Despite ongoing scandal-related challenges, Nomura Holdings (NMR, Financial), Japan's leading brokerage and investment bank, reported a significant profit increase in the second quarter. Benefiting from strong performance in wealth management, trading, and investment banking, the company's net profit more than doubled. From July to September, the net profit totaled 98.4 billion yen ($645 million), surpassing both the previous year's 35.2 billion yen and analysts' expectations of 63 billion yen. This marks Nomura's sixth consecutive quarter of profit growth, achieving the highest net profit in four years. The results highlight robust global markets and investment banking performances.
However, this positive momentum is under scrutiny following a market manipulation incident revealed at the end of September. Japan's financial regulator fined Nomura 21.8 million yen ($143,000) due to a March 2021 investigation finding a trader manipulated 10-year government bond futures. In response, Nomura pledged to enhance compliance and internal controls, imposing "strict disciplinary action" on the involved trader and manager. Additionally, some senior executives, including CEO Kentaro Okuda, agreed to voluntary salary reductions, and certain clients have moved their bond trading and underwriting business elsewhere.
Last month, Japan's Finance Ministry announced a one-month suspension of Nomura Securities' primary dealer status for government bonds, adding to the company's reputational challenges. The firm's reputation faced further risk with the arrest of a former employee for attempted robbery and murder of an elderly client.
Chief Financial Officer Takumi Kitamura expressed regret over the market manipulation case and the arrest but stated it's too early to assess the potential impact on Nomura's wealth business. He also noted that the bond trading violation's impact on profits might be limited. Despite these issues, the second quarter's "very strong" results remain a focal point for investors.
During this period, Japan's stock market experienced extreme volatility, hitting record highs in July before a significant sell-off in early August. The market lost $1.1 trillion over three days due to large-scale yen carry trade withdrawals, causing the yen to surge. However, the market has since rebounded.
Despite the turbulence, Nomura capitalized on substantial commissions from individual clients shifting to investment trust products. The wealth management division, serving domestic retail clients, saw an 18% revenue increase, reaching its highest pre-tax profit in nine years.
The wholesale business, encompassing Nomura's trading and investment banking operations, witnessed a 29% revenue growth, joining ranks with Wall Street firms like Morgan Stanley (MS) and Goldman Sachs (GS) achieving strong trading results. Fixed income trading rose by 32% and stock trading by 26%. In addition, investment banking revenue increased by 27% as the company continued to benefit from robust trading conditions in Japan.
Nonetheless, this quarter's bond underwriting income may face pressure, with Nomura's ranking in the corporate debt market slipping from third to fifth. Progress was made in reducing wholesale division expenses, part of Okuda's long-term plan to make the segment self-funding under Christopher Willcox's leadership. Last quarter, the cost-to-income ratio dropped to 83% from the previous quarter's 91%.
Nomura's overseas operations generated a pre-tax profit of 39.8 billion yen, with all regions achieving profitability. Japanese Finance Minister Katsunobu Kato described both the arrest and market manipulation case as "very regrettable" during a routine press briefing.
Before the earnings announcement, Nomura's shares on the Tokyo Stock Exchange dropped 2.7%, reducing the year's gains to 22%.
