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Asia-PacificNovember 4 2004

Zenji Nakamura

Nomura may not be the swashbuckling firm that it was in the 1980s and 1990s but, according to Zenji Nakamura, head of global markets, Europe, that will not prevent it from regaining a more prominent position in the international capital markets. Geraldine Lambe finds out how it intends to flex its Asian advantage.
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Nomura is Japan’s number one arranger of equity and bond sales and also tops the rankings in Japanese M&A transactions. It possesses an enviable Japanese brokerage network and last year it earned more than the combined profit of its two biggest domestic rivals, Daiwa Securities and Nikko Cordial (15% owned by Citigroup).

On an international scale, however, it is often portrayed as an also-ran, with global rankings of 10th in share sales, 15th in bond underwriting and 24th in M&A, according to Bloomberg. Its profits are less than one-third of those of Merrill Lynch, Goldman Sachs and Morgan Stanley.

New CEO

Nomura’s new CEO, Nobuyuki Koga, is hell bent on changing all that. Alongside increasing the firm’s lead in Japan and winning the business of Japanese companies that are seeking acquisitions overseas, he is promising to compete against the US bulge brackets and European banks for non-Japanese business.

While many believe that Nomura may have pronounced one ambition too far in thinking it can go head to head with Wall Street’s big boys in international investment banking, in fixed income, it may not be such a tall order. Nomura has produced many excellent traders and salesman, as well as structural innovators and principal finance stars.

Zenji Nakamura is head of global markets, Europe. Alongside Najib Canaan, head of global markets, US, he is responsible for co-ordinating the efforts of Nomura’s international business. Mr Nakamura believes that the bank has two distinct advantages that will enable it to raise the level of its game and take its rightful place among the top international houses.

“We are expanding our European and US franchise by leveraging a Japanese and Asian expertise that cannot be rivalled by any other firm and a risk culture that enables us to offer very attractive opportunities to our clients,” says Mr Nakamura.

Culture of risk

The risk culture derives from a time when Nomura was a far more swashbuckling (if also more accident prone) house than it is today. Mr Nakamura admits that in the 1990s, with the dazzling performances of the likes of Simon Fry in fixed income and Guy Hands in principal finance, Nomura was more of a proprietary trading house than an investment bank. “Given our [then] limited product lines, we were very focused on our proprietary businesses. They offered very attractive returns at a time when Japan was going through its lost decade but the US and Europe were enjoying a prolonged bull market. Because of that experience, Nomura established a risk culture that enables the firm to accept the different types of risk generated by those lines of business.”

The firm’s acceptance of risk, and Nomura International’s relative autonomy outside of Japan, ran the bank into some high-profile brick walls in the mid-1990s. But it seems to have learned its lesson: the bank now plays a quieter and steadier game.

The heritage of that era, though, is a risk management culture that will take risks for the right reward, says Mr Nakamura. The advantage for today’s Nomura, he adds, is that the bank can use that risk culture for the benefit of its clients. For example, the firm’s asset finance group acquires whole assets, working as principal rather than agent, and tranches them into smaller pieces aimed at specific investor groups, often keeping pieces such as the mezzanine tranche itself. “Although we have significant capital, it is only through our ability to repackage assets for our clients that we are able to capture all the opportunities that we identify,” he says.

Market knowledge

Mr Nakamura believes that the depth of Nomura’s understanding and access to Japanese and broader Asian markets remains a key differentiator. He says that the bank is best placed to deliver those investors to US and European issuers. Outside Japan, Nomura has operations in the majority of Asian countries, with its largest hubs in Hong Kong, Korea and Taiwan.

“Our relationships with Japanese and Asian investors and our understanding of their different requirements means that we can deliver to those investors. Last year, they wanted European bank debt and we enabled several European sovereign and supranational issuers [including EIB and KfW] to capture flows from Asian investors,” says Mr Nakamura.

China, too, is on Nomura’s radar, although the bank has yet to make a serious impact on the deal sheets. Mr Nakamura says: “We have a growing presence there. For example, we have arranged several public offers without listings [POWL] Chinese clients this year. But it is too early to disclose the firm’s plans.”

