouldn't expect volatility to always work in such a benign fashion, and we forecast Nomura's ROE to normalize back to mid- to high-single digits in 2021 and mid-single digits over the next decade, though we do think higher demand for investment banking services may persist for a while given the amount of structural change in society. On the positive side, we are encouraged to see signs that Nomura's pledge to control costs overseas--a key reason we have preferred Nomura's smaller rival Daiwa--seems to be being honored more than we expected. For example, profit in the Americas grew quarter on quarter even while revenues eased. Year on year, Americas pretax profit rose more than JPY 30 billion compared with October-December 2019 versus only a JPY 7 billion rise in revenues. Nomura said that not only does it expect to complete its previously announced JPY 140 billion cost-reduction program one year of schedule in March, the pandemic also opened opportunities for further cost efficiencies that it hadn't initially planned, presumably items like office rent and travel.