Nomura (NMR) - 2020 Q4 - Annual Report

PART I Key Information This section provides a five-year summary of Nomura's key financial data, highlighting a rebound in profitability in fiscal year 2020 after a net loss in 2019, and details comprehensive risk factors Selected Financial Data This section presents a five-year summary of Nomura's key financial performance and position from fiscal years 2016 to 2020 Selected Financial Data (Fiscal Years 2016-2020, Billions of Yen) | Indicator | 2016 | 2017 | 2018 | 2019 | 2020 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net revenue | 1,395.7 | 1,403.2 | 1,497.0 | 1,116.8 | 1,287.8 | | Income (loss) before income taxes | 165.2 | 322.8 | 328.2 | (37.7) | 248.3 | | Net income (loss) attributable to NHI shareholders | 131.6 | 239.6 | 219.3 | (100.4) | 217.0 | | Total assets | 40,934.2 | 42,532.0 | 40,343.9 | 40,969.4 | 43,999.8 | | Total NHI shareholders' equity | 2,700.2 | 2,789.9 | 2,749.3 | 2,631.1 | 2,653.5 | | Diluted EPS (Yen) | 35.52 | 65.65 | 61.88 | (29.92) | 66.20 | | Return on equity (ROE) | 4.9% | 8.7% | 7.9% | (3.7%) | 8.2% | Risk Factors The company faces multiple risks in global financial markets, liquidity, credit, competition, and extensive legal and regulatory challenges - The company's business is materially affected by global financial markets and economic conditions, with specific risks highlighted from the COVID-19 pandemic, post-transition Brexit uncertainties, and governmental fiscal and monetary policy changes[25][26][27][28] - Nomura faces significant liquidity risk, defined as the difficulty in securing necessary funding or facing higher funding costs. A credit rating downgrade could increase funding costs and limit access to capital. A one-notch and two-notch downgrade as of March 31, 2020, would require posting approximately 5.5 billion Yen and 64.3 billion Yen in additional collateral, respectively[45][59][64] - The company is exposed to substantial legal, regulatory, and reputational risks. The financial services industry is subject to extensive and increasing regulation globally, which could limit activities and result in significant penalties. For example, U.S. subsidiaries settled an investigation with the DOJ regarding RMBS for 480 million US dollars in October 2018[89][93] - Nomura is subject to new and revised regulations regarding capital adequacy, including Basel III and TLAC requirements. The FSA has identified Nomura as a D-SIB, and it will be subject to TLAC requirements in Japan from March 31, 2021, requiring it to hold TLAC of at least 16% of risk-weighted assets, rising to 18% by March 31, 2024[97][168] - An impairment loss on goodwill of 81.4 billion Yen was recognized in the Wholesale segment for the fiscal year ended March 31, 2019, attributable to previous overseas acquisitions[58] Information on the Company This section details Nomura's corporate history, business structure, and strategic direction, outlining its four main business divisions, competitive landscape, regulatory environment, and management's strategies History and Development of the Company This section outlines Nomura's corporate history, including its spin-off from The Osaka Nomura Bank and its adoption of a holding company structure - Nomura was incorporated on December 25, 1925, as a spin-off from The Osaka Nomura Bank, Ltd. It adopted a holding company structure on October 1, 2001, changing its name to Nomura Holdings, Inc. and listing on the NYSE[123][126][127] - In 2008, Nomura acquired and integrated the operations of Lehman Brothers in Asia Pacific, Europe, and the Middle East to expand its global presence[128] Business Overview This section details Nomura's four main business divisions: Retail, Asset Management, Wholesale, and Merchant Banking, along with strategic priorities and responses to market conditions - Nomura's business consists of four main divisions: Retail, Asset Management, Wholesale, and Merchant Banking[131] - The Retail Division serves individuals and corporations in Japan through a network of 128 branches as of March 2020[134] - The Asset Management Division, led by Nomura Asset Management Co., Ltd. (NAM), had 49.3 