Back to top

Analyst Blog

According to Reuters, Japan's largest brokerage house -- Nomura Holdings Inc. -- is moving ahead with the implementation of its cost-cutting strategies. The company plans to let go hundreds of employees, particularly in the equities and investment banking division, as the unit was hit harshly owing to the ongoing difficult economic conditions. The company aims to trim down expenses and reinstate profitability in its overseas operations.

Though the extent of the streamlining and cost-savings efforts have not been disclosed by the company, according to the source, Nomura is looking for a target of $750 million in annual cost savings. These savings would be added over the previous target of $1.2 billion of cost savings plan launched in the latter half of 2011, which also included 1,000 layoffs.

Based on the downfall in earnings in fiscal first quarter 2013 and the ongoing pressure in Europe, most of the job cuts will take place in Europe as well as in Asia and the Americas. Previously, Nomura acquired the European and Asian operations of the failed Lehman Brothers in 2008, while it established its own operations in the United States.

Since the first quarter, Wholesale revenues for Nomura were driven by Fixed Income, which prompted the company to plan moving some resources to fixed income to increase profitability.

Among the U.S. banks, which are sailing on the same boat as Nomura, Morgan Stanley (MS - Analyst Report) laid off 2,935 employees in 12 months ended March 31, 2012 as part of its cost-cutting efforts. Majority of the banks worldwide are struggling to contain costs amidst the gloomy macro-economic factors and Eurozone crisis.

Banks including Citigroup, Inc. (C - Analyst Report), HSBC Holdings plc and The Royal Bank of Scotland Group plc (RBS - Snapshot Report) have also significantly trimmed down their workforce as part of their cost-cutting measures.

Our Viewpoint

The near-term outlook of an economic recovery remains dismal. Moreover, the regulatory landscape is becoming stringent with the Federal Reserve’s new proposed rules that take into consideration both Basel III as well as the Dodd-Frank reforms. These proposed rules require banks to maintain higher capital ratios that will significantly alter their investment and lending capacities and dent the revenue prospects.

Consequently, banks will adopt rigorous cost-cutting measures to maintain a sound capital buffer in order to withstand any financial crisis. However, with numerous job losses, unemployment rate could worsen and put the economic recovery at stake.

In the current sluggish markets, which are marred by new regulations, the banks have resorted to downsizing in order to reduce expenditures. Moreover, concerns regarding the European debt crisis have added to their woes.

Overall, until revenue generation revives, a worsening cost-to-income ratio will continue to force many more banks to reduce their costs through job cuts as they need to maximize profits in order to boost capital ratios.

Nomura currently retains a Zacks #4 Rank, which translates into a short-term Sell rating.

Please login to Zacks.com or register to post a comment.