June 16 (Bloomberg) -- Nomura Holdings Inc.’s European unit will return to profit by the end of 2012 after four consecutive quarterly losses, the head of the lender’s investment banking and global markets unit said.
“Over the next 18 months, we will start to see a noticeable improvement in our performance in regards to profitability,” Jesse Bhattal, chief executive officer of Nomura’s wholesale division, said in an interview in London.
The bank’s bid to expand globally by buying Lehman Brothers Holdings Inc.’s operations in Europe and Asia in 2008 has so far failed to boost profit. The Tokyo-based brokerage said in April net income fell 35 percent in the three months through March as its European unit posted a loss. Nomura has slumped about 74 percent in Tokyo trading since the $250 million acquisition.
Bhattal, 54, is seeking to return the division to profit by reducing costs and reallocating capital from unprofitable units such as commodities to areas such as equity derivatives and interest rates that produce higher returns. The lender is also trying to muscle in on the largest mergers and acquisitions. Bhattal cited Nomura’s role in advising International Power Plc during the reverse takeover by France’s GDF Suez SA last year.
“When we start to see the benefit of the very aggressive cost discipline that we’ve started to institute over the last 12 months, that will bolster earnings,” Bhattal said in the interview at Nomura’s London office last week.
Nomura expects to boost the whole bank’s return on equity, a measure of profitability, to between 7 percent and 9 percent within the next 18 months, Bhattal said. Nomura’s ROE was 1.4 percent last year, according to data compiled by Bloomberg.
“The Lehman businesses here took almost two decades to build and they had reached critical mass,” Bhattal said. “What history has taught us is that the ability to build businesses and platforms purely organically is reasonably difficult.” The purchase “was almost too good an opportunity to pass up.”
Barclays Plc, which bought Lehman’s U.S. operations, had a group ROE of about 7.2 percent in 2010, and plans to almost double it to 13 percent by 2013. Britain’s second-biggest lender by assets has dropped about 29 percent in London trading since the acquisition.
“Nomura’s got a lot of headwinds,” said Christopher Wheeler, a London-based banking analyst at Mediobanca SpA, who covers securities firms. “Markets are very difficult at the moment, and the competition for market share is going to be fierce.”
Nomura said in April net income fell last quarter to 11.9 billion yen ($150 million) after a 10.1 billion yen loss in Europe. Its operations in Japan, where it gets most of its revenue, and the U.S. were both profitable in the period.
Nomura is the 17th-ranked adviser on European mergers this year, down one spot from 2010, according to data compiled by Bloomberg. The firm is the 10th-placed manager of stock offerings in Europe, up 11 spots from last year, the data show. In Japan, the bank has been the top-ranked adviser on mergers for the past five years.
Nomura earned about $182 million in investment banking fees in western Europe last year, according to New York-based research firm Freeman & Co. Lehman and Nomura earned a combined total of about $569 million in the region in 2007, Freeman said.
About half of Nomura’s revenue in the region comes from structured products such as equity derivatives that aren’t included in league tables, according to Bhattal.
“The classic fee pool isn’t going to change very much in the next five years,” Bhattal said. Revenue “is actually going to migrate towards the invisible sphere until such time as there’s greater regulatory clarity.”
Nomura has kept the proportion of revenue it pays out as compensation “steady” at about 46 percent, Bhattal said.
Cost discipline “coupled with the core embedded profitability that exists within both the wholesale business in Japan, as well as the asset management and retail businesses, should bolster earnings quite significantly from a three to five-year perspective,” Bhattal said.
Bhattal, a former Rhodes Scholar at Oxford University, joined Lehman in 1993 and was most recently chairman of its Asian business. He took over as president of a new wholesale division in March last year, becoming the first non-Japanese member of the bank’s 14-member executive management committee.
Bhattal’s post was created in part to help stem a flow of departures of former Lehman bankers. Christian Meissner, deputy global investment banking head, quit in April last year, less than two years after he helped arrange the sale to the Japanese company. Other dealmakers to have quit include London-based mergers banker Adrian Mee and joint head of global equities Rachid Bouzouba.
Since starting the wholesale division, departures have been “fairly few” Bhattal said. “We are very happy and it’s a stable team. Our attrition statistics are vastly better than last year and, in fact, better than the industry average.”
The bank has now nearly completed its hiring in the region, Bhattal said. The firm appointed 800 bankers in Europe last year, including 55 managing directors. It has also built a U.S. division over the past 18 months that employs about 2,000 people, Bhattal said.
“There are certain of our core countries in which we need to add some muscle, namely China, Australia and India,” Bhattal said. “In Europe, the Middle East and Africa, it’s very selective, because there our investment for the first two years was quite front-loaded.”
--Editor: Edward Evans, Russell Ward.
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