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Nomura Profit Beats Estimates as Outlook Clouded by Scandals

AInvestFriday, Nov 1, 2024 2:56 am ET
2min read
Nomura Holdings, Inc., Japan's leading brokerage and investment bank, reported a robust quarterly profit on Friday, November 1, 2024, marking its sixth consecutive quarter of growth. The company's net profit totaled ¥98.4 billion ($645 million) in the July-September period, more than double the ¥35.2 billion reported in the same period last year. This impressive performance was driven by a significant jump in the wholesale business, which contributed to a 167% increase in profit.


However, the positive financial results were overshadowed by a series of scandals that have tarnished Nomura's reputation and raised concerns about the company's internal controls. In September, the Financial Services Agency (FSA) reported that a Nomura employee had engaged in market manipulation by placing misleading orders in the government bond futures market in 2021. The trader, who is no longer with the firm, profited from a practice called layering, which involves placing large orders without intending to buy or sell all of them. The FSA imposed a ¥21.8 million ($144,000) fine against the company, and Nomura has since taken steps to enhance its compliance framework and internal controls.


The market manipulation incident has prompted clients to take their bond trading and underwriting business elsewhere, hurting Nomura just as Japan re-emerges as a key growth area. At least 10 institutional investors have temporarily suspended some business activities with Nomura due to the breach, while other clients have taken the company off underwriting debt deals. As a result, Nomura's ranking in the corporate debt market dropped from No. 3 to No. 5 in October, and its primary-dealer "special entitlements" at government debt auctions were suspended for about a month.

Adding to Nomura's woes, a former employee was arrested on suspicion of robbery and attempted murder of two elderly clients in Hiroshima. The 29-year-old man, who worked for Nomura Securities Co. when the alleged crime took place in July, is suspected of drugging a customer and his spouse, stealing about ¥26 million in cash from their home, and setting it on fire. The couple in their 80s escaped safely. Nomura Holdings confirmed that the person is a former employee who was dismissed for disciplinary reasons.


In response to the scandals, Nomura's CEO Kentaro Okuda and other top managers agreed to take pay cuts. Okuda will return 20% of his pay for two months, while deputy president Yutaka Nakajima and several other executives at the domestic securities unit will take similar or smaller cuts. Nomura has also apologized to clients and pledged to further enhance its compliance framework and internal controls to prevent similar incidents in the future and regain trust.

Despite the recent setbacks, Nomura's strong financial performance highlights the company's underlying strength and potential for growth. However, the scandals pose long-term risks to the company's reputation and future earnings. Nomura must prioritize rebuilding trust with clients and demonstrating a commitment to enhanced compliance and ethical practices to maintain its competitive position in the market.

As Nomura works to address these challenges, its competitors are poised to capitalize on the situation. Rival brokerage houses, such as Daiwa Securities and Mizuho Financial Group, have seen an influx of clients seeking alternative services and have been vocal about their commitment to compliance and ethical standards. Nomura must act swiftly and decisively to mitigate the damage from these scandals and protect its market share.

In conclusion, Nomura's impressive quarterly profit underscores the company's potential for growth and success. However, the recent scandals have cast a shadow over the company's reputation and raised concerns about its internal controls. To maintain its competitive position in the market, Nomura must address these challenges head-on, rebuild trust with clients, and demonstrate a commitment to enhanced compliance and ethical practices.
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