trillion Yen in total assets under management as of March 31, 2020[137] - The Wholesale Division comprises Global Markets (sales and trading of fixed income and equity products) and Investment Banking (underwriting and financial advisory). On April 1, 2020, Nomura acquired Greentech Capital, LLC, an M&A boutique focused on sustainable technology[140][149] - Management has adopted Return on Equity (ROE) as a key management indicator, with a medium to long-term target of 8-10% for the fiscal year ending March 2025. The company also targets a Common Equity Tier 1 (CET1) ratio of at least 11%[244][245][246] - In response to the COVID-19 pandemic, management's urgent priorities include maintaining market functions, ensuring employee and client safety, supporting economic recovery, and maintaining a robust financial position[232][233][234] Organizational Structure This section outlines Nomura Holdings, Inc.'s significant subsidiaries and their respective countries of incorporation - The report lists Nomura Holdings, Inc.'s significant subsidiaries and their respective countries of incorporation, including Nomura Securities Co., Ltd. (Japan), Nomura International plc (U.K.), and Nomura Securities International, Inc. (U.S.), all of which are 100% owned[262][263] Property, Plants and Equipment This section provides an overview of Nomura's owned land, buildings, and equipment as of March 31, 2020 - As of March 31, 2020, the aggregate book value of land and buildings owned by Nomura was 121 billion Yen, and the book value of equipment was 36 billion Yen[266] Operating and Financial Review and Prospects This section provides a detailed analysis of Nomura's financial performance for the fiscal year ended March 31, 2020, covering the challenging business environment, segment results, critical accounting policies, and robust liquidity and capital management Operating Results This section details Nomura's financial performance for the fiscal year ended March 31, 2020, highlighting a significant recovery in net income and ROE, driven by increased net revenue and decreased non-interest expenses - For the fiscal year ended March 31, 2020, Nomura's net revenue increased by 15.3% YoY to 1,287.8 billion Yen, and net income attributable to shareholders was 217.0 billion Yen, a significant recovery from a loss of 100.4 billion Yen in the previous year. ROE improved to 8.2% from (3.7%)[286][296] - The increase in net revenue was primarily driven by higher Commissions and Net gain on trading. Other revenue also increased significantly, mainly due to a realized gain of 73.3 billion Yen from the partial sale of Nomura's investment in Nomura Research Institute, Ltd[296][298] - Non-interest expenses decreased by 10.0% YoY to 1,039.6 billion Yen, largely due to the absence of the 81.4 billion Yen goodwill impairment charge that was recorded in the previous fiscal year[286][302] Retail Division Operating Results (Millions of Yen) | | FY 2019 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Net revenue | 339,480 | 336,359 | (0.9)% | | Non-interest expenses | 289,990 | 286,926 | (1.1)% | | Income before income taxes | 49,490 | 49,433 | (0.1)% | Asset Management Division Operating Results (Millions of Yen) | | FY 2019 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Net revenue | 97,845 | 92,605 | (5.4)% | | Non-interest expenses | 63,660 | 63,833 | 0.3% | | Income before income taxes | 34,185 | 28,772 | (15.8)% | Wholesale Division Operating Results (Millions of Yen) | | FY 2019 | FY 2020 | % Change | | :--- | :--- | :--- | :--- | | Net revenue | 555,388 | 648,619 | 16.8% | | Non-interest expenses | 666,787 | 556,399 | (16.6)% | | Income (loss) before income taxes | (111,399) | 92,220 | — | Liquidity and Capital Resources This section details Nomura's liquidity management, capital adequacy, and credit ratings, highlighting its robust financial position and dividend policy - Nomura maintains a liquidity portfolio of cash and highly liquid, unencumbered securities to meet potential requirements. As of March 31, 2020, this portfolio totaled 5,354.4 billion Yen, an increase from 4,870.5 billion Yen a year prior[384][386] Leverage