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Not so Lehman

31 January 2013 By John Foley

Who wants to be a global investment bank anyway? Not Nomura. The Japanese financial group delivered a solid quarter-on-quarter boost in underlying pre-tax profit in the final three months of 2012, driven largely by a recovery in its home market. Last year’s insider trading scandal and subsequent resignations punctured the global dreams Nomura was pursuing when it bought parts of bankrupt Lehman Brothers in 2008. For investors, that may be no bad thing.

Deducing Nomura’s profitability means digging through numerous one-offs. Strip away the 23.3 billion yen charge caused by increases in the value of Nomura’s own debts, a 24.1 billion yen write-down on real estate, and a gain of 13.2 billion yen from selling a private equity portfolio, and the headline 13 billion yen in pre-tax profit becomes a more creditable 47 billion yen, a third above the previous quarter’s figure.

While Japan now makes up just a quarter of Nomura’s investment banking revenue, the domestic market sets the tone. It accounted for half of the quarter’s revenue growth in equities and a third of the growth in fixed income, as Tokyo’s market bounced in anticipation of Prime Minister Abe’s election victory.

Meanwhile, Japanese companies angered by the insider trading fiasco look to have been placated by the corporate seppuku of its then-chief executive. Nomura ended the year back at the top of Japan’s equity underwriting league tables.

Nomura’s revised strategy of taking up profitable niches abroad is also working out for now. The Americas business almost doubled revenue since a year ago, though it remains minuscule compared with Wall Street’s biggest trading houses. Much of Nomura’s performance elsewhere may have benefited from rising bond prices. It is also taking on more risk, in the hope of getting more of the structured finance that brings in greater fees.

For investors, that risk requires greater reward. Nomura’s annualised return on equity for the quarter of 3.7 percent is dismal compared with a cost of capital perhaps three times higher. That explains why the stock trades at below its book value. Yet Nomura’s shares have risen by 80 percent since the beginning of November, outperforming peers. Call it the unwinding of the Lehman discount, and the beginning of a second chance.


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