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Can Nomura crack the Chinese market?

Japanese investment house targets wealthy mainland investors

HONG KONG/TOKYO -- Koji Nagai, the group chief executive of Nomura Holdings, likes to tell a story about his first job at the Japanese bank. It was 1981 and the recent university graduate was sent to a branch in Takamatsu, the capital of Kagawa Prefecture. Nagai was there to learn the basics of selling shares, bonds and mutual funds to individual investors, and his timing was good: Japan's great stock market run still had eight years of life left in it.

His resolve faced a test one afternoon, however, when he was caught in a sudden downpour on his way to meet a client at her house. He found some shelter and rode out the storm, but only after becoming soaking wet and muddy. Once the storm broke, Nagai worried about whether he should turn up in this condition.

Embarrassed about his soggy appearance, Nagai hesitated to enter the house, but the client handed him a towel and invited him in with a smile. She thanked him for coming despite the heavy rain and, at the end of his visit, she bought some products.

Nagai earned his stripes as a salesman that day, and he remained in Nomura's retail business for the next 20 or so years, making a wide range of proposals to wealthy individuals and the management of midsize companies in the community. "These early years are the driving force behind everything I do today," he says.

Though he would go on to work on the institutional side of Nomura's business for more than a decade, he never lost his conviction that all investment ultimately begins when an individual places his or her money at risk. And it is this idea that lies at the heart of Nomura's next big initiative: setting up a retail business in mainland China aimed at the country's rising numbers of wealthy individuals.

On the move in Shanghai: Nomura sees big opportunities in China's growing wealth. (Photo by Kosaku Mimura)

Nomura is hoping to take advantage of a liberalization push by China to allow foreign control of financial institutions, including securities firms and asset managers, on the mainland. Chinese officials stunned the global finance industry by announcing the plans in November 2017, and Nomura -- which had been studying the feasibility of doing business on the mainland for years -- acted quickly. JPMorgan Chase has also been quick in applying for a license.

Nagai says Nomura's model, in which the retail and institutional businesses work together under one roof, is well-suited for the mainland. "I think it is the right strategy to employ an approach in China that is similar to the way we operate in Japan," he said in an interview with the Nikkei Asian Review. "I believe this will prove to be a competitive edge."

A successful push into China could help soothe investors' painful memories of the bank's past international expansions, including the acquisition of Lehman Brothers' Asian and European operations in 2008.

Large-scale, independent securities companies with big brokerage arms have become rarer in the decade since the collapse of Lehman Brothers. Merrill Lynch, with its "thundering herd" of retail brokers, was similar, but that ended when Merrill was acquired by Bank of America in 2008.

Though it is unusual today, Nagai says the Nomura model still makes sense. Corporate clients like that Nomura still has a large retail sales force, while retail clients appreciate its diverse product offerings, he says.

Nagai has made frequent visits to China this year, including a day trip from Tokyo in early September. Although he won't comment on the purpose of his business trips, it is clear that the company is preparing to establish a Chinese joint venture. Nomura applied for approval for a joint venture with Chinese authorities in early May.

It is unclear when the joint venture will be approved, but Nomura's in-house China Committee -- headed by Toshiyasu Iiyama, executive chairman of Nomura's Asia businesses outside of Japan -- is busy drawing up a business plan from Hong Kong. The new company will be headquartered in Shanghai, is expected to employ around 100 people initially, and will be focused on building a wealth management business for rich Chinese. Almost all the financial consultants will be hired within China. The goal is to break even within several years.

It sounds ambitious, but Nomura officials point to the rapid accumulation of individual wealth in China as evidence that it is possible. According to the "China Private Wealth Report" jointly issued by Bain & Co., a U.S. consultancy, and China Merchants Bank, high net worth individuals -- those with investable assets of more than 10 million yuan (about $1.46 million) in China reached 1.86 million in 2017, a sixfold increase in nine years.

Nomura is looking to build up its overseas operations, as the vast majority of its revenue still comes from Japan. (Photo by Ken Kobayashi)

Once the retail business is established, Nomura hopes to expand into serving institutional clients. Company officials say this should flow naturally out of the wealth management business. Since many of those wealthy clients are likely to run their own companies, Nomura bankers should be able to help them take their companies public, make an acquisition or raise capital.

Besides JPMorgan Chase, other Western banks -- including Goldman Sachs, Citigroup, Morgan Stanley and Credit Suisse -- could seek to take advantage of China's less restrictive rules. 

Since he became CEO in 2012, Nagai has said Nomura will become an Asia-based global financial services group. In the interview, he said this can't be done without a strong footprint in mainland China. Nomura already serves some Chinese customers from Hong Kong.

"We all know it is a difficult market, but China is an essential piece," he said.

Nagai explains that there is simply too much wealth being created in China to ignore. According to the IMF, the country's per capita GDP surpassed $10,000 for the first time in 2018, triple the level it was at 10 years ago. This puts China on par with Malaysia, the richest emerging Asian country excluding Singapore.

"When GDP per capita reaches $10,000 to $15,000, wealth starts to accumulate in the household sector. Then it becomes an appropriate environment for us to start [capital market-based] financing business in that country," Nagai said.

In contrast with the bullish view of Nomura's management team, others are more cautious about its prospects.

