Nomura (NMR) - 2019 Q4 - Annual Report

PART I Key Information This section provides a five-year summary of Nomura's key financial data and principal risks, including a ¥100.4 billion net loss and (3.7)% ROE in FY2019 Selected Financial Data (Fiscal Years 2017-2019) | Indicator | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Net revenue (¥ millions) | 1,403,197 | 1,496,969 | 1,116,770 | | Income (loss) before income taxes (¥ millions) | 322,795 | 328,158 | (37,701) | | Net income (loss) attributable to NHI shareholders (¥ millions) | 239,617 | 219,343 | (100,442) | | Total NHI shareholders' equity (¥ millions) | 2,789,916 | 2,749,320 | 2,631,061 | | Diluted EPS (¥) | 65.65 | 61.88 | (29.92) | | Return on equity (%) | 8.7% | 7.9% | (3.7)% | - The company faces significant risks from financial market volatility, economic conditions, and geopolitical events which can adversely affect business, revenues, and lead to substantial losses[25] - A one-notch or two-notch downgrade of credit ratings as of March 31, 2019, would have required posting additional collateral of approximately ¥6.2 billion and ¥51.4 billion, respectively[44] - During the fiscal year ended March 31, 2019, the company recognized a goodwill impairment loss of ¥81,372 million in its Wholesale segment, attributable to previous overseas acquisitions[55][74] - On May 28, 2019, the FSA issued a business improvement order to Nomura Holdings and Nomura Securities due to inappropriate information handling, which could damage the company's reputation and business[80] Information on the Company This section outlines Nomura's history, four-division business structure, competitive landscape, and extensive global regulatory environment, including TLAC requirements - Nomura operates through four primary business divisions: Retail, Asset Management, Wholesale, and Merchant Banking, serving a diverse client base including individuals, corporations, and governments[126] - The company faces intense competition from other financial services firms, driven by factors like deregulation in Japan, the rise of online firms, and consolidation of large financial groups[70][71][72] - Nomura is subject to extensive regulation in Japan by the FSA under the FIEA and has been designated as a Final Designated Parent Company and a Domestic Systemically Important Bank (D-SIB)[151][155][204] - Overseas operations are regulated by authorities such as the SEC and CFTC in the U.S., and the PRA and FCA in the U.K. The company is adapting to major regulatory reforms like the Dodd-Frank Act and MiFID II[159][160][178] - Nomura will be subject to Total Loss-Absorbing Capacity (TLAC) requirements in Japan from March 31, 2021, requiring it to hold TLAC of at least 16% of risk-weighted assets, increasing to 18% by 2024[158] Operating and Financial Review and Prospects This section analyzes Nomura's operating results, financial condition, and liquidity, highlighting a 25.4% decrease in net revenue and a ¥100.4 billion net loss in FY2019 Consolidated Financial Performance (FY2019 vs FY2018) | Metric | FY ended Mar 31, 2018 (¥M) | FY ended Mar 31, 2019 (¥M) | Change (%) | | :--- | :--- | :--- | :--- | | Net Revenue | 1,496,969 | 1,116,770 | -25.4% | | Non-interest Expenses | 1,168,811 | 1,154,471 | -1.2% | | Income (Loss) Before Income Taxes | 328,158 | (37,701) | -111.5% | | Net Income (Loss) Attributable to NHI Shareholders | 219,343 | (100,442) | -145.8% | - The decrease in net revenue was primarily driven by lower commissions and net gain on trading in the Retail and Wholesale Divisions[262] - Non-interest expenses decreased slightly, as lower performance-based bonuses were offset by a goodwill impairment charge of ¥81,372 million attributable to the Wholesale segment[267] - The company's liquidity portfolio stood at ¥4,870.5 billion as of March 31, 2019, a decrease from ¥5,134.4 billion in the prior year, but deemed sufficient to meet stress scenario requirements[362][364] - The dividend for the fiscal year was ¥6.00 per share, down from ¥20.00 in the previous year[254][418] Operating Results Nomura's operating performance declined significantly in FY2019, with Retail income down 52.0%, Asset Management down 48.3%, and Wholesale recording a ¥111.4 billion loss Income (Loss) Before Income Taxes by Segment (FY2019 vs FY2018) | Business Segment | FY ended Mar 31, 2018 (¥B) | FY ended Mar 31, 2019 (¥B) | Change (%) | | :--- | :--- | :--- | :--- | | Retail | 103.1 | 49.5 | -52.0% | | Asset Management | 66.2 | 34.2 | -48.3% | | Wholesale | 100.6 | (111.4) | -210.7% | - Retail client assets decreased by ¥3.0 trillion to ¥114.7 trillion as of March 31, 2019, mainly due to market depreciation and net outflows in equities[287] - Assets under management in the Asset Management division increased to ¥51.4 trillion as of March 31, 2019, driven by net inflows, despite market