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Nomura is finally making money from Asia investment banking

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Nomura Holdings Inc's investment banking business in Asia is set to return to profit this fiscal year after more than a decade of losses since its Lehman Brothers Holdings Inc acquisition, according to its division chief.

[HONG KONG] Nomura Holdings Inc's investment banking business in Asia is set to return to profit this fiscal year after more than a decade of losses since its Lehman Brothers Holdings Inc acquisition, according to its division chief.

Cost cuts and fees from financing will drive the profit rebound in the year ending March 31, said Kenji Teshima, head of investment banking for Asia excluding Japan. Revenue is set to rise by about one third, led by private financing and dealmaking in India and Australia, he said, while warning that some transactions in China may be affected by the coronavirus outbreak.

Japan's biggest securities firm last year unveiled plans to cut US$1 billion of costs at its struggling global wholesale operation, helping to revive profit that's been under pressure from years of losses abroad. Mr Teshima's group is benefiting from the firm-wide savings even as he keeps net headcount largely unchanged.

The cost cuts "will indirectly have a positive impact in terms of cost to my business", he said in an interview in Hong Kong. Coupled with the revenue gains, that means "all of a sudden, it's a game-changer year".

Nomura's 2008 purchase of Lehman assets in Asia swelled costs as it took on bankers. For global firms in the region, it can be harder to make money from investment banking than in Europe and America because of lower fees and high costs of running operations in multiple countries.

Mr Teshima has shifted Nomura's focus in several nations since taking the role four years ago. In India, he increased the emphasis on financing and the capital markets business rather than mergers advice, because many companies there need access to funds for growth. In Australia, he built a sponsor business from scratch, helping private equity funds execute deals.

While Nomura doesn't split out regional earnings figures for its investment banking unit, wholesale revenue - which also includes global markets - in Asia ex-Japan jumped 53 per cent in the nine months ended Dec 31. Pre-tax profit from the region was 23.1 billion yen (S$292.2 million) for the period, compared with a 3.7 billion yen loss a year earlier.

Shares of Nomura rose 1 per cent on Wednesday morning in Tokyo, outpacing a 0.4 per cent gain in the benchmark Topix Index. The stock has gained about 69 per cent since early June on renewed optimism over the profit outlook.

Private financing, which involves giving loans against collateral, has been growing in India and Australia in the past few years, Mr Teshima said. India has provided "a very good mix" of revenue as the bank bolsters its margin lending business there, enabling it to compete with foreign players, he said.

The bank set up a joint entity with the markets division two years ago to better structure financing deals when advising clients on mergers and stock and bond transactions. One growth area is to provide leverage to hedge funds and insurers to purchase high-yield bonds underwritten by the bank, allowing it to earn multiple fees from one transaction, he said.

In Australia, there are also opportunities stemming from Japanese companies' appetite for acquisitions. "Australia is a country where there's a hot eye from Japan in terms of foreign investment," he said.

Australia and India contribute about 20 per cent and 15 per cent of ex-Japan Asia investment banking revenue respectively, while China is the biggest market, making up about 40 per cent, Mr Teshima said.

VIRUS IMPACT

Deals involving public fundraising in China may be affected by the coronavirus outbreak and the trade war as market valuations shrink, Mr Teshima said. Still, that will lead to more deals where companies need to raise funds privately, he said, adding that he expects inbound mergers and offshore financing for Chinese clients to increase. Investors will switch to investment-grade issuance due to higher perceived risks, he added.

The virus that originated in China has led to more than 1,800 deaths in the country and at least 72,000 confirmed cases globally. It has caused delays in dealmaking as travel restrictions put discussions on hold. A handful of Hong Kong-based managing directors at Nomura who were on business trips elsewhere in Asia have opted to stay in other offices temporarily for health and safety.

"Over this period, it is about being as flexible as possible," Mr Teshima said. "In fact, it works to our advantage to have some of the active bankers to be sitting outside of Hong Kong for a temporary period."

BLOOMBERG