Nomura: Okuda’s fine work undone by Archegos mess

Euromoney, April 27 2021

Kentaro Okuda had been delivering. Nomura was reporting strong and sustainable profits, with a streamlined international business driven by trading in the Americas. Then came Archegos.

It had all been going so well.

Nomura has faced challenges for as long as anyone can remember. Domestically, its retail brokerage model is under considerable pressure, more exposed than any peer to a changing environment. Internationally, it has been fighting not only to build but to define a successful business model ever since taking over the Lehman Brothers assets in the aftermath of the global financial crisis.

But under chief executive Kentaro Okuda, things had been turning around. Nomura hit – or got very close to hitting – record profits for each of Okuda’s first three quarters in charge and had been expected to announce a fourth, for the full year, on April 27. Nomura had had a boom year in US trading, getting on the right side of the Covid-19 pandemic and the following bounce in equity prices; it had successfully simplified its overseas business and focused only on what it appeared to be good at.

“Nomura’s overseas business has become able to generate steady earnings, even during market volatility, owing to its persistent efforts in the last few years,” Okuda said in December. By then, announcing the third quarter results, international income accounted for 42% of the firm-wide total, the sort of contribution the bank’s executives and shareholders have dreamed of for years. The rejuvenated Americas business contributed the largest chunk of wholesale revenues – bigger even than Japan.

And then it all went wrong.

On March 29, two days before concluding its fiscal year, Nomura announced it could face losses of as much as $2 billion “arising from transactions with a US client.” This was Archegos Capital Management. By the time Nomura reported its full-year results on April 27, the matter had proven to be worse still: a total of $2.87 billion of losses, made up of a ¥245.7 billion ($2.3 billion) loss booked in the fourth quarter, with ¥62 billion more to come in the 2021/2022 numbers.

Instead of announcing a record profit and a strategy bearing fruit, Nomura had to announce a ¥155.4 billion attributable net loss for the fourth quarter. It’s only because the rest of the businesses had been performing so well that Nomura still announced a full year profit, ¥153.1 billion, down 29% year on year.

It undermined what should have been an outstanding first year at the helm for Okuda. “I shouldn’t be talking about ‘what if’,” he said on the earnings call. “But excluding what happened, the performance would have been very robust.”

Not now.

“The unexpected loss may end the relative honeymoon new CEO Kentaro Okuda has enjoyed since assuming the top post last April,” said Morningstar analyst Michael Makdad in a report on the bank. Unlike his two predecessors, Kenichi Watanabe and Koji Nagai, who presided over losses and soft earnings respectively when they took the reins in 2008 and 2012: “Okuda’s term so far has shown a remarkable turnaround from losses in 2019 to very strong earnings in 2020, thanks to its US operation” – a US operation Okuda used to run.

All of this has led to an inevitable question: had Nomura’s recovery in its international operations been achieved by taking undue risk?

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