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Rare quarterly loss torpedoes Nomura's wholesale profit growth

Nomura has laid bare the damage wreaked by plunging liquidity and Japan’s negative rate move on its fixed-income business and wider wholesale unit, posting a first quarterly loss in almost four years that wiped out profit growth over the previous nine months.

Pre-tax profits at Nomura’s wholesale division, which comprises its trading and traditional investment banking businesses, had been 35% higher than the previous year at the nine-month stage of the Japanese bank’s 2015/2016 fiscal year, which ends on March 31. But trading conditions since the start of 2016 have wiped out that growth.

In the three months to March 31 – Nomura’s fiscal fourth quarter – the wholesale unit’s revenues from fixed-income trading plummeted 76% from a year earlier to ¥27.6 billion ($248.5 million), which, despite largely flat revenues from equities, dragged overall global markets revenues down 46% from a year earlier to ¥108.3 billion.

Revenues from fixed income were the lowest for any quarter at Nomura since the three months to March 31, 2009, according to a spokeswoman for the bank.

While investment banking revenues for the quarter declined only 14%, the fixed-income plunge dragged the wholesale division to a ¥22.8 billion pre-tax loss in the three months to March 31, from a ¥53.8 billion profit a year earlier.

The loss was Nomura’s first in wholesale banking since the second quarter of 2012, and dragged profits at the unit for the full year down 81% to just ¥15.4 billion – the lowest total for a year since the wholesale unit posted a loss in the 12 months to the end of March 2012.

In a presentation accompanying the results on April 27, Nomura blamed the fixed-income drop – which was far bigger than the drops posted by Wall Street’s biggest investment banking houses – on “rapid spread widening, plunging liquidity, and market disruption following negative rates in Japan”, as well as a slowdown in rates business and “underperformance in spread products”.

Japan’s central bank had stunned analysts in late January with its announcement of a cut in interest rates to minus 0.1%.

Nomura said fixed-income revenues fell across “all regions and products” in the fiscal fourth quarter.

In investment banking, revenues in the quarter of ¥27.9 billion were 14% below the year-earlier period, but full-year revenues climbed more than 12% to ¥120 billion. Mergers and acquisitions was a bright spot, with revenues surging 40% from the previous year, while equity capital markets activity rose 15%.

Nomura had presaged the ugly quarterly results earlier in the month, announcing on April 12 it had made several changes in its wholesale business in Emea and the Americas in light of the “extreme volatility”, decline in liquidity and economic uncertainty. The bank said it would close “certain” businesses in Emea and rationalise parts of its Americas operations, with people familiar with the situation telling Financial News the bank would cut up to 500 jobs – or up to 15% of head count – across its Emea equities business.

Equity research, underwriting and derivatives had been expected to be affected by the cuts, with Nomura’s Instinet agency trading business unaffected.

The bank confirmed on an April 27 analyst call it was exiting several business lines in Emea including equity research and underwriting, as well as trading in equity derivatives, delta one, equity financing, and equity futures and options. It said it would maintain an international cash equities offering mainly focused on Instinet, which it said it would grow globally.

Steve Ashley, Nomura’s co-head of wholesale banking, said on the call that the revenues of the exited operations accounted for less than 5% of the total revenues of its international business.

The bank, in a presentation alongside the results, said the strategic reviews of its business in the Americas and Emea would help cut annual costs at the wholesale division by around a fifth from $6.4 billion in the 2014/2015 fiscal year.

Additional reporting by Tim Cave

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