NRSCF - Nomura Holdings: Too Early To Be Bullish

2023-11-16 17:47:33 ET

Summary

• Nomura Holdings, Inc.'s ability to meet its 2025 ROE goal is uncertain.
• But Nomura Holdings is a play on the expansion of Japan's investor base in the future in tandem with an increase in financial literacy.
• A Hold rating for Nomura stock is fair, as I think that it is premature to turn bullish on the stock now.

Elevator Pitch

I continue to assign a Hold rating to Nomura Holdings, Inc. ( NMR ) [8604:JP] shares.

It is premature to raise my investment rating for NMR to a Buy now. In the long term, Nomura should benefit from a larger Japanese investor base by virtue of its status as a leading player in the country's investment banking and brokerage markets. But there is a meaningful risk that Nomura Holdings will find it tough to achieve its 2025 ROE target, which will cap the stock's capital appreciation potential in the short term. As a result, I choose to leave my Hold rating for Nomura Holdings unchanged.

Uncertainty Over NMR's Ability To Meet 2025 ROE Goal

In my earlier article written on September 5, 2023, I referred to NMR's process of ROE improvement as a "work-in-progress," and shared my opinion that it "will take a longer than expected period of time for Nomura Holdings to meet its 8%-10% ROE target" for fiscal 2025. Nomura Holdings' recent quarterly performance , the sell side's consensus numbers, and management commentary appear to provide support for my cautious view of the company's ROE expansion progress.

NMR refers to fiscal 2024 as the financial period between April 1, 2023, and March 30, 2024. ROE for Nomura Holdings increased by +1.4 percentage points QoQ, from 2.9% in Q1 FY 2024 to 4.3% for the most recent Q2 FY 2024 (July 1, 2023 to September 30, 2023) as indicated in its October 2023 corporate presentation slides . NMR's ROE also improved by +240 basis points YoY from 1.2% for 1H FY 2023 to 3.6% in 1H FY 2024.

But both the actual Q2 FY 2024 (4.3%) and 1H FY 2024 (3.6%) ROEs for NMR were significantly below the company's FY 2025 ROE target in the 8%-10% range. Also, Nomura Holdings' Q2 FY 2024 net profit attributable to shareholders amounting to RMB35,232 million turned out to be -2.6% lower than the analysts' consensus bottom line estimate of RMB36,177 million (source: S&P Capital IQ ).

It is also worth mentioning that the market doesn't see Nomura Holdings achieving high-single digit percentage ROEs anytime soon. As per consensus data taken from S&P Capital IQ , the sell-side analysts' current consensus FY 2024, FY 2025 and FY 2026 ROE projections for are 4.6%, 3.6%, and 3.9%, respectively.

At the company's most recent Q2 FY 2024 results briefing (event transcript sourced from S&P Capital IQ ), NMR emphasized that "we don't think that (the 8%-10%) target (for 2025) is impossible." But Nomura Holdings also stressed at the latest quarterly results call that it is tough to rely solely on share repurchases to achieve its ROE goal, and it also acknowledged that certain of its businesses like international wholesale and fixed income have been performing below expectations.

NMR's management comments suggest that that there is no quick fix to enhance the company's ROE by simply accelerating share buybacks. Nomura Holdings' 8%-10% ROE goal can only be achieved if all the stars are aligned. This implies that a combination of top line expansion, cost control, and increased shareholder capital return is needed for a substantial improvement in its ROE.

It doesn't help that the weak global economic environment and volatile financial markets pose significant downside risks for Nomura Holdings' future revenue. Separately, NMR hasn't been able to cut costs as fast and as much as it would have liked. As an example, Nomura Holdings' Q2 FY 2024 cost-to-income ratio of 96% (source: October 2023 corporate presentation) was still way higher than the FY 2025 cost-to-income target of 80% outlined at its 2023 Investor Day in May this year.

In summary, there is significant uncertainty regarding whether Nomura Holdings' ROE can increase to 8%-10% for FY 2025 as per its financial goals.

But Nomura Is Long-Term Play On Japanese Investor Base Expansion

Earlier on September 28, 2023, Nomura Holdings hosted its 2023 Sustainability Day. In its Sustainability Day presentation slides and the investor call (transcript sourced from S&P Capital IQ ) on the same day, NMR disclosed a number of key metrics which provide an indication of the company's growth potential for the long run.

NMR is referred to "Japan's largest brokerage and investment bank" by S&P Global Market Intelligence . Therefore, it is reasonable to view Nomura Holdings as a key beneficiary of an expansion in Japan's investor base.

According to its asset management arm's investor survey conducted this year that was cited at its 2023 Sustainability Day, 8%, 31% and 61% of Japan's individual financial assets are owned by investors deemed to have high, medium, and low financial literacy, respectively. Among Japanese investors who boast either medium or low financial literacy, more than half of them keep their monies in deposits and don't invest.

Nomura Holdings estimated at the company's Sustainability Day presentation this year that a potential "JPY 400 trillion ($2.6 trillion) will shift from deposits to investments," assuming that "40% (of Japanese asset owners) who own JPY 800 trillion will invest 50% of their assets" in the future as their financial literacy improves.

In a nutshell, as Japanese individuals in general become more financially savvy over time, they will save less and invest more of their monies, and this is likely to be a secular growth trend for NMR.

Final Thoughts

My Hold rating for NMR remains intact. I don't think Nomura Holdings, Inc. can meet its FY 2025 ROE goal, but I have a favorable opinion of NMR's long term growth prospects, which are driven by positive expectations of a growing Japanese investor base.

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