* Oct-Dec net profit 17.8 bln yen vs consensus 2.5 bln yen loss
* Profit driven by fixed income trading, Skylark sale
* Nomura still faces possible credit rating cut by Moody’s
* Nomura’s head of wholesale division left firm last month
By Nathan Layne and Emi Emoto
TOKYO, Feb 1 (Reuters) - Nomura Holdings, Japan’s largest investment bank, posted a surprise return to quarterly profit on a sharp upswing in its overseas fixed-income business and a one-off gain on the sale of the Skylark restaurant chain.
The rebound was driven largely by a recovery in its wholesale division, where deep losses had claimed the scalp last month of division chief Jasjit Bhattal and another senior ex-Lehman Brothers banker, raising questions over the bank’s overseas strategy.
The solid quarter could spare the bank a credit downgrade by Moody’s Investors Service, which put it on review in November due to the continued losses overseas. A decision is expected within days.
Nomura booked a net profit of 17.82 billion yen ($234 million) for October-December, beating a market consensus for a 2.5 billion yen loss, according to the average estimate of six analysts polled by Reuters. The broker lost 46.1 billion yen in July-September, its first quarterly loss in two and a half years.
Net revenue jumped by more than a third from the previous quarter to 405 billion yen, boosted by a 56 percent increase in fixed income, with big improvements in credit and interest rate products, and business in Europe and Asia particularly strong.
Nomura said the momentum had carried into this year.
“It’s clear that the European situation is still very much under watch and fragile, but we’ve certainly started the quarter well,” Jonathan Lewis, chief financial officer of the wholesale division, told Reuters after the results.
Nomura said it significantly lowered its break-even point thanks to steady progress on a $1.2 billion cost-cutting plan announced in November, which was targeted mainly at the wholesale operations and will eliminate about 1,000 jobs.
Revenues in the wholesale division, which includes capital markets and investment banking, more than doubled from the prior quarter. In addition to securing the top spot in Japanese league tables, it was also the bookrunner for several capital raisings by European financial firms.
Nevertheless, some investors remain unconvinced that Nomura can continue to deliver overseas growth.
Even after a recent upturn, the stock is down more than 80 percent since Nomura bought the Asian and European businesses of failed Wall Street bank Lehman Brothers in 2008, embarking on an aggressive global expansion.
“Even if the Q3 results are positive, I find it hard to change my negative view on Nomura,” said Yuuki Sakuari, president at Fukoku Capital Management, which had $7.6 billion in assets under management as of end-March last year.
“What really matters is the very difficult business environment in which it has to operate, with a corporate culture still not fully integrated after its very expensive acquisition of Lehman operations a few years ago.”
Nakagawa said Nomura has been explaining to Moody’s the steps it has made to bolster profitability, hoping to avoid a downgrade of its Baa2 debt rating, which is sitting just two notches above speculative grade, or “junk”.
Analysts have said any cut by Moody’s would likely be by one notch, and, in that case, the focus would be on whether the outlook was negative, leaving the risk of a future cut to junk on the table. That could be enough to spook some counterparties and force Nomura to further trim operations overseas.
“It’s difficult to say at this stage, but the improvement of wholesale revenues could have a positive sway on Moody’s decision,” said Makarim Salman, head of Japan Financials Research at Jefferies in Tokyo.
“If there was a rating cut, it would clearly impact Nomura’s business negatively, especially in the fixed-income business.”
Nomura is confident its balance sheet is strong enough to weather a downgrade.
It has built up a liquidity pool equal to 15 percent of its assets, has secured funds to meet refinancing needs over the next four quarters, and the average maturity of its loans is now six years, all making an immediate funding crunch unlikely.
On a conference call with analysts, Chief Operating Officer Takumi Shibata estimated Nomura would need to put up 10 to 20 billion yen in additional collateral for existing derivatives contracts in the case of a one-notch cut. A two-notch downgrade would require 60 to 70 billion yen.
“There would be virtually no impact,” Shibata said, comparing those figures to Nomura’s liquidity pool of $70 billion.
The October-December profit was inflated by a 34 billion investment gain, the bulk of which came from the sale of Skylark by Nomura and other investors to Bain Capital for $2.1 billion in equity in one of Japan’s largest buyouts.
Still, Nomura’s results compared favourably with other Japanese brokers, which were hit hard by the downturn in mutual fund sales and stock commissions. Many also set out to cut more jobs. On Tuesday, second-ranked investment bank Daiwa Securities Group booked a fourth straight quarterly loss, of 21.6 billion yen.
Japan’s benchmark Nikkei average fell 3 percent in October-December, while the daily trading average on the Tokyo Stock Exchange fell below 1 trillion yen in December for the first time in more than eight years.
Nomura shares, valued at close to $14 billion, have risen 26 percent since hitting their lowest level in at least 28 years in late-November. During the same period, the Nikkei is up 8 percent.