"In order to survive as a global player, entering the Chinese market is the right strategy," said Koichi Niwa, analyst at Citigroup Global Markets Japan. "But unfortunately, it remains to be seen what tactics will be used to implement it."

A fund manager who holds Nomura's shares was also concerned about how the bank will execute its strategy. "I expected a lot about progress from Nomura's globalization. But I wonder if as an organization they have enough management resources, experience and know-how to advance their business in China."

Post-Lehman leader

Nagai became CEO in 2012, a moment when financial institutions around the world were feeling the aftershocks of the Lehman collapse and the escalating European debt crisis. Nomura was still reeling from its decision in 2008 to acquire the Asian and European operations of Lehman Brothers -- a move that Nomura officials hoped would allow the bank to leapfrog into the ranks of the biggest global players.

Nomura bought the Asian and European operations of Lehman Brothers in hopes of leapfrogging into the ranks of global players. (Photo by Yoshimasa Shimizu)

Instead it resulted in years of pain. Its net loss for the fiscal year ended March 31, 2009 was over 700 billion yen due to the heavy burden of personnel expenses for ex-Lehman bankers and significant write-downs of overseas assets. Its international business recorded heavy losses after that. In 2016, Nomura reportedly cut roughly 1,000 jobs, mainly in the U.S. and Europe.

Still, the experience left Nomura with far more employees. Its head count stands at over 28,000 -- approximately 70% more than in the fiscal year ended March 2007. In Asia, where it took over Lehman's back office work in India, it has expanded to 6,800, 7.5 times more than before.

But there has been no change in the revenue structure, where the majority still comes from domestic operations. In the last fiscal year only its Asian business made a profit -- its U.S. and European operations both recorded losses. Some investors are concerned that when the joint venture starts in China, the upfront investment will squeeze the profitability of Nomura's overall Asian operations, at least for a while.

Former Chairman Kiichiro Kitaura began building Nomura's prized human network in China some 40 years ago.    © Kyodo

Yet Nomura executives insist this international push will fare far better than the Lehman adventure. One reason for this optimism, Iiyama of the China Committee says, is the company's "human network" in China.

In 1979, not long after Deng Xiaoping vowed to open up the Chinese economy, Nomura's then-chairman, Kiichiro Kitaura, visited China. The next year, Nomura began to accept trainees, including aspiring young businesspeople, financiers, politicians and other talented figures from China.

They spent about a year gaining a basic knowledge of Japanese politics, economics and capital markets. After returning to China, they formed influential human networks in various fields. Approximately 1,000 trainees were accepted into the program. One of them is a former executive at Orient International, a large trading company in China and also Nomura's partner in a joint venture.

"Our network of former trainees is a treasure for us," Iiyama said.

"Financial gerontology"

The other competitive edge in China, Iiyama said, is a business that Nomura is already promoting in Japan: financial services for the elderly. Japan is one of the most rapidly aging countries in the world, and now China is suffering from the aftereffects of its one-child policy. Its working-age population has already begun to decline, and there is concern about society aging with insufficient support.

Nomura says its experience serving elderly clients in Japan will prove a valuable asset in China. (Photo courtesy of Nomura)

Nomura has created a team of financial consultants with specialties such as tax and inheritance aimed at Japan's wealthy elderly population. The number of these specialists -- known as "heartful partners" -- has increased from 36 to 180 since last April. The bank is also collaborating with Keio University on a research program focusing on the field of "financial gerontology."

Such specialized services for the elderly "could be applied in China as well," Iiyama said.

Nomura executives also point to the bank's experience accumulated in other Asian countries to show what it has to offer in mainland China. Nomura entered Thailand in 1970 with the assistance of leading local conglomerates and was involved in the establishment of the Stock Exchange of Thailand in 1975.

The bank has also advised on how to modernize the stock market in Thailand. It was one of the first stock brokers to introduce the concept of "investor relations" to the country, especially for small and midsize listed companies.

Weeraphon Simaroj, a fund manager who was attending a recent investment conference in Bangkok, said: "It will be highly appreciated that Nomura puts a focus on small-cap [companies]. This is a good strategy in enhancing reputation in emerging markets."

In the Philippines, Nomura established a joint venture with the biggest local bank, BDO Unibank, and started an online securities business in 2016. Within two years, BDO Nomura is estimated to have reached the No. 2 position in the market by number of accounts.

"In Asia, it is important to maintain a relationship of trust of your joint venture partners. This is our lesson for the Chinese business," Koichi Katakawa, president of BDO Nomura Securities, said.

Yet Nomura's plans for the joint venture in China come as the country faces new headwinds. The trade war between the U.S. and China is becoming more intense, and it casts a dark shadow over the global economy. The yuan and Chinese share prices have fallen this year. And there is concern that China's huge debt pile could lead to financial turmoil.

All of which prompts a question for Nomura: Is it a good time to advance into China?

Vikas Sharma, Nomura's head of Asia, excluding Japan, thinks so. "China is the world's second-largest economy with a growth rate of roughly 6.5%. It's going to add more than $700 billion [to its] GDP this year," he said. "You can't take a short-term view on China."

Nagai says Nomura has a relatively small platform in China considering its stage of economic development. "We aim to rectify that to supplement the missing parts of our global strategy."

One thing is for certain: the biggest securities business group in Japan is ready to go through muddy roads, just like Nagai did in his younger days.

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