No More $2.9 Billion Archegos Shocks, Nomura

Kentaro Okuda’s first year as chief executive was going to end in a blaze of glory. Instead, it was charred by last-minute disappointment.

As the Nomura Holdings Inc. boss patches up the $2.3 billion hole already left by the Archegos Capital Management scandal, the good news — if one can call it that — is all relative. Japan’s biggest brokerage got away from the collapse of U.S. family office client Bill Hwang’s toxic trades with less damage than the $5.5 billion hit to Credit Suisse Group AG.

The timing of the implosion — two days before Nomura could close the books on what was shaping up as a year of record profit — was also relatively fortuitous, though it may not seem that way to employees who had every reason to look forward to a tidy bonus. According to results announced Tuesday, the balance sheet emerged from the crisis with Tier 1 common equity backing 15.7% of risk-weighted assets. The capital cushion is thinner than December’s 17.7%, but isn’t an impediment to growth. Or, for that matter, to buybacks that the firm may announce later during the year to pull up the sagging share price. 

Whatever else follows from the unraveling of Archegos, Okuda perhaps doesn’t need to follow Credit Suisse into tapping investors for fresh capital. The fourth quarter saw a loss, but full-year, pre-tax income of 230 billion yen ($2.1 billion) was only 7% lower from last year. With 97% of the Archegos trading positions already offloaded, the risk of further losses are limited. Nomura’s most recent estimate suggests a $570 million impact on the current year’s earnings, taking the total fallout to $2.9 billion. As confidence returns, Nomura could reintroduce the $3.25 billion bond sale it pulled back.

As to what else might follow, the answer is clear: new management and improved risk control, with perhaps an external consultant brought in to unearth fault lines missed in internal reviews.

The volatility in earnings, particularly of wholesale U.S. operations, is indeed off-putting. When it’s business as usual, being a Wall Street prime broker — lending money and securities to hedge-fund and institutional clients — gives Nomura an advantage over peers Mitsubishi UFJ Financial Group Inc. and Mizuho Financial Group Inc. But the edge cuts both ways. Nomura shareholders don’t want to be left bleeding, like when the stock fell 20% in one week after the investment bank warned of a “significant” potential loss from an unnamed U.S. client, revealed by Bloomberg News as Hwang’s Archegos.

Investors want fewer rude surprises and more predictable earnings. Okuda, who has previously overseen U.S. operations, is the right man to deliver. A change in guard at the troubled Americas unit is already under way with Christopher Willcox, a Citigroup Inc. veteran who headed up JPMorgan Chase & Co. Asset Management, named as co-chief executive. A tighter screening of hedge-fund clients before lending them money should go hand-in-hand with doubling down on strengths in niche areas like underwriting of U.S. residential mortgage-backed securities, where Nomura is the No. 2 player. If the firm is half-hearted about a clean up, the risk is that Japanese regulators will step in and demand tougher measures. After all, to them, Nomura is a systemically important domestic bank.  

The Japanese end of operations is holding strong. Pre-tax income of the retail unit, which accounts for 40% of total, rose 87% during the financial year. Profit from the slightly smaller asset management division jumped 158%, led by bumper demand from Japanese investors for funds that adhere to environmental and social mandates. But it’s the 30% drop in income of the wholesale business — Nomura’s third pillar after retail and asset management — that spoiled everything.

Apart from casting a temporary shadow on the brokerage’s credit rating, the Archegos blowup also threatened to become a costly distraction from Okuda’s push into international wealth management. For his second year, the chief executive will wish for less excitement, both at home and overseas. Shareholders and employees will agree.

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

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

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