depreciation[296] - Wholesale non-interest expenses increased by 8%, primarily due to the goodwill impairment and one-off expenses related to business portfolio revisions[303] Liquidity and Capital Resources Nomura maintains a robust liquidity and capital position, with a ¥4,870.5 billion liquidity portfolio and a 17.11% Common Equity Tier 1 capital ratio as of March 31, 2019 Liquidity and Capital Metrics (as of March 31, 2019) | Metric | Value | | :--- | :--- | | Liquidity Portfolio | ¥4,870.5 billion | | Total Unsecured Debt (maturing < 1 year) | ¥2,518.8 billion | | Total Long-Term Unsecured Debt | ¥6,483.5 billion | | Common Equity Tier 1 Capital Ratio | 17.11% | | Tier 1 Capital Ratio | 18.28% | | Consolidated Leverage Ratio | 5.03% | - The company's liquidity management framework is designed to ensure sufficient liquidity to meet all obligations for one year under a market-wide stress scenario without raising new unsecured funds[357] - Nomura has been identified as a Domestic Systemically Important Bank (D-SIB) by the FSA, requiring an additional capital charge[204] - Nomura will be required to meet a minimum TLAC requirement of 16% of risk-weighted assets from March 31, 2021, increasing to 18% from March 31, 2024[432] Directors, Senior Management and Employees This section details Nomura's 'Company with Three Board Committees' governance structure, executive compensation totaling ¥1,366 million in FY2019, and global employee headcount of 27,864 - Nomura has adopted a 'Company with Three Board Committees' governance structure, separating management oversight (Board of Directors) from business execution (Executive Officers)[527] Aggregate Compensation for FY2019 | Category | Number of Officers | Basic Compensation (¥M) | Deferred Compensation (¥M) | Total (¥M) | | :--- | :--- | :--- | :--- | :--- | | Directors | 10 | 251 | 42 | 293 | | Executive Officers | 8 | 607 | 466 | 1,073 | | Total | 18 | 858 | 508 | 1,366 | - The primary type of deferred compensation is now Restricted Stock Units (RSUs), introduced in 2018 to align employee and shareholder interests[497] Employee Headcount by Region | Region | March 31, 2018 | March 31, 2019 | | :--- | :--- | :--- | | Japan | 15,819 | 15,852 | | Europe | 3,057 | 2,909 | | Americas | 2,362 | 2,357 | | Asia and Oceania | 6,810 | 6,746 | | Total | 28,048 | 27,864 | Major Shareholders and Related Party Transactions This section identifies BlackRock, Inc. as a major shareholder and details significant related party transactions with Nomura Research Institute (NRI), including ¥54.5 billion in purchases in FY2019 - As of February 6, 2019, BlackRock, Inc. beneficially owned 6.10% of the Company's issued common stock[544] - As of March 31, 2019, U.S. holders held 10.9% of Nomura's outstanding common stock[545] - Nomura held a 39.3% stake in its equity-method affiliate, Nomura Research Institute, Ltd. (NRI), as of March 31, 2019[548] - For the fiscal year ended March 31, 2019, Nomura purchased ¥13,515 million in software/equipment and paid ¥40,965 million for other services to NRI[548] Financial Information This section details Nomura's global legal proceedings, including a $480 million RMBS settlement and an estimated ¥44 billion maximum loss for certain cases - On October 15, 2018, Nomura's U.S. subsidiaries settled an investigation with the DOJ regarding RMBS activities, agreeing to pay $480 million[89][1538] - Nomura faces ongoing civil claims in Italy from Fondazione Monte dei Paschi di Siena (FMPS) and other investors seeking significant damages related to structured financial transactions with Banca Monte dei Paschi di Siena (MPS)[1515][1520][1521] - As of June 25, 2019, the company estimates the aggregate reasonably possible maximum loss for certain legal proceedings, in excess of recognized liabilities, to be approximately ¥44 billion[1505] - In June 2018, a foreign subsidiary experienced a cybersecurity incident involving unauthorized network access, which may result in financial loss from reputational damage, legal liability, and remediation costs[99][1545] Quantitative and Qualitative Disclosures about Market Risk This section details Nomura's comprehensive risk management framework, including market, credit, and operational risks, with a total VaR of ¥4.49 billion as of March 31, 2019 - Nomura's risk management is governed by a Risk Appetite Statement approved by the Executive Management Board, covering capital, liquidity, market, credit, and operational risks[621][622] Value at Risk (VaR) - 99% Confidence, 1-day Horizon | Risk Type | Mar 31, 2018 (¥B) | Mar 31, 2019 (¥B) | | :--- | :--- | :--- | | Equity | 1.21 | 1.07 | | Interest rate | 3.10 | 2.85 | | Foreign exchange | 3.20 | 1.88 | | Total VaR (after diversification) | 6.38 | 4.49 | - Credit risk from derivatives is concentrated with financial institutions. As of March 31, 2019, gross