A POWL is a structure that enables firms to offer stock to retail investors without listing on the local exchange

It is Nomura’s network of more than 120 retail brokerages with more than 3.4 million clients in Japan (which accounted for 37% of Nomura’s pre-tax profits last year) that Mr Nakamura believes will pay even bigger dividends as Japanese investors continue to move from bank deposit-based savings to investment in the capital markets. The migration will accelerate when the government insurance scheme covering bank deposits is removed in April 2005, he says.

“The flow of money into the capital markets will be massive. At the moment, there are about $12,000bn of financial assets in the Japanese retail sector, much of it in cash deposits. Even a 1% shift can have a huge impact on global money flows.”

Increased competition

However, this trend, coupled with the recent regulatory change that will enable Japanese banks to act as intermediaries for securities and related products, has galvanised Nomura’s Japanese competition into trying to tap the country’s retail market. On top of existing online brokers, new players such as Shinsei and the megabanks, with thousands of branches, have shown that they are keenly aware of the potential revenue streams.

So is Nomura in danger of losing the lead in its domestic market? Mr Nakamura thinks not. He argues that it will take competitors considerable time to remodel their operations to take advantage of such changes. For example, their platforms were set up to sell less risky financial products, and staff training will be a major issue. Moreover, he is confident that it will be a case of the pie getting bigger and everyone getting a slice. “[Our competitors] will increase their volumes but I think the market will grow faster than they can erode our market share,” he says.

Nomura is also exploiting deregulation to expand its market share, says Mr Nakamura. It is in talks with the country’s regional banks (of which there are 113) to forge strategic alliances under which they will broke Nomura products. “We are also the only Japanese securities firm with the sort of global network that can bring products from the US and Europe to our Japanese clients,” he says.

International co-ordination

The co-ordination of Nomura’s non-Japan business is also occupying Mr Nakamura’s time. He and Mr Canaan are charged with what he calls “internationalising” Nomura, making each of its constituent parts work more effectively as a whole. Aside from adopting what is now a common mantra among many investment banks – moving from a product-led to a solutions-based approach – Mr Nakamura says that, at times, this can mean doing something as simple as ensuring that the firm pitches US and European issuers to Asian markets on a co-ordinated basis.

“We need to make sure that we pick which products to market to our Asian base at the right time. For example, there is no point in presenting them with an issue from a European supranational and a US agency at the same time, as this does not maximise the investor base for our clients,” he says.

Internationalisaton is also about increasing Nomura’s presence in the league tables. “Our longer-term goal is to be in the top 10 but we do not want to waste our shareholders’ money,” says Mr Nakamura. The bank has therefore carried out careful risk/reward studies to decide on which areas to focus its efforts and how much to invest. He says that progress can be expected in supranationals, European governments and the financial institutions group.

With existing hedge fund clients on its books, it also seems logical that Nomura would leverage those relationships and develop a prime brokerage presence. As it boasts excellent access to the Japanese investor base, for example, it could surely build a very profitable business. Mr Nakamura declines to comment.

New initiatives

But there are other plans. Nomura recently combined its fixed income and equity groups to improve its asset liability management capabilities. And, betraying his derivatives roots – Mr Nakamura moved to London in 2000 as global head of derivatives and head of the asset investment group – under his leadership, the European business is seriously building its equity derivatives expertise. It recently hired a 13-member equity derivatives team from Merrill Lynch. “We will have about 40 people covering this sector across Europe by the end of this year. It is a pretty big leap from zero to 40,” he says.

Here, too, success will be about leveraging the firm’s Asian advantage –co-ordinating its efforts and exploiting its strengths. “We will combine Asian investor demand for these products with our pan-European platform. Across all our transactions, in all geographies, we will structure the product to suit the issuer’s requirements and our investor base. It is key to creating the demand, to building a big transaction.”

Career history Zenji Nakamura has an MA in Engineering from Waseda University, Japan

2004: appointed head of global markets and now oversees all equity, fixed income and syndicate business in Europe

2002: became co-head of the fixed income division, in charge of asset investment and credit trading

2000: transferred to Nomura’s international headquarters in London as global head of derivatives and head of the asset investment group

1997:became global head of fixed income derivatives

1994: appointed manager of R&D in the debt markets division of Nomura Securities in Tokyo

1987: joined the Nomura Research Institute from IBM-Japan covering equity derivatives and then fixed income quantitative research in both Tokyo and New York

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