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Nomura aims to rebuild US wholesale business after Archegos loss

Nomura Holdings Inc. said it is committed to rebuilding its U.S. wholesale business, once its fastest-growing segment, after a loss tied to the collapse of Archegos Capital led the largest Japanese brokerage to post its steepest quarterly loss in 12 years.

Kentaro Okuda, Nomura Holdings' CEO, told a press conference April 27 that the company has appointed a new co-lead for its U.S. operations from JP Morgan Asset Management. The company also plans to hire third-party experts on risk management framework to review its wholesale business. Okuda did not provide further details on its U.S. strategy.

"There is no major change to our overall strategy for our wholesale business," Okuda said. "Our Japanese clients' interest in overseas markets is very strong and they are looking at the U.S. market. It's important to build a solid platform in the U.S."

In the three months ended March 31, Nomura booked a loss of ¥245.7 billion due to the unwinding of massive bets by the fallen U.S. hedge fund. The brokerage plans to book the remaining loss of about $570 million in the current fiscal year ending March 2022. It had already exited 97% of the related positions.

"I don't think Nomura will make many changes to its strategy as a result of this loss," said Morningstar analyst Michael Makdad. "It sees the incident as idiosyncratic and unlikely to recur, especially after it has adjusted its risk management to account for this kind of idiosyncratic client. However, it does raise the question of how Nomura and its peers could have had this huge exposure to a single client."

The Archegos incident has led some experts to call for a review of Nomura's risk management practices of the U.S. wholesale business, which was the company's second-biggest revenue source after its retail operations in Japan in the quarter ended December 2020. The incident also forced Nomura to cancel a $3.25 billion bond sale while its credit ratings are downgraded or under review.

"We're reviewing our prime brokerage business in the U.S. and we're conducting a thorough investigation into it," Okuda said. "We'll maintain our business with family offices there because they're our important customers."

Makdad added that the major upcoming challenges for Nomura are the same challenges it had a year ago before the coronavirus pandemic: growing its overseas businesses to an "appropriate size" that can control costs and risks, and leverage the areas where Nomura has some advantage vis-à-vis global investment banks; and growing its domestic retail and asset-management businesses to cater to digitally savvy younger consumers.

On April 26, Nomura named Christopher Willcox, who was CEO of JP Morgan Asset Management until recently, to co-lead Nomura's U.S. operations, effective May 3. "My goal is to continue the focus on building our Americas business," Willcox said in another statement April 26.

The loss in the U.S. wholesale business in the fiscal fourth quarter wiped out strong gains in pretax profit of Nomura's two other segments, leading to an overall net loss of ¥155.41 billion. The pretax profit of its retail segment rose 42% to ¥26.12 billion from a year earlier, while its asset management business swung to a profit of ¥21.36 billion from a loss of ¥8.74 billion a year ago. Nomura last posted a bigger quarterly loss of ¥215.83 billion in the January-March period of 2009.

Nomura's U.S. wholesale business, which trades stocks and bonds and offers investment banking services to institutional clients in North America, has been a major driver of the company's earnings recovery since its last net loss in the October-December 2019 quarter.

The dependence on revenue growth outside Japan is a result of years of ultralow interest rates at home. More than half of household assets in Japan were held as cash or bank deposits, 28.4% were allocated to insurance and pension funds, 9.6% to securities, 3.4% to investment trusts and 1.4% to bonds as of March 2020, according to the Bank of Japan. Nomura, alongside many other Japanese financial institutions, have increasingly allocated money to overseas markets, particularly the U.S.

As of April 26, US$1 was equivalent to ¥108.14.