Nomura Holdings, Inc.

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

Nomura Holdings, Inc. is a global financial services group, with business segments including Retail, Investment Management, and Wholesale, offering a wide range of financial products and services.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Nomura operates across three main divisions:

  • Retail: This division provides investment solutions and services to individual investors in Japan, including securities brokerage, financial planning, and insurance products.
  • Investment Management: This segment manages assets for both institutional and retail investors, offering a variety of investment funds, advisory services, and related products.
  • Wholesale: This division encompasses global markets activities in equities, fixed income, and investment banking services, catering to institutional clients worldwide.

Industry Trends: The financial services industry is undergoing rapid transformation due to various factors, including digitalization, regulatory changes, geopolitical uncertainties, and changing client preferences. The global economy has seen significant fluctuations, with challenges such as inflation, interest rate hikes, and potential recessionary pressures. This environment places pressure on traditional brokerage models and requires companies like Nomura to adapt and innovate to maintain profitability. In particular, the trend of retail investors demanding cheaper and easily available investment options is reshaping the landscape.

Competitive Landscape: The financial services industry is extremely competitive and fragmented, with numerous local and global players. The competition is driven by various factors including fees, products, and services provided. Some of the key competitors include: JP Morgan, Goldman Sachs, Credit Suisse, Morgan Stanley, and several Japanese-based financial institutions. Companies with strong brands, well-established relationships, and large client bases tend to have an advantage.

What Makes Nomura Different?

  • Japanese Heritage: Nomura’s strong presence in its domestic market gives it a competitive advantage, and the cultural understanding to understand and serve those specific customers, also serves as moat.
  • Global Network: The company’s international network allows it to serve a wide variety of clients worldwide with global and local expertise. This is seen through their presence in the Americas, Europe, Middle East and Africa and Asia (excluding Japan).
  • Diversified Service Portfolio: Nomura offers a diverse suite of financial services, allowing it to cater to a wide variety of needs for different clients. These services are offered to high-net worth retail investors, as well as large global institutions.

Financial Analysis

  • Revenue Distribution: For the six months ended September 30, 2023, NMR’s net revenue was ¥622.6 billion (YOY decrease of -3.5%), with wealth management contributing ¥192.2 billion (YOY decrease of -10.5%), investment management contributing ¥63.7 billion (YOY decrease of -1.5%), wholesale contributing ¥367.3 billion (YOY decrease of 2.4%), and other activities contributing (¥0.6 billion).

  • Profitability: The net income attributable to Nomura shareholders decreased from ¥165 billion in 2022 to ¥113 billion in 2023. This decline reflects the challenges faced by the company in current market conditions, increased taxes and volatility. While the Investment Management division showed increased profitability.
  • Margins: Operating margins for Retail were 10.4% down from 11.1% the year prior, for Investment management they were 7.5% up from 5.9% the year prior, and for Wholesale were 3.1% down from 5.1% the year prior.
    • The Retail Division experienced a slight decrease, primarily due to declines in domestic sales. While profitability in the Investment Management division has improved, Wholesale saw its profits decreased mostly due to lower fixed income trading gains.
  • Balance Sheet: As of September 30, 2023, Nomura’s total assets were ¥55.9 trillion, with total equity of ¥3.8 trillion. Their liquidity remained high with cash and cash equivalents being almost ¥4.9 trillion.
    • The company is fairly leveraged and has significant liabilities (at around 49 trillion). A lot of it is long-term debt.
    • They maintain a good amount of investment securities, both at fair value and held for sale.
    • They also have a substantial amount of client liabilities, mainly in the form of short-term borrowings (at almost 12 trillion).

Moat Analysis: Nomura’s moat is relatively weak, and would be considered as a narrow moat. The company’s main competitive advantages are not easily replicable, however. This is a result of:

  • Japanese Presence and Reputation: The firm is one of the largest Japanese-based institutions, and also has a strong presence and relationships in their domestic market that have been cultivated for more than 100 years.
  • Large Client Network: As a global financial services firm they do have access to a large global network of clients, both institutional and retail.

These factors are not as easily replicable as patents or trade secrets, and they aren’t as durable as network effects, which gives it a very narrow moat.

  • Moat Rating: 2/5
  • This is mostly due to the low barriers to entry in the industry and the ease of competitors eating at profit margins with smaller fees.

Legitimate Risks That Could Harm the Moat and Business Resilience

  • Intensified Competition: Increasing competition from other financial firms can decrease profit margins as they attempt to steal share by lowering prices.
  • Regulatory Changes: The financial industry is heavily regulated, and any significant rule changes or more strict enforcement can limit their operations and profitability.
  • Economic Slowdowns: Any global recession or slow-down will reduce transactional volume and lower client confidence which would lower revenue and performance.
  • Technological Disruption: The rapid pace of technological advancement can lead to the obsolescence of their IT infrastructure and can require larger amounts of investments which negatively impact profitability.
  • Loss of Key Personnel or talent can diminish its ability to create value.
  • Geopolitical Risks: Being a global financial institution means there will always be external factors that can impact business continuity from different nations.
  • Client Confidence and Trust: The firm’s financial results largely depend on investor and client confidence, which can be hurt by scandals or other reputational issues.

Business Resilience:

  • As a large financial institution they are likely to be resilient to large disruptions, and their global network will continue to benefit them.
  • They do have a loyal client base.

Understandability:

  • Rating: 4/5
  • While the business model itself is simple to understand, their financial statements are complex and can require a lot of careful investigation and study to understand properly. The different kinds of financial instruments they use in their business, and the types of risk they face make it a bit more complicated than a simple retailer or manufacturer, for instance.

Balance Sheet Health:

  • Rating: 3/5
    • While the company maintains decent amount of cash and liquid securities and maintains decent levels of capital, the high amounts of debt on the balance sheet can indicate they have a less than healthy balance sheet. These are also a concern for the long term.

Overall: Nomura is a large player in the financial world with a solid business and an established brand in the domestic market of Japan, but faces a lot of challenges and competition that make it a tougher market to compete in. It does have a narrow moat, and relies heavily on being in the financial industry, whose nature is largely cyclical. The most recent financial results from Nomura also indicate the issues they are facing, and highlight the need for them to strategize to reduce liabilities and make operations more efficient. Their balance sheet health is mediocre, and could improve with a better balance between long-term liabilities, and short term assets.