Fixed income underpins Nomura results

TOKYO Mon Oct 29, 2012 2:21pm EDT

A logo of Nomura Holdings, Japan's largest brokerage, is pictured in Tokyo April 22, 2008. REUTERS/Yuriko Nakao

A logo of Nomura Holdings, Japan's largest brokerage, is pictured in Tokyo April 22, 2008.

Credit: Reuters/Yuriko Nakao

TOKYO (Reuters) - Nomura Holdings (8604.T), Japan's largest investment bank, posted its fourth straight quarterly profit on Monday as an upswing in its fixed income operations helped it counter weak equity markets and the fallout from an insider trading probe.

The results were weaker than expected as the company restructures operations following an ill-fated expansion overseas through the 2008 acquisition of parts of Lehman Brothers.

But Chief Financial Officer Junko Nakagawa said the benefits of a $1 billion cost-cutting program outlined in August and largely focused on Europe could show up in the company's results by the final quarter of its fiscal year to the end of March.

"You will be able to see the real effect of cost-cutting plan in Q4 or at the beginning of the next fiscal year starting in April 2013," Nakagawa told a media briefing.

Nomura, whose top competitor in Japan is Daiwa Securities Group (8601.T), reported a net profit of 2.81 billion yen ($35.3 million) for the July-September second quarter, against a loss of 46.09 billion yen in the same period last year. The consensus of eight analysts was for a profit of 5.7 billion yen.

The results were supported by a boost in bond trading and other fixed income products, a major factor also bolstering banks elsewhere, including Morgan Stanley (MS.N) and JP Morgan Chase & Co (JPM.N).

Net revenue in fixed income operations doubled to 88.6 billion yen from a year earlier, helping Nomura's wholesale division swing to a pretax profit of 200 million yen from a year earlier 70.7 billion yen loss. The wholesale business includes investment banking.

The strong fixed income performance helped the wholesale division generate a 68 percent increase in net revenue to 137.1 billion yen and helped offset a 4 percent slide in net revenue from equity trading.

The benchmark Nikkei average .N225 fell 1.5 percent during July-September, while turnover on the first section of the Tokyo Stock Exchange slumped 12 percent from April-June.

COST CUTTING

Still, Nomura also lost underwriting business due to an insider trading scandal, which triggered a shake-up of top management. In the most high-profile case, Nomura was relegated to a more junior role on the $8.5 billion initial public offering of Japan Airlines (9201.T), the world's second-largest IPO of 2012.

Its European operations also showed deepening pretax losses as the company accounted for cost cutting.

Following a review by newly appointed Chief Executive Koji Nagai, the company announced plans at the end of August to chop an additional $1 billion in costs in its second major restructuring since it embarked on the overseas expansion.

The previous pruning, launched last year and completed in June, also sought to cut $1 billion in costs from the wholesale division and eliminate about 1,000 jobs across the group.

Europe's pretax loss swelled in the second quarter to 40.2 billion yen from a 16.4 billion yen loss in the previous quarter and 15.5 billion yen shortfall a year earlier.

A Nomura spokesman in London said that these figures do not reflect the performance of the Europe, Middle East and Africa (EMEA) business as they include financial transactions which take place in all of the bank's other regions, but which are booked through London.

Reflecting the cost-cutting measures, Nomura cut its half-year dividend in half to 2 yen per share.

The latest cost cutting measures will centre on Nomura's equities and investment banking businesses overseas. Nearly half the savings will come from Europe, where Nomura has lost nearly $1 billion in the past year as the region stumbles through the sovereign debt crisis.

Nagai wants to focus more on fast-growing markets in Asia, although he acknowledged in a Reuters interview last month that it could take two to three years before Nomura is in a position to generate significant profits in the region.

Nomura does not give annual forecasts. Analysts on average expect net profit to come to 58 billion yen in the year to March 2013, according to 11 polled by Thomson Reuters, up from the 11.6 billion yen profit logged in the previous year.

After reaching a 2012 peak of 417 yen in March, Nomura's shares slid to a year-low of 241 in early June, partly as investors worried about the insider trading scandal but also as investment banks globally came under pressure. The shares closed on Monday ahead of the results announcement at 283 yen.

(Reporting by Nathan Layne, Junko Fujita and Emi Emoto; Editing by Neil Fullick and David Cowell)