Nomura makes progress without going for broke

Japan's biggest brokerage took a huge risk when it bought part of Lehman Brothers' overseas operations in 2008 with the aim of going global. Today, the jury is still out.

Nomura, Japan's largest brokerage, has yet to transform itself into a global powerhouse after buying Lehman Brother's overseas operations in 2008.

In 2008, Japan's biggest brokerage, Nomura Holdings, made arguably its riskiest decision in the company's history. It bought the European and Asian operations of Lehman Brothers, the defunct Wall Street firm that with its collapse triggered a near-global financial meltdown and the worst recession most people have experienced.

What Kenichi Watanabe, the Japanese company's boss, saw in the ensuing turmoil was a shortcut to global expansion, a backdoor into an elite club of investment banks dominated by the likes of Goldman Sachs and Morgan Stanley. What some investors feared, however, was monumental folly that would leave Nomura with little to show for the US$200 million-plus (Dh734.5m) it paid after most of the talented bankers it inherited escaped to join American and European rivals. Nearly three years on, and the jury is still out.

Nomura has yet to transform itself into the global powerhouse of investment banking it promised. Yet, neither has it given up and retreated to the stronghold of its home market.

Nomura can point to some encouraging signs in its performance in the final three months of last year. Releasing its earnings for the quarter last week, the financial firm, which posted a 31 per cent net income gain from the same period in 2009, achieved a sizeable quarter on quarter reduction in wholesale losses in part because its investment banking business overseas won a bigger chunk of fees. Its league table ranking for mergers and acquisitions (M&As) rose to 12th last year from 16th in 2009, according to Thomson Reuters.

Neither has there been the feared exodus of Lehman's best people. Generous bonuses and a willingness by the Japanese company to adapt to western norms of compensation appear to have provided most people with enough incentive to stay. One of the key executives Nomura retained was Jesse Bhattal, who as chief operating officer in charge of the wholesale business and a member of the board, is leading Nomura's charge overseas.

Yet, with almost 60 per cent of its revenue still coming from its home market, much of it from its retail business, the better performance in the three months had more to do with a 10 per cent rebound in Tokyo stocks rather than any prowess overseas. Costs too are a worry, rising to 48 per cent of revenue as it adds to its payroll in the US and elsewhere, well above the 45 per cent limit it needs to stay below.

To convince investors its global push is worth the money Nomura still needs to land a couple of juicy M&A deals, particularly in the US, which accounts for about half of the world's investment banking market.

The brokerage's fortunes also matter to the rest of corporate Japan. Although it's easy enough to think of a Japanese car company or consumer electronics maker, fewer people could name a Japanese bank, supermarket chain, insurer or media company.

If Nomura succeeds it has created a model for others to follow. If it fails it provides an excuse not to try.

Undaunted, the Japanese securities company says it is determined to push on with hiring and expanding around the world. The Middle East is part of its expansion plan. In February 2009, Dubai Financial Services granted it a licence to provide banking and capital markets services from the Dubai International Financial Centre, its largest office in the region.

A couple of notable deals in the UAE, including helping PCP Gulf Invest 3 hedge its investment in Barclays, has helped boost Nomura's overseas investment banking division. It also managed the repayment and refinancing of a $1.1 billion loan for Borse Dubai.

More of those, and the Japanese brokerage might start to convince investors it is a global brand to be reckoned with.