derivative assets were ¥13,332 billion, with a net exposure of ¥223 billion after netting and collateral[1095] Top 5 Country Exposures (as of March 31, 2019) | Country | Exposure (¥B) | | :--- | :--- | | Japan | 2,867 | | United States | 2,562 | | United Kingdom | 500 | | India | 242 | | Germany | 217 | - Operational risk is managed using a 'Three Lines of Defense' model, and regulatory capital for this risk is calculated using the Standardized Approach[687][692] PART II Controls and Procedures This section confirms the effectiveness of Nomura's disclosure controls and internal control over financial reporting as of March 31, 2019, with no material changes reported - Management, including the Group CEO and CFO, evaluated and concluded that the company's disclosure controls and procedures were effective as of March 31, 2019[720] - Based on the COSO framework, management concluded that internal control over financial reporting was effective as of March 31, 2019. This assessment was attested to by the independent registered public accounting firm[721] - No changes in internal control over financial reporting occurred during the fiscal year ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, these controls[722] Principal Accountant Fees and Services This section details fees paid to Ernst & Young ShinNihon LLC, totaling ¥3,925 million in FY2019, primarily for audit services, under the Audit Committee's pre-approval policy Principal Accountant Fees (Millions of yen) | Fee Category | FY ended Mar 31, 2018 (¥ million) | FY ended Mar 31, 2019 (¥ million) | | :--- | :--- | :--- | | Audit Fees | 3,173 | 3,414 | | Audit-Related Fees | 334 | 179 | | Tax Fees | 163 | 293 | | All Other Fees | 211 | 39 | | Total | 3,881 | 3,925 | - The Audit Committee has a pre-approval policy for all audit and non-audit services provided by the principal accountant, utilizing both 'General Pre-Approval' for routine services and 'Specific Pre-Approval' for other engagements[728][729] Purchases of Equity Securities by the Issuer and Affiliated Purchasers This section outlines Nomura's share repurchase activities, including 100 million shares bought back for ¥51.7 billion in FY2019, and a new program for up to 300 million shares or ¥150 billion - During the fiscal year ended March 31, 2019, Nomura purchased a total of 100,020,867 shares, with 100,000,000 shares being part of a publicly announced buyback program[732][734] - The share buyback program authorized on April 26, 2018, for up to 100 million shares or ¥70 billion, was completed during the fiscal year[734] - On June 18, 2019, a new share buyback program was authorized to purchase up to 300 million shares or a maximum of ¥150 billion, effective until March 31, 2020[736] Corporate Governance This section highlights differences between Nomura's Japanese corporate governance practices and NYSE standards, particularly regarding independent directors and shareholder approval for equity compensation - Nomura, as a foreign private issuer, follows Japanese corporate governance practices, which differ from NYSE standards in several areas[739] - Unlike NYSE rules, the Companies Act of Japan does not require a majority of independent directors on the Board, but does require a majority of outside directors on the Audit, Nomination, and Compensation committees, a requirement which Nomura meets[741] - Shareholder approval is generally not required for equity compensation plans like RSUs and SARs under the Companies Act; these are determined by the Compensation Committee[741] - In response to Japan's Corporate Governance Code, Nomura has established and publicly disclosed the 'Nomura Holdings Corporate Governance Guidelines'[742] PART III Financial Statements This section presents Nomura's audited consolidated financial statements for FY2019 and prior years, prepared under U.S. GAAP, including balance sheets, income statements, and detailed notes - The consolidated financial statements are prepared in conformity with U.S. Generally Accepted Accounting Principles (U.S. GAAP)[756][802] - The independent auditor, Ernst & Young ShinNihon LLC, issued an unqualified opinion on both the consolidated financial statements and the effectiveness of internal control over financial reporting as of March 31, 2019[756][764] Consolidated Balance Sheet Summary (As of March 31) | (Billions of yen) | 2018 | 2019 | | :--- | :--- | :--- | | Total Assets | 40,343.9 | 40,969.4 | | Total Liabilities | 37,544.1 | 38,288.6 | | Total NHI Shareholders' Equity | 2,749.3 | 2,631.1 | Consolidated Statement of Income Summary (Year Ended March 31) | (Billions of yen) | 2017 | 2018 | 2019 | | :--- | :--- | :--- | :--- | | Net Revenue | 1,403.2 | 1,497.0 | 1,116.8 | | Income (Loss) Before Income Taxes | 322.8 | 328.2 | (37.7) | | Net Income (Loss) Attributable to NHI Shareholders | 239.6 | 219.3 | (100.4) |