(Bloomberg) -- Nomura Holdings Inc. paid almost nothing for Lehman Brothers Holdings Inc.’s European investment bank as the financial crisis raged in 2008. But the deal has still cost it dearly.
So much so that after its most recent results, Nomura’s chief financial officer said there’s a "strong sense" of urgency for the bank to improve performance. Japan’s biggest brokerage hasn’t been among the top 10 investment banks in Europe since at least 2013, according to data from Coalition Development Ltd.
Nomura, like other securities firms, has struggled with regulatory burdens and negative interest rates that have eaten into returns. But its troubles in Europe have been deepened by internal woes, such as management tumult and risky trades that backfired. Now the bank is betting a leadership overhaul, a push into complex financing deals and better technology will reverse the trend, according to people with knowledge of its strategy.
“Nomura has a low share in a difficult market and so has struggled to achieve profits, which has been compounded by poor performance,” said David Marshall, an analyst with CreditSights Inc. “If you’re not in the top five by market share in any particular region or product, it’s getting increasingly difficult to make money."
Since taking over the former Lehman assets a decade ago, Nomura’s European division has lost about 767 billion yen ($6.7 billion) on a pretax basis, including 5.2 billion yen for the quarter ended in June, group filings that break out numbers for the European legal entity show. More than 400 billion yen of losses were in 2009, according to the public accounts.
By internal measures, performance in Europe has been stronger. Operating losses in the region have amounted to about $500 million since the Lehman acquisition, including litigation costs, according to a person with knowledge of the figures.
"In the case of EMEA, and based on how we measure performance internally, the last nine years have been challenging," Takumi Kitamura, Nomura chief financial officer, said in an e-mailed statement. "But importantly the region has now been profitable for the last two years," he said, citing the bank’s own calculations.
The losses in Europe since the Lehman deal compare with about 541.2 billion yen in total net profit for Nomura overall, the filings show. Kitamura told reporters in July that urgent action is needed.
“The Nomura/Lehman acquisition illustrates the challenges of acquiring a capital markets business,” said Joseph Dickerson, a bank analyst in London with Jefferies Group LLC. “Acquiring and integrating them is like performing heart surgery and brain surgery on someone and expecting them to function as normal.”
Nomura has struggled to establish a base of long-term clients in Europe, the Middle East and Africa that would generate a steady flow of revenue, according to interviews with a dozen people inside or close to the bank. To compensate, the division may have relied too heavily on traders making outsized bets, which at times failed to pay off, people also said.
“When you’re playing second fiddle and you’re trying to gain market share, sometimes people get a little bit more aggressive,” said Filippo Alloatti, a senior credit analyst specializing in global financial companies at Hermes Investment Management in London.
Late last year, Nomura traders lost about $23 million on an ill-timed wager that Noble Group Ltd., the troubled Singapore-listed commodity trader, would default on its debts, people with knowledge of the matter said. The bank also lost money around the same time on large European government-bond trades with a Chinese state entity, according to one of the people. In January, it took a hit of about $130 million on a complex loan to South African billionaire Christo Wiese.
Veteran investment-bank chief Steve Ashley, who leads the securities business globally, is charged with reversing the trend for good. He previously oversaw a deep restructuring across EMEA in 2016 when the bank shut much of the stock-trading business and let go hundreds of people.
An Englishman, Ashley has been in charge of global trading since 2012 and was later promoted to head all of investment banking. Since June, he has ousted about 50 workers in London, including some of his most senior traders and business heads. (The bank has about 3,000 employees in Europe.)
With the reductions, executives didn’t just want to cut costs, according to the people familiar with the strategy. Ashley, a rates trader hired from Royal Bank of Scotland Group Plc in 2010, also wanted to replace senior staff and change the leadership in London, said one of the people.
At the same time, he’s brought in new blood. He’s hired John Gousias from hedge fund Millennium Management to help run flow credit trading, and promoted Tom Heenan to run rates trading, the EMEA unit’s biggest business, which deals in products tied to interest rates, the people said.
Executives in London are expanding a newly-formed business called Client Financing and Solutions, or CFS, which tailors complex deals for clients. Ashley also wants to bolster revenue from credit trading -- the buying and selling of corporate bonds and derivatives -- by 25 percent and also increase profit from dealing in European government bonds, a person familiar with the strategy said.
"We continue to enhance the franchise through our CFS platform which has been established to promote our distinct offering of tailor-made financing and solutions under one umbrella," Ashley said in an e-mailed statement. "We have also made notable progress in our newly launched wholesale digital office and have strengthened our EMEA franchise with targeted hires.”
The London division has now moved to build relationships with customers that generate a less volatile flow of business, according to people with knowledge of its strategy. The new CFS business, which structures esoteric finance deals, often for corporate clients, is its fastest-growing unit, they said.
Nomura also hired a high-profile figure to improve its performance in EMEA: Jezri Mohideen, a former rates trader at RBS, who joined as the investment bank’s global chief digital officer earlier this year. He reports directly to Ashley, and his duties include bolstering technology, controls and governance.
Yet, the hire surprised some within the organization, according to people with knowledge of the matter. Nomura managers discussed the hire at length to become comfortable with the allegations surrounding his role making Libor submissions in a previous job, the people said.
Mohideen was suspended from RBS after Bloomberg reported that he instructed colleagues to lower the bank’s submission. He denied the allegations but left soon after. In 2014, he settled a suit for unfair dismissal against the lender and later joined hedge fund Brevan Howard Asset Management.
Mohideen, whose duties also include leading a project to make it easier for asset managers to invest in cryptocurrencies, declined to be interviewed.
Even if these Nomura executives fix the firm’s internal challenges, they must face external ones too. In a sign of the broader pressures, analysts at JPMorgan Chase & Co. estimate that some of the industry peers will probably see an 8 percent decline in fixed-income trading in the quarter. The U.S. banks that survived the demise of Lehman now dominate the continent, while London-based rival Barclays Plc is also picking up market share.
“Nomura clearly does not have the resources and commitment to compete across the board with the U.S. investment banks,” said Marshall, the CreditSights analyst. “Is it possible for it to succeed in certain products and markets by targeting resources on these while exiting others? That will be a difficult management feat, but it is what they are trying to do.”
--With assistance from Thomas Beardsworth and Takahiko Hyuga.
To contact the reporter on this story: Donal Griffin in London at email@example.com
To contact the editors responsible for this story: Ambereen Choudhury at firstname.lastname@example.org, Elisa Martinuzzi
©2018 Bloomberg L.P.