Has Brexit left Nomura's London business exposed?
It's nearly a year since disaster struck Nomura's credit traders. More to the point, it's nearly a year since disaster struck Nomura's credit traders while they were on the beach. Around 60 of Nomura's traders were dismissed in August 2015, some of whom were sunning themselves. Eight months later, this was followed by the evisceration of Nomura International's London equities business and by similar culls on the high yield and ABS desks. In theory, Nomura International has now made all the cuts necessary to ensure it endures. In reality, some people are suggesting that Brexit has thrown a spanner into the works.
The first problem is size. Nomura International is diminutive compared to its competitors. In the year ending March 2015 (the most recent for which figures are available), it generated $1.8bn in revenues. By way of comparison, revenues at J.P. Morgan Securities (the London trading operation of the U.S. bank) were $6.3bn in 2015. Nomura ranks 20th for EMEA M&A so far this year, according to Dealogic, down from 19th last year. The Japanese bank's fixed income trading business ranks outside the top five for EMEA according to Greenwich Partners. Globally, J.P. Morgan's banking analysts place Nomura around 10th for fixed income trading - far outside the sweet spot of leading firms who J.P. Morgan says will enjoy self-perpetuating economies of scale.
Size alone is not the real issue for Nomura International though. The real issue is profitability: Nomura's international business has not been profitable since 2010. While J.P. Morgan Securities made $2.7bn of profits on its revenues of $6.3bn in 2015, Nomura International made a loss of $460m on its smaller top line. This was lower than the previous year, but not by much: in 2014, Nomura International made a loss of $471m.
Those losses should have been partly cauterized by the closure of the equities business and last summer's cuts in fixed income. Nomura declined to comment for this article, but it seems optimistic. A couple of weeks ago (post-Brexit vote), COO Tetsu Ozaki declared that the international operation is due to become profitable by March 2017, irrespective of any complications caused by Brexit. In another sign of positivity, the Japanese bank has been hiring. Since April alone, it's recruited five people for its London trading business, including Bilal Hafeez, formerly of Deutsche Bank, as global head of G10 FX strategy, Rubens Iwakura, a rates trader from Standard Bank, and Pushkar Acharya a distressed investments analysts from hedge fund Capeview Capital.
Nonetheless, questions remain over Brexit-related costs at banks which are already struggling with profitability in Europe. In a report out last week, consultancy firm BCG warned that the cost of setting up a presence in mainland Europe could be significant for London-based banks which don't already have one. In worst case scenario, BCG said setting up on the mainland could hike costs by 22% thanks to investment in headcount and IT systems. For a bank like Nomura, which has been slowly, slowly inching towards profitability, Europe could yet remain loss-making as a result. And then what?