Nomura's BB(EXP) Rating: A Crossroads for Japanese Financial Institutions in Global Credit Markets

The recent BB(EXP) rating assigned by Fitch Ratings to Nomura Holdings' debut USD-denominated perpetual AT1 bonds marks a pivotal moment for Japan's financial sector. While the rating specifically applies to the securities—not Nomura's overall creditworthiness—it underscores deeper structural challenges facing Japanese financial institutions in global USD markets. This article examines the implications for investor confidence, funding costs, and competitive positioning, leveraging data on sector trends, peer comparisons, and macroeconomic forces.

### The BB(EXP) Rating in Context
Fitch's BB(EXP) rating for Nomura's AT1 bonds, announced on May 15, 2025, contrasts sharply with the firm's long-term issuer default rating (IDR) of A- (Stable outlook) as of May 2024. The discrepancy arises because AT1 securities are subordinated and absorb losses before equity holders, inherently riskier than senior debt. However, the downgrade reflects broader investor skepticism about Japan's financial sector amid a challenging global landscape.

The BB(EXP) rating places Nomura's AT1 bonds in the “non-investment grade” category, potentially deterring institutional investors who are restricted from holding sub-investment-grade debt. This could force Nomura to offer higher coupon rates to attract buyers, raising its funding costs. Meanwhile, peers like Mitsubishi UFJ Financial Group (MUFG) and Sumitomo Mitsui Financial Group (SMFG)—rated A- or higher by global agencies—retain easier access to cheaper capital.



### Investor Confidence: A Fragile Balance
Investor confidence hinges on two factors: Nomura's ability to manage its capital structure and broader concerns about Japan's banking sector. The BB(EXP) rating could amplify scrutiny of Japanese banks' exposure to commercial real estate (CRE) and aging demographics, which weigh on profitability.

- CRE Risks: Regional Japanese banks hold CRE loans at 199% of risk-based capital, versus 54% for larger global peers. While Nomura's direct CRE exposure is lower, its participation in syndicated loans or securitization markets could indirectly amplify risks.
- Demographics: Japan's shrinking workforce and low birth rate strain balance sheets through stagnant loan demand and rising operational costs.

These factors, combined with global trends like rising interest rates and volatile equity markets, create a fragile backdrop for investor sentiment. Fitch's BB(EXP) rating may exacerbate outflows from Nomura's AT1 bonds, signaling a broader loss of confidence in Japan's financial institutions' resilience.

### Funding Costs: The Cost of Complexity
Nomura's BB(EXP)-rated AT1 bonds will likely carry a coupon rate 200–300 basis points above senior debt, reflecting the subordinated risk. In contrast, SMFG's A- rated senior notes trade at spreads of just 80–120 basis points over U.S. Treasuries. This disparity highlights the competitive disadvantage Nomura faces in USD funding markets.



The widening credit spread also raises questions about Nomura's capital strategy. With Basel III reforms finalized in late 2024, banks must optimize capital buffers. A higher cost of capital could force Nomura to reduce risk-weighted assets or seek equity financing, both of which could strain growth initiatives in areas like investment banking or wealth management.

### Competitive Positioning: A Sector-Wide Struggle
Japanese financial institutions face a triple threat in USD markets:
1. Rating Gaps: Nomura's BB(EXP) contrasts with peers' higher ratings, limiting its access to dollar liquidity.
2. Structural Challenges: Weak loan demand in Japan and reliance on low-margin retail banking constrain profitability.
3. Global Competition: U.S. and European banks dominate high-margin segments like M&A advisory and private wealth management, areas where Japanese firms trail.



Yet, Nomura's strength in Asia-Pacific equities trading and cross-border M&A—bolstered by its regional network—offers a niche advantage. If it can balance capital discipline with strategic investments, it could maintain relevance despite the rating headwind.

### Investment Implications
1. Nomura Holdings: Short-term pressure on its stock (NMR.N) is likely, but the BB(EXP) rating does not reflect its core creditworthiness. Investors should monitor its ability to deleverage CRE exposures and improve fee-based revenue (e.g., asset management).
2. Peer Comparisons: SMFG (8316.T) and MUFG (8306.T), with their higher ratings and diversified operations, remain safer bets for yield-seeking investors.
3. Sector Play: Consider ETFs like EWJ (iShares MSCI Japan ETF) for broad exposure, but be mindful of sector-specific risks like CRE and deflationary pressures.

### Conclusion
Fitch's BB(EXP) rating for Nomura's AT1 bonds is a symptom, not the disease, of Japan's financial sector challenges. While it elevates funding costs and risks investor confidence, the broader threat lies in structural underperformance relative to global peers. For investors, the path forward requires a nuanced approach: avoid overexposure to subordinated debt but remain open to high-quality institutions like SMFG and MUFG. Nomura's success will hinge on whether it can leverage its niche strengths while addressing the rating's underlying causes—a balancing act that defines its future in global credit markets.