Breakingviews - Archegos pours sand into Nomura’s main fuel tank

The logo of Nomura Securities is pictured at the company's Otemachi Head Office in Tokyo, Japan, November 18, 2016. Picture taken November 18, 2016. REUTERS/Toru Hanai - RC1720F068D0

HONG KONG (Reuters Breakingviews) - Sometimes ambition is not enough. Nomura warned on Monday that it might lose up to $2 billion from a single U.S. client, widely reported to be Archegos, the fund whose forced liquidations have rocked Wall Street. That sparked a 16% drop in the Japanese bank’s share price, its worst-ever one-day performance. It’ll be hard work unclogging the sand its relationship with the troubled fund has poured into its main fuel tank.

If Nomura takes the full hit, it’ll wipe out the $2.1 billion in pre-tax income generated in the first nine months of its financial year by its wholesale division, which houses its investment bank and overseas units. It’ll also roughly halve its full-year pre-tax profit, per analyst forecasts collated by Refinitiv.

Last year’s appointment of investment-banking veteran Kentaro Okuda as overall chief executive – the first not from Nomura’s powerful domestic retail brokerage – was seen as a sign of its commitment to the business. Outside Japan, the 95-year-old lender is still defined by its struggles to profit consistently from its 2008 purchase of Lehman Brothers’ European and Asian operations. Okuda’s predecessor Koji Nagai carried out three restructurings in his eight years. Okuda has continued Nagai’s efforts to focus on areas where Nomura could be a top player. U.S. equity options, the unit believed to have been responsible for the Archegos losses, was one of them.

There is strategic logic in the effort to keep trying to take Manhattan. The United States accounts for about half of all investment-banking fees worldwide, per Dealogic. For Nomura, it produced a quarter of all revenue so far in its current financial year and accounted for more of the wholesale bank’s pre-tax profit than any other region. Moreover, the bank can’t tout its global skills to its deep-pocketed Japanese clients without a New York base.

Nomura may take comfort from Credit Suisse and domestic rival Mitsubishi UFJ also facing losses. But that’s no relief to Nomura’s shareholders. Okuda touted the greater stability of its investment bank in a December presentation, and until this week a 57% rally in the year since he stepped up suggested investors believed him. Rebuilding that faith will require a lot of explaining.


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