Nomura’s Finally on the Right Track

(Bloomberg Opinion) -- It's rare to be able to say that a Japanese bank is getting something right. It's even rarer when the institution in question is Nomura Holdings Inc.

The jump in trading revenue that drove Nomura's first profit increase in six quarters contrasts with declines at Wall Street rivals, which have struggled with their fixed-income businesses amid persistent low interest rates since the global financial crisis more than a decade ago. Japan's biggest brokerage was profitable in all three of its overseas markets – Europe, Asia outside Japan, and the U.S. – in a sign that repeated waves of cost-cutting are finally bearing fruit.

That offers some respite for Chief Executive Officer Koji Nagai, who won reappointment to the board last month by the narrowest margin of his seven-year reign. Scrutiny of Nagai has intensified after Nomura's first fiscal-year loss in a decade and an information leak at a research affiliate led to regulatory penalties. The brokerage's shares rose as much as 9.8% on Thursday morning in Tokyo.

Nomura said it's halfway through plans announced in April to slash $1 billion of costs. These have fallen heavily on Europe, with Nagai at the same time beefing up Nomura's operations in the U.S. The June quarter results vindicated that strategy, as U.S. mortgage bond trading picked up. The brokerage has cut 629 employees since June last year, 255 of them in Europe.

The contrast with Wall Street is stark. Trading revenue at the five biggest U.S. investment banks, including JPMorgan Chase & Co., dropped 8% in the April-June quarter, following a 14% slide in the first three months. European rivals have done better: An upturn in bond trading helped spur improved results at Credit Suisse Group AG and BNP Paribas SA this week.

Some caution is warranted. This quarter was free of legal issues that beset Nomura in the year-earlier period, flattering the comparison. And crucially, its home market shows few signs of improving. Japanese investors aren't trading much, with the firm's brokerage fees and commissions dropping 14% in the three months through June. Daiwa Securities Group Inc., with a smaller overseas business, posted a 13% drop in fiscal first-quarter profit.

Nomura also faces a looming demographic challenge. Its high-net worth client base, while Japan's most affluent, is also probably also the oldest, according to Morningstar analyst Michael Makdad. Nagai's challenge will to be to draw in younger customers while keeping free of scandals such as last month's Nomura Research Institute leak, which cost the firm many big deals.

For now, though, the brokerage at least looks to be on the right track.

To contact the editor responsible for this story: Matthew Brooker at mbrooker1@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Nisha Gopalan is a Bloomberg Opinion columnist covering deals and banking. She previously worked for the Wall Street Journal and Dow Jones as an editor and a reporter.