Nomura Holdings: Focus On Performance, Valuations And ROE Target (NYSE:NMR)

Elevator Pitch

I rate Nomura Holdings, Inc.’s (NYSE:NMR) [8604:JP] shares as a Hold.

I previously initiated on NMR with an article published on January 12, 2021, touching on the company’s regulatory issues and capital allocation. The current update for Nomura Holdings focuses on NMR’s recent quarterly performance, its valuations, and medium-term ROE goal.

My view for Nomura Holdings is mixed, translating into a Hold rating. On one hand, NMR’s recent quarterly results weren’t encouraging and its prospects in the near term are poor. On the other hand, the negatives are priced into NMR’s valuations to some extent, and ROE expansion is a long-term catalysts for NMR.

Poor Results For Recent Quarter

Nomura Holdings issued a press release detailing its financial performance for Q1 FY 2022/2023 (year ended March 31, 2023) at the beginning of this month.

The company’s financial results for the most recent quarter were very weak. NMR’s revenue declined by -15% YoY and -12% QoQ to JPY299.0 billion in Q1 FY 2022/2023. The YoY decrease in Nomura Holdings’ top line was mainly attributable to a -88% drop in its investment management revenue from JPY63.5 billion in Q1 FY 2021/2022 to JPY7.6 billion in the recent quarter. The company highlighted at its Q1 FY 2022/2023 earnings call that “market headwinds led to a widening of negative investment revenue.”

NMR did even worse in terms of earnings for Q1 FY 2022/2023. Its pre-tax income fell by -76% QoQ and -85% YoY to JPY11.7 billion in the recent quarter. As per its management commentary for the first-quarter investor briefing, Nomura Holdings explained that “the impact of fair valuations led to a worsening of losses on investment securities and losses related to economic hedging transactions.” Specifically, NMR suffered from economic hedging losses amounting to -JPY9.8 billion in the first quarter of the current fiscal year. The company’s recent quarterly bottom line was also hurt by a -JPY2.8 billion paper loss with respect to equity securities due to a decline in market values.

The prospects for Nomura Holdings in the very short-term aren’t favorable. Based on the sell-side’s consensus estimates taken from S&P Capital IQ, NMR’s revenue is expected to recover slightly by +3.5% YoY in Q2 FY 2022/2023, before experiencing top line contraction of -3.4% and 4.0% for Q3 FY 2022/2023 and Q4 FY 2022/2023, respectively. Considering the current financial market environment, it will be tough for NMR to achieve good results in the near term.

As such, it doesn’t come as a surprise that NMR’s share price corrected by -8% from $3.77 at the end of the August 2, 2022 trading day to close at $3.48 as of August 3, 2022 after reporting recent quarterly earnings. But Nomura Holdings’ shares have recovered to pre-results levels in the past two weeks, and its last done share price was $3.81 as of August 16, 2022.

In my view, Nomura Holdings’ current valuations and the presence of a key re-rating catalyst (ROE expansion) might have driven the increase in its stock price in the last two weeks, which I discuss in the next two sections of this article.

Undemanding Valuations

The headwinds that NMR is facing appears to have been factored into the stock’s valuation to a considerable degree.

On a historical valuation basis, Nomura trades at a trailing twelve months’ price-to-book ratio of 0.51 times now, which is much lower than its five-year and 10-year average P/B multiples of 0.61 times and 0.76 times, respectively as per S&P Capital IQ data.

In terms of peer valuation comparisons, the market values NMR at a discount to its Japanese peer, Daiwa Securities Group Inc. (OTCPK:DSECF) (OTCPK:DSEEY) [8601:JP]. Daiwa Securities Group is currently trading at a relatively higher trailing P/B multiple of 0.63 times.

With regards to forward earnings multiples, Nomura is now valued by the market at consensus forward FY 2022/2023 and FY 2023/2024 P/E multiples of 9.6 times and 7.8 times, respectively. In comparison, Daiwa Securities Group trades at 11.4 times forward FY 2022/2023 P/E and 9.9 times forward FY 2023/2024 P/E. Note that Daiwa also has its financial year ending on March 31.

The depressed valuations for Nomura Holdings can be attributed to both its poor Q1 FY 2022/2023 performance, and its low ROEs on an absolute and a relative basis. According to financial data sourced from S&P Capital IQ, NMR’s generated a ROE of 6.6% for full-year FY 2021/2022, which was lower than the 7.0% ROE that Daiwa delivered in the same year.

ROE Target

Looking beyond the weak financial performance for NMR in the recent quarter, Nomura Holdings set an intermediate-term ROE target of 8%-10% to be achieved in the FY 2024/2025 period at its May 17, 2022 Investor Day. This might be the re-rating catalyst needed for NMR to command higher P/E and P/B multiples.

The targeted increase in Nomura Holdings’ ROE will be supported by a number of factors.

Firstly, NMR intends to increase the revenue contribution from recurring sources, so as to improve the quality and resilience of its top line. Specifically, the company hopes to grow the recurring revenue-to-income ratio from 40% in FY 2021/2022 to 50% by FY 2024/2025. A key driver will be Nomura Holdings’ retail business gradually transitioning from selling products to offering consulting services for investors.

Secondly, Nomura Holdings targets to maintain its cost-to-income ratio at 80%, even as its top line expands. There are a number of levers that NMR will be relying on to control its expenses, which include optimizing the hiring process, increasing the usage of digital technologies, and reducing the degree of operating leverage (i.e. changing the fixed-to-variable cost mix) for the company.

Thirdly, it is important for Nomura Holdings to continue returning excess capital to its shareholders, which will help to shrink the capital base and boost its ROEs. NMR stressed at its Q1 FY 2022/2023 investor briefing that “shareholder return” stays as “one of the important options” for the company’s capital allocation plans. The sell-side’s consensus forecasts as per S&P Capital IQ point to Nomura’s dividend per share increasing from JPY 40 per share in FY 2021/2022 to JPY 45, JPY 49, and JPY 54 for FY 2022/2023, FY 2023/2024, FY 2024/2025, respectively.

Closing Thoughts

I continue to assign a Hold rating to Nomura Holdings. NMR’s valuations are reasonably attractive with a key re-rating catalyst in the form of ROE expansion, but the poor financial outlook will continue to be a drag on Nomura’s share price performance for the near term.