TOKYO Nomura Holdings Inc (8604.T) and Daiwa Securities Group Inc (8601.T) reported jumps in quarterly profit from a year earlier, but slowing trade in Tokyo stocks has knocked some wind out of a resurgence of Japan's top two investment banks.
Both companies have seen their fortunes improve markedly this year thanks largely to the aggressive economic growth agenda of Prime Minister Shinzo Abe, who came to power in December, renewing investor interest in Japanese stocks.
While the latest quarter revealed some bright spots, such as Nomura expanding revenues from fixed income trading while most of its peers suffered declines, the results also underscored just how crucial "Abenomics" is to the two companies' future growth prospects.
"If there is a regression in Abenomics then that will of course hit the markets," Daiwa's Chief Financial Officer Mikita Komatsu said after the earnings release. "But we are optimistic. We don't think that will happen."
Nomura posted on Tuesday a net profit of 38.1 billion yen ($389.9 million) for July-September, up from 2.8 billion yen a year earlier but down from 65.9 billion yen in April-June. The Starmine SmartEstimate of four top-ranked analysts was 43 billion yen.
Daiwa said its net profit increased fivefold on year to 35.5 billion yen, compared with the SmartEstimate of 32.8 billion yen and a record 57.3 billion yen in April-June.
Nomura Chief Financial Officer Shigesuke Kashiwagi pointed to revenue gains in Europe, the Americas and Asia outside Japan as progress toward making its overseas business profitable. That business, built by buying parts of failed bank Lehman Brothers in 2008 and expanding in the U.S. on its own, was downsized as part of a recently completed $1 billion cost-cutting program.
"There is no need for us to embark on a big expansion overseas," Kashiwagi said at an earnings briefing. "Our break-even point has been lowered and we can steadily work towards boosting market share and profitability."
The flow of money into Japanese equities has slowed as investors become skeptical about whether Abe can deliver on promised reforms. Trading value on the Tokyo Stock Exchange fell 30 percent in the September quarter, cutting into brokerages' bread-and-butter business of selling shares.
Both Nomura and Daiwa said profit from their retail divisions halved from the prior quarter. Nomura has 176 branches across Japan while Daiwa has 120, though it has announced plans to expand in its network by 50 percent over the next few years.
The heavy exposure to retail investors in Japan is one of the factors that sets Nomura and Daiwa apart from Goldman Sachs Group Inc (GS.N) and other investment banks that focus primarily on corporate customers. Nomura stock is up 47 percent this year, while Daiwa's has surged 86 percent, suggesting some investors view this exposure as a strength.
Nomura and Daiwa are both banking on the introduction this month of a tax-free investing scheme to encourage individuals to put more of their $15 trillion of savings into stocks. Over three million Japanese have filed applications for the accounts, which offer a five-year tax holiday on dividends and capital gains and allow individuals to invest about $10,000 each year.
Nomura said profit in its wholesale division, which covers global markets and investment banking, was roughly flat from the previous quarter. The 7 percent on-year rise in fixed income revenues compared favorably with other global investment banks, many of which suffered steep declines as clients refrained from trading those products while the U.S. Federal Reserve's stance on its bond-buying program remained unclear.
Shares of Nomura closed down 0.7 percent before its earnings were released, whereas those of Daiwa ended down 0.9 percent. The benchmark index .N225 fell 0.5 percent. ($1 = 97.7100 Japanese yen)
(Additional reporting by Taiga Uranaka; Editing by Christopher Cushing and Jean Yoon)