By Makiko Yamazaki and Mariko Katsumura
TOKYO (Reuters) -Japan's Nomura Holdings (NYSE:NMR) Inc saw about $850 million wiped off its market value on Thursday as its latest earnings slump showed it remains a long way off CEO Kentaro Okuda's goal of finally making the bank a global force in investment banking.
Shares in Japan's biggest investment bank and brokerage dropped more than 7%, its biggest daily percentage decline in two years, the day after it said first-quarter profit tumbled by three-quarters, exacerbating worries about a global banking crisis.
The results underscored that Nomura is still far from its target of enhancing stable revenue sources, such as mergers and acquisitions (M&A) advisory, and the bank flagged cost cuts up ahead.
The investment bank has had a troubled history of occasional major financial hits at its wholesale division, including a $2.9 billion loss from the collapse of U.S. investment fund Archegos, which CEO Okuda has been eager to change since he took the helm in 2020.
Nomura's wholesale division, which houses its investment banking and trading businesses, reported its second consecutive quarterly loss, at 14.2 billion yen ($106 million) pre-tax, as dealmaking fees plunged and global inflation and a weaker yen boosted costs.
"If Nomura embarks on cost cutting in wholesale now when rivals are doing reasonably well, it fears that it may hurt its franchise," Morningstar analyst Michael Makdad said. "But I think the firm may not have a choice."
Under Okuda's helm, Nomura's wholesale business unit had initially emerged as a key profit driver, thanks to an overhaul that included $1 billion in cost cuts and scaling back some of its lower growth business in Europe, as well as a favourable market environment.
But the Archegos loss put a brake on the wholesale business two years ago, and the current global banking turmoil clouds prospects.
Chief Financial Officer Takumi Kitamura said on Wednesday that the current quarter got off to a weak start for the wholesale business due to low trading flows.
He also said the cost ratio at the division had been high as revenue struggled to grow. "We will reduce costs through restructuring, while also striving to achieve revenue growth," he said.
Investors have grown more cautious about volatile markets as a banking crisis that began with the collapse of Silicon Valley Bank spread to Europe with the sale of Credit Suisse Group AG to its Swiss rival UBS Group AG (SIX:UBSG).
CEO Okuda's mid-term plan, announced last year, calls for an increase of up to 90% in annual pre-tax income from its three core divisions - retail, wholesale and investment management in three years by boosting advisory services.
Kitamura reiterated on Wednesday Nomura needs to diversify and increase stable revenue sources. "We want to expand businesses that do not consume large (capital) resources, such as M&A advisory," Kitamura said.
Meanwhile, its cash cow domestic retail business is increasing facing pressure due to competition to lower stock commission fees from individual investors.
Moody's (NYSE:MCO) has a negative outlook on Nomura Holdings' rating, "reflecting structural challenges to the company's profitability in the domestic retail segment," ratings agency Moody's Japan senior analyst Tomoya Suzuki wrote in a report.
($1 = 133.6600 yen)