Published July 26, 2012
Nomura Holdings Inc CEO Kenichi Watanabe resigned on Thursday over a widening insider trading scandal and will be replaced by company veteran Koji Nagai, as Japan's top investment bank warned additional cases could come to light.
The management shake-up was confirmed in a news conference at the end of a dramatic day in Tokyo that also saw Watanabe's top lieutenant, Takumi Shibata, resign over leaks of insider information to clients of its securities unit in 2010.
Watanabe is the second global bank boss to resign this month - Barclays (BCS) chief Bob Diamond stood down over the Libor rate-rigging scandal on July 3 - as the industry finds itself under huge political and regulatory pressure.
The departure of Watanabe and Shibata, the architects of Nomura's takeover of the Asian and European assets of Lehman Brothers, raises questions about the future of the global expansion strategy they pursued.
Nagai, a three-decade company veteran who took over as head of the Nomura's domestic securities unit in April as part of a management reshuffle, said he would map out a "new global strategy". He said he had no intention of dropping Nomura's ambition of being a global investment bank centered in Asia, but suggested he may pursue further restructuring overseas.
"We will make bold choices of what we will focus on. We will not simply stick to how we did things in the past," he said.
In an update on its own investigation into the scandal, Nomura said there was a "high possibility" that it leaked inside information on additional share offerings to clients beyond the three cases already unearthed by Japanese regulators.
The resignations of Watanabe and Shibata, Nomura's chief operating officer, and their replacement by Nagai and Atsushi Yoshikawa, the head of its U.S. operations, would take effect on August 1, the bank said.
Nomura's shake-up comes a month after the bank cut pay for both of its top executives in response to the third insider trading scandal since Watanabe, who joined the bank in 1975, took the helm four years ago.
"When you look at their history, the number of scandals, this was the last straw," said Jim Sinegal, an analyst with Morningstar research house.
Investors reacted positively, bidding Nomura shares up nearly 6 percent ahead of its fiscal first quarter earnings, which saw the bank report a net profit of 1.89 billion yen ($24.2 million), against a profit of 17.7 billion yen in the same period last year. The consensus of eight analysts was for a profit of 500 million yen. Earnings were hit by slumping mutual fund sales and stock trading commissions.
At the start of a news briefing on the results, CFO Junko Nakagawa apologized for the scandal and promised to bolster internal controls.
"I can't say that there is no impact on our earnings," she said. "It is difficult at this stage to numerically estimate the possible damage. All we want to do is make efforts to regain trust."
Nagai joined Nomura in 1981 after graduating from the law department of Chuo University, gaining experience in both retail and corporate banking as he rose up the ranks.
AT LOGGERHEADS WITH REGULATORS
The resignation of Watanabe, 59, had been expected by many inside Nomura since signs emerged that the bank's leadership was at loggerheads with Japan's financial regulators, which accused Nomura of being slow to respond to an investigation into insider trading practices that had grown rampant in the Tokyo market.
The global investment banking sector has been battered in recent months by falling trading and advisory income as clients pull back from markets due to the euro zone crisis, and by political calls for a change of culture after a string of scandals.
Watanabe and Shibata oversaw the troubled 2008 attempt to absorb assets of failed U.S. bank Lehman Brothers and a key question for their successors will be whether to follow their ambitious plans for worldwide expansion.
That strategy was dealt a blow earlier this year with the abrupt departure of Jasjit Bhattal, Lehman's former Asia Pacific CEO who helped broker the deal.
Global rivals Goldman Sachs <GS.N> and Credit Suisse Group <CSGN.VX> twinned their quarterly reports with additional restructuring, but CFO Nakagawa said Nomura had no plans for additional cost cuts on top of the $1.2 billion savings drive launched last year.
Moody's Investors Service cut its debt rating on Nomura to one notch above speculative or "junk" grade in March, citing concerns about the long-term profitability of its overseas operations.
Nomura booked a pretax loss of 12.1 billion yen in the latest quarter overseas, but that was about half the loss in the previous quarter - suggesting the cost-cutting plan is starting to bear some fruit.
The scandal that brought down the bank's leaders dates back to 2010. Nomura has confirmed it was the source of leaks on planned share offerings by energy firm Inpex <1605.T>, Mizuho Financial Group <8411.T> and Tokyo Electric Power <9501.T>.
In all three cases, employees in its institutional sales department provided the tip-offs.
A panel of attorneys brought in by Nomura to investigate the insider trading cases said it found equity sales staff would regularly pump colleagues for inside information about upcoming stock offerings and then share tips with investors.
Nomura is awaiting possible sanctions from Japan's Financial Services Agency but the scandal has already cost it clients.
Some asset managers have stopped trading with the firm to meet their own compliance rules and it has lost underwriting business, including being left off the government's sale of $6 billion worth of Japan Tobacco <2914.T> shares.
Shares of Nomura have fallen in value by more than a third since the first insider trading case emerged in March. That compares with a 10 percent fall in the Japanese securities sub-index <.IFINS.T> during the same period.
Scandals have forced Nomura to change executive leadership twice since the collapse of Japan's asset bubble. In 1991, then-President Yoshihisa Tabuchi resigned after the brokerage admitted to compensating favored clients for stock losses.
In 1997, President Hideo Sakamaki stepped down after the bank was found to have channeled more than $3 million to a gangster in order to keep him from raising trouble at its 1995 shareholder meeting.
(Additional reporting by Mayumi Negishi and Jochelle Mendonca; Writing by Kevin Krolicki in Tokyo and Alex Richardson in Singapore; Editing by Dean Yates)