Nomura calls time on European equities
Nomura EMEA bankers left reeling; industry in structural decline.
Large swaths of Nomura’s European equity business were closed down on April 12, with hundreds of bankers across equity underwriting, equity research, sales and equity derivatives informed they were to pack up and leave. Bankers at the firm tell Euromoney it was no surprise that cuts were on the way, but they had expected only selective pruning rather than the scale of withdrawal that has been implemented.
The remaining business will be of a very different size. But the Instinet brokerage business that Nomura bought in 2007, and which now houses the bulk of the firm’s equity trading, is untouched in all regions by the cuts. Instead there is likely to be further development of the platform to incorporate additional parts of the bank’s fixed income franchise, including vanilla interest rate swaps and FX.
The bank says the cuts reflected expectations for the global fee pool for 2016. Its base case, based on its own data alongside estimates from Oliver Wyman and Coalition, is for a drop of 8%, with investment banking and equities falling by about 10%. The bear case sees an overall fall of 17%.
“We had known something was in the offing since an offsite in Tokyo finished on Good Friday [March 25],” says one departing senior banker. “We knew big decisions were being taken and that the firm was under huge pressure to stop sending excess capital over here to support the business.
“Now that we know we are in a structural rather than a cyclical decline, it was clear something had to be done. But even so, I had reckoned there was only about a 25% chance of a complete shutdown.”
Sources within Nomura are at pains to highlight that what has happened stops short of a complete shutdown, but it is certainly big enough for those on the way out to be feeling dazed. The decision was communicated to staff at about 8.30am by senior equities and investment banking management, with one banker estimating that the cuts numbered in the hundreds.
About 200 to 300 staff will remain across the entire equity-related business in EMEA, including Instinet, according to one source at the bank, although there has been no official comment on the number of departures in specific business lines. As of December 31, 2015, Nomura employed 3,400 people in Europe.
Alongside its full year 2015/16 results announcement on April 27, the bank confirmed that it was closing research coverage of EMEA stocks, but would maintain a sales presence in the region for Asia-Pacific equities. It also said it was ceasing domestic underwriting in EMEA equity capital markets, but would retain an equity advisory service. US ECM and research remains in place, but will be more focused.
EMEA equity derivatives, Delta 1 trading, equity financing and equity futures and options are all being closed, but the bank is retaining its global convertibles operation.
The US equity business appears safe for the moment, which will come as good news to staff such as Mark Connelly, who joined as head of Americas ECM in late November 2015 after leaving Jefferies, where he was global co-head of ECM. Some bankers leaving the European business struggled to understand how the firm would make a better fist of things in the US. For its part, the bank said it would focus its US ECM and research coverage on sectors where it felt it had greatest strength.
Outside equities, the bank said it would trim the cost base of acquisition and leverage finance in the US, as well as fixed income sales and research in EMEA.
Between two stools
Nomura has struggled to make its European primary equity franchise compete, largely because it fell between the two stools of bulge bracket and niche without effectively being either. Former Nomura bankers recall it had an excellent year in 2009, when it had many hundreds more bankers than today, but its presence has faded since.
“The European equity market will not blink at the fact that Nomura has gone,” says one banker. “We are a pin-prick in the excess capacity that exists in this industry. We were positioned as a bulge-bracket equity house, but we were finding it hard to compete, and nor were we niche enough to compete with the likes of smaller shops. And the industry is now as tough as I’ve known it.”
Some point to the entry of new management in 2012 as the turning point in terms of pressure, with profitability becoming a key concern. It was at that time that Koji Nagai took over from Kenichi Watanabe as group CEO as the bank sought to build what it said was a new global business model that would allow it to remain flexible and adapt quickly to a changing environment.
But even with expensive staff cut over the years, the pressure in a region like Europe only increased as revenues stagnated and market share fell. Nomura does not feature in Dealogic’s top 25 ECM bookrunner rankings so far this year in EMEA. It ended last year in 25th place, with a 0.7% market share.
Nomura’s full year results show the wholesale division posted pre-tax profits of just ¥15.4 billion ($142 million) compared with ¥82.2 billion the previous year. The fourth quarter saw a loss of ¥22.8 billion.
Within the annual figure, equities revenues grew year-on-year, from ¥286 billion to ¥325 billion, although the bank said this was helped by a one-off gain in the Americas on the sale of shares in Chi-X, a trading venue operator. The bank said that there had been a “sharp decline” in EMEA equities, however.