Published on the Value Lab 3/26/23

Nomura (NYSE:NMR) had a pretty decent quarter. On the topline, we saw resilient IB performance, and the demand for liquidity in a volatile environment is supporting parts of global markets. Asset management stayed solid despite pressures, and gains on proprietary capital made the major income contribution for the quarter. Nomura’s results are being skewed positively by Japan’s continued monetary accommodation, and also the more limited loan and deposit business means Nomura isn’t that exposed to recent concerns around banking, insofar balance sheets are concerned.

Q4 Results

The retail segment includes the retail lending business, as well as sales of other products like annuities, insurance and products meant for retail customers in the course of relatively typical banking. Loans are a pretty small part of the Nomura balance sheet, which in this case is a good thing because it means considerations about bank balance sheets is less pronounced here. About 10% of total assets are loan assets. All these businesses are included in the retail recurring revenue segment. Includes also revenues associated with investment trusts that contain retail money.

In flow revenue you have revenue that is made off stocks and bonds, and benefits from levels of trading of these products where NMR takes commissions on this transaction flow by retail clients. Increased sentiment in markets in Japan towards the end of the year as the Yen stalled in its declines and even made a recovery, as well as some disinflation from falling commodity prices, meant that the declines otherwise seen in 2022 were less pronounced in Q3. Meanwhile, recurring revenue, by its nature, remained robust.

Investment management did well in terms of business revenues because AUMs were pretty solid, but the big delta for the quarter came from this segment because of performance of the proprietary capital portfolio, where major gains gave income a steroid coming from their interest in American Century Investments.

Wholesale has two segments, the stuff related to trading and selling products to institutional clients, and then investment banking. Since their IB segment is pretty levered to activity in Japan, and outside Japan to activity in the renewable space due to their pretty recent acquisition of Greentech, their IB segment overperformed meaningfully relative to peers. It is only down 11% YoY, and accommodation in Japan, and superior Japanese credit conditions, are in part responsible for this.

Of course, the weather in markets isn’t so fair. The global markets business didn’t do so well. There was a lot of demand for liquidity in execution services, which sustained weakness in other areas of equities, but macro related fixed income products did well YoY and supported the overall segment, stemming any potentially major declines.

Again, note the relatively strong performance of Japan, where you can really see what happens when credit is allowed to be available. In geographies where there is major rate hiking, the declines are much more substantial – more aggressive base effects for the Americas are contributing as well.

Bottom Line

Nomura is mostly a financial products and trading company, with a decently large IB division as well. Concerns around bank balance sheets and the situation in loans and deposits is not of major concern to their direct health.

Of course, the situation of credit tightening in America and other Western countries is a problem for the majority of their business. Difficulties in the market will weaken returns, and cause outflows overall from their AM business. Tight credit conditions will not help the M&A and advisory environment either, although some certainty, of which there is none in the market, will at least get buyers and sellers to agree, and allow for some resumed activity in the DCM and ECM markets. Global markets will also suffer if investors take a pause on the markets, but here at least volatility is somewhat of a backstop.

The good news is that while issues in Western markets will echo into Japan, credit conditions in Japan are likely to stay good. Inflation in Japan is not a bad thing, they’ve had too little of it. I don’t believe that the BoJ is foolish enough to end control of their yield curve. Moreover, if other economies falter before Japan, they can take one for the team in reducing demand-pull inflation.

NMR is better positioned than most publicly listed shops, its business mix isn’t going to be a severe issue. The problem is that a 11x PE for the almost complete FY 2023 is not something that is very exciting. There are likely headwinds, and investors can do better elsewhere, especially in the universe of Japanese stocks.