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Reality of cost cutting, weak economy sinks in for Nomura after strong quarter

After a strong quarter buoyed by its trading business, Nomura Holdings Inc. is set to face lingering challenges of cost reduction and a slowing economy hit by the pandemic.

In the fiscal first quarter ended June 30, Japan's biggest brokerage house reported a net income of ¥142.5 billion, the highest in almost two decades. It was compared to a net loss of ¥34.5 billion in the previous quarter, and more than doubled the ¥55.8 billion net profit a year earlier.

"We need to continue [with] cost reduction in a bid to [maintain] profitability" amid the lingering risks of the coronavirus outbreak, CFO Takumi Kitamura told a July 29 conference call.

"We had the very good results [for the quarter]," he added. "But we can't be optimistic given the macro economy."

Unlike previous quarters the company did not release its full-year earnings estimates, citing uncertain prospects for its business.

Like many Wall Street brokerages such as Goldman Sachs Group Inc. and Morgan Stanley, Nomura's strong quarterly performance benefited mainly from its trading business. Pretax income from the wholesale segment more than quadrupled to ¥87.9 billion in the fiscal first quarter from ¥20 billion a year ago. That is also a jump from ¥10.1 billion in the previous quarter.

Of the total revenue of ¥248.7 in that segment, the U.S. business generated ¥92.1 billion, getting strong support from its fixed-income operation. "The market has normalized from the March downturn," Kitamura said.

Michael Makdad, an analyst at Morningstar, is concerned about the outlook for this business. He said: "The reason is that ultimately the positive conditions for bond trading were engineered by the U.S. Fed as an emergency measure. But that does have side effects so once the immediate emergency has passed, the stimulus to markets will be tapered."

Nomura has been working on cost reduction, targeting about ¥140 billion in cuts by March 2022. More than 70% of the savings was achieved as of June-end.

Looking ahead, Nomura will cut costs further with measures such as holding back business travels and entertainment as well as marketing campaign and streamlining branches.

Kitamura expects the brokerage house to embrace online meetings amid the prolonged pandemic. Even before the coronavirus outbreak, Nomura's sales teams had started shifting away from their face-to-face sales style to email and phone calls to increase businesses, he added.

"I think the pandemic opens up new opportunities in domestic retail for Nomura and other brokers but these won't show up in profits right away and require investment in the near term around digitalization," Morningstar's Makdad said.

As of July 29, US$1 was equivalent to ¥105.05.