Ratios | Ratio | March 31, 2019 | March 31, 2020 | | :--- | :--- | :--- | | Leverage ratio | 15.6 x | 16.6 x | | Adjusted leverage ratio | 9.0 x | 10.6 x | Consolidated Capital Adequacy Ratios (Basel III) | Ratio | March 31, 2019 | March 31, 2020 | | :--- | :--- | :--- | | Common equity Tier 1 capital ratio | 17.11% | 15.34% | | Tier 1 capital ratio | 18.28% | 16.40% | | Consolidated capital adequacy ratio | 18.60% | 16.60% | - The total annual dividend for the fiscal year ended March 31, 2020, was 20 Yen per share, consisting of an interim dividend of 15 Yen and a year-end dividend of 5 Yen[287][447] Credit Ratings as of May 28, 2020 | Agency | Nomura Holdings, Inc. (Long-term) | Nomura Securities Co., Ltd. (Long-term) | | :--- | :--- | :--- | | S&P Global Ratings | BBB+ (Stable) | A- (Stable) | | Moody's | Baa1 (Negative) | A3 (Negative) | | Fitch Ratings | A- (Stable) | A- (Stable) | Tabular Disclosure of Contractual Obligations This section presents a detailed breakdown of Nomura's contractual obligations as of March 31, 2020, categorized by type and maturity Contractual Obligations as of March 31, 2020 (Millions of Yen) | Obligation Type | Total Contractual Amount | Less than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years | | :--- | :--- | :--- | :--- | :--- | :--- | | Long-term borrowings | 7,720,941 | 778,008 | 1,224,258 | 1,645,653 | 4,073,022 | | Contractual interest payments | 458,021 | 74,270 | 125,210 | 91,478 | 167,063 | | Operating lease commitments | 215,916 | 41,270 | 56,349 | 43,751 | 74,546 | | Purchase obligations | 126,949 | 20,523 | 35,720 | 8,392 | 62,314 | | Commitments to extend credit | 2,247,433 | 1,399,086 | 139,295 | 167,322 | 541,730 | Directors, Senior Management and Employees This section provides details on Nomura's corporate governance, including its directors, executive officers, board practices, compensation framework, and employee numbers by region Compensation This section outlines Nomura's compensation framework, which links variable pay to performance and includes deferred components like RSUs to align interests with shareholders - Nomura's compensation framework consists of fixed compensation (base salary, allowances) and variable compensation (cash bonuses, deferred compensation) linked to group, divisional, and individual performance[512][513] Aggregate Compensation for Fiscal Year Ended March 31, 2020 (Millions of Yen) | Category | Number of Officers | Basic Compensation | Bonus | Deferred Compensation | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | Directors | 8 | 253 | 100 | 15 | 368 | | (Outside Directors) | (6) | (129) | (—) | (—) | (129) | | Executive Officers | 8 | 538 | 560 | 203 | 1,301 | | Total | 16 | 813 | 638 | 218 | 1,669 | - Deferred compensation awards, primarily Restricted Stock Units (RSUs), are used to align employee interests with shareholders, increase retention, and encourage long-term value creation. The deferral period is generally three or more years[521][522][527] Board Practices This section describes Nomura's "Company with Three Board Committees" corporate governance structure, which separates management oversight from business execution - Nomura has adopted a "Company with Three Board Committees" corporate governance structure, separating management oversight from business execution. This includes a Nomination Committee, an Audit Committee, and a Compensation Committee, each with a majority of outside directors[555][556] Employees This section provides a breakdown of Nomura's employee numbers by geographic region for the fiscal years 2018 to 2020 Number of Employees by Region | Region | March 31, 2018 | March 31, 2019 | March 31, 2020 | | :--- | :--- | :--- | :--- | | Japan | 15,819 | 15,852 | 15,748 | | Europe | 3,057 | 2,909 | 2,691 | | Americas | 2,362 | 2,357 | 2,120 | | Asia and Oceania | 6,810 | 6,746 | 6,070 | | Total | 28,048 | 27,864 | 26,629 | Major Shareholders and Related Party Transactions This section identifies Nomura's major shareholders and details significant related party transactions, primarily with Nomura Research Institute, Ltd Major Shareholders This section identifies the major