Abigail Hofman: Foreshadowing Nomura’s fall

By:
Abigail Hofman
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The firm might be stuck in the middle with nowhere to go: it is neither a global, bulge-bracket player nor a focused, low-cost, niche operator.

It was a surprising summer. Despite Mitt Romney’s misgivings, the London Olympics were a spectacular success. Despite being viewed as the acceptable face of banking, Standard Chartered tripped over its halo. And despite, once again, being tipped as the favourite chief executive in waiting, former JPMorgan banker Bill Winters failed to show up at the Barclays party.

This was also the summer when many of the chickens that the Abigail with attitude column has been husbanding came home to roost. Some of my morose musings and occasional dark prophecies have come to pass. I suppose I should feel triumphant. Instead, though, I feel irritated when I contemplate the hostility that I endured from fulsomely paid, but intellectually bankrupt, PR peons.

Let’s start with Nomura. Almost as soon as the ink was dry on its contract to purchase the Asian and European operations of Lehman Brothers in the autumn of 2008, I claimed the deal would never work and that the firm’s international expansion plans and ever-increasing cost base would end in savage restructuring. Although few other commentators were as unremittingly negative, everything I wrote came to pass: numerous metaphorical body bags were carted off. The supposed architect of the deal, Sadeq Sayeed, departed and senior managers, such as Jesse Bhattal, Takumi Shibata and Kenichi Watanabe, have all left the building.

This was the summer when many of the chickens that the Abigail with attitude column has been husbanding came home to roost
This was the summer when many of the chickens that the Abigail with attitude column has been husbanding came home to roost
Although it was a domestic malaise – an insider-trading scandal – that precipitated a review of the international operations, the runes were there for several years for those who cared to read them. Think: poorly conceived strategy, hefty costs in the international operations, and a lack of focus on shareholder value. The international operations posted losses for consecutive quarters and the share price plummeted to multi-decade lows.

The death knell to the strategy devised by Shibata and Sayeed might have occurred when Moody’s downgraded the firm, in March 2012, to one level above junk status. A lower credit rating means a higher cost of capital and that implies slow strangulation for a balance-sheet-heavy investment banking operation. In an unusual show of shareholder strength, more than a third of Nomura’s shareholders voted against Watanabe’s re-election to the chief executive role at the annual general meeting in June 2012.

The new Nomura CEO, Koji Nagai, inherits a daunting task. He needs to refocus Nomura’s international operations, which are struggling to cover their costs. However, the firm cannot afford to retreat totally to the land of cherry blossom and Samurais. The limited prospects for domestic growth were among the key factors that prompted the Lehman acquisition. In late August, Nagai unveiled plans to cut an additional $1 billion of costs by March 2014. Cost reductions will apparently be centred on wholesale operations and will involve job cuts in Europe, where some 4,000 people are employed.

Indeed a week later it was announced that William Vereker, a former Lehman executive and co-head of global investment banking, would be retreating to a new role as vice-chairman focusing on client relationships. This is probably the clarion call that I have been waiting for. The gung-ho spirit of international advancement of the Nomura warriors is over.

Nagai is to be congratulated on grasping an unpalatable nettle quickly. But I still worry about the firm. It might be stuck in the middle with nowhere to go: it is neither a global, bulge-bracket player nor a focused, low-cost, niche operator. The firm’s future, to me, looks a bleak shade of grey.