shareholders of Nomura Holdings, Inc. with reported ownership exceeding 5% - As of February 5, 2020, BlackRock, Inc. was reported to own 5.80% of the Company's common stock[573] - As of February 12, 2020, Sumitomo Mitsui Trust Holdings, Inc. was reported to own 5.10% of the Company's common stock[574] Related Party Transactions This section details significant transactions between Nomura and its related parties, primarily focusing on its equity-method affiliate, Nomura Research Institute, Ltd - Nomura is a major client of its equity-method affiliate, Nomura Research Institute, Ltd. (NRI). For the year ended March 31, 2020, Nomura purchased 17.7 billion Yen in software/equipment and paid 45.9 billion Yen for other services to NRI[577][578] Financial Information This section addresses Nomura's involvement in various global legal proceedings and investigations, including an estimated aggregate reasonably possible maximum loss for certain cases, and references the company's dividend policy - Nomura is involved in numerous legal proceedings and investigations globally. For certain cases where a loss is reasonably possible, the company estimates the total aggregate reasonably possible maximum loss in excess of any recognized liability to be approximately 53 billion Yen as of June 30, 2020[1599] - A significant legal matter involves a criminal trial in Milan related to structured finance transactions with Banca Monte dei Paschi di Siena (MPS). In November 2019, a court found two former NIP employees guilty and imposed a fine of 3.45 million Euros on NIP and ordered confiscation of 88 million Euros. NIP is assessing its options, including an appeal[1615][1616] - On May 28, 2019, Nomura Securities Co., Ltd. (NSC) and the Company received business improvement orders from Japan's FSA due to improper communication of information, which has led to a loss of some business opportunities[1637] Quantitative and Qualitative Disclosures about Market Risk This section details Nomura's comprehensive risk management framework, covering market, credit, and operational risks, and outlines key metrics and processes for managing each risk category - Nomura's risk management framework is based on a Risk Appetite Statement approved by the Executive Management Board (EMB), covering capital adequacy, liquidity, financial risk, and non-financial risk[650][651] Value at Risk (VaR) - 99% confidence, 1-day horizon (Billions of Yen) | Metric | FY 2018 | FY 2019 | FY 2020 | | :--- | :--- | :--- | :--- | | VaR at March 31 | 6.38 | 4.49 | 25.31 | | Maximum daily VaR | 8.98 | 10.61 | 32.89 | | Average daily VaR | 4.25 | 4.58 | 6.67 | | Minimum daily VaR | 3.05 | 3.05 | 3.62 | - The significant increase in VaR as of March 31, 2020, reflects heightened market volatility due to the COVID-19 pandemic[686] Top 10 Country Exposures (As of March 31, 2020, Billions of Yen) | Country | Exposure (Billions of Yen) | | :--- | :--- | | United States | 4,880 | | Japan | 2,713 | | United Kingdom | 710 | | India | 210 | | Singapore | 207 | | France | 144 | | South Korea | 130 | | China | 116 | | Hong Kong S.A.R. | 113 | | Saudi Arabia | 106 | PART II Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of March 31, 2020, despite the shift to remote work due to COVID-19 - Management concluded that as of March 31, 2020, the company's disclosure controls and procedures were effective[754] - Based on an evaluation using the COSO framework, management concluded that internal control over financial reporting was effective as of March 31, 2020. This was attested to by the independent registered public accounting firm[755] Purchases of Equity Securities by the Issuer and Affiliated Purchasers During the fiscal year ended March 31, 2020, Nomura repurchased nearly 300 million shares under a share buyback program authorized on June 18, 2019 - On June 18, 2019, the Board of Directors authorized a share buyback program of up to 300,000,000 shares or a maximum of 150 billion Yen, to be completed by March 31, 2020[770] Share Repurchases for the Year Ended March 31, 2020 | Metric | Value | | :--- | :--- | | Total Shares Purchased | 299,381,781 | | Average Price Paid per Share | 501 Yen | | Total Shares Purchased as Part of Program | 299,362,300 | PART III Financial Statements This section indicates that the required financial information is set forth in the consolidated financial statements included in the annual report Exhibits This section lists all the exhibits filed with the annual report, including the Articles of Incorporation, various committee regulations, the Deposit Agreement for ADSs, certifications by the CEO and CFO, and the consent of the independent registered public accounting firm Consolidated Financial Statements Report of Independent Registered Public Accounting Firm Ernst & Young ShinNihon LLC issued an unqualified opinion on Nomura's consolidated financial statements and the effectiveness of its internal control over financial reporting, highlighting critical audit matters related to valuation and provisions - The independent auditor, Ernst & Young ShinNihon LLC, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[796][797][809] - Critical audit matters highlighted by the auditor included: - Valuation of less liquid (Level 3) financial instruments, which was complex due to subjectivity and the impact of COVID-19 - Assessment of the valuation allowance for deferred tax assets, which involved significant judgment regarding future taxable income - Provisions for conduct and litigation, which required subjective judgment to assess the probability and estimability of losses[800][801][803] Consolidated Balance Sheets Nomura's total assets increased to 44.00 trillion Yen as of March 31, 2020, primarily due to a rise in trading assets, while total liabilities also grew, and shareholders' equity saw a slight increase Consolidated Balance Sheet Highlights (Millions of Yen) | | March 31, 2019 | March 31, 2020 | | :--- | :--- | :--- | | Total assets | 40,969,439 | 43,999,815 | | Total cash and cash deposits | 3,261,869 | 3,874,948 | | Trading assets and private equity and debt investments | 14,385,789 | 16,898,100 | | Total liabilities | 38,288,646 | 41,268,551 | | Securities sold under agreements to repurchase | 15,036,503 | 16,349,182 | | Long-term borrowings | 7,915,769 | 7,775,665 | | Total NHI shareholders' equity | 2,631,061 | 2,653,467 | Consolidated Statements of Income For the fiscal year ended March 31, 2020, Nomura reported a significant turnaround to profitability with net revenue of 1,287.8 billion Yen and net income attributable to NHI shareholders of 217.0 billion Yen Consolidated Income Statement Summary (Millions of Yen) | | FY 2018 | FY 2019 | FY 2020 | | :--- | :--- | :--- | :--- | | Net revenue | 1,496,969 | 1,116,770 | 1,287,829 | | Commissions | 373,313 | 293,069 | 308,805 | | Net gain on trading | 442,885 | 342,964 | 356,609 | | Total non-interest expenses | 1,168,811 | 1,154,471 | 1,039,568 | | Income (loss) before income taxes | 328,158 | (37,701) | 248,261 | | Net income (loss) attributable to NHI shareholders | 219,343 | (100,442) | 216,998 | Notes to the Consolidated Financial Statements The notes provide detailed explanations of Nomura's accounting policies and financial figures, covering fair value measurements, derivative instruments, segment reporting, regulatory capital, and the impact of new accounting standards - Nomura adopted ASC 842 "Leases" from April 1, 2019, resulting in the recognition of 169.3 billion Yen in right-of-use assets and 163.7 billion Yen in lease liabilities on the consolidated balance sheet[978] - The upcoming adoption of ASC 326 "Measurement of Credit Losses" from April 1, 2020, is expected to result in a cumulative effect adjustment to decrease Retained earnings, net of tax, by 18.2 billion Yen[980] - As of March 31, 2020, Level 3 financial assets (valued using significant unobservable inputs) were 949 billion Yen, representing approximately 5% of total financial assets measured at fair value[360][1014] - In a subsequent event, on May 29, 2020, a rights conversion for the Tokyo Nihonbashi redevelopment project became effective. Nomura expects to record an income before income taxes of approximately 70 billion Yen from this event in the first quarter of the fiscal year ending March 31, 2021[1667][1669]