Maybe Nomura can't afford its high achievers

There are people at Nomura who've done well in the past three months. However, today's results from the Japanese bank suggest that Nomura may be struggling to pay for them.

As the chart below, from Nomura's presentation, shows, costs (shown by CIR/cost income ratio) accounted for....99% of revenues in its wholesale bank in the first quarter. This was better than the 108% of revenues consumed by costs in the preceding quarter, but in the words of Nomura CFO Takumi Kitamura, it was not "necessarily satisfactory."

Costs and revenues in Nomura's wholesale bank:

Source: Nomura

Nomura's problem is one of falling revenues and rising costs. 

Revenues across Nomura's wholesale bank fell 4% year-on-year in the three months to June. The bank attributed this to poor performance across FX, emerging markets and securitized products as "market participants remained on the sidelines due to macro uncertainty." At the same time, however, costs increased 9% by virtue of an 11% increase in compensation costs and rising spending on business development, IT and commissions. 

Why are compensation costs rising in the wholesale bank while revenues are falling? Nomura attributes the increase to rising base salaries in its international unit, but it might also have something to do with new hiring in equities, the addition of people like Nat Tyce as its global head of markets for EMEA and the accrual of bonuses for people who've done well.  

Nomura's high performers are in its investment banking division. While its declining securitized products revenues seem to be at odds with reports of thriving securitized businesses at the likes of JPMorgan and Barclays, financing revenues are up and M&A revenues are down by less than elsewhere. 

Will Nomura be in a position to reward people who've done well?  CFO Kitamura also said today that the cost situation must be 'dealt with immediately.' We're only three months into the new fiscal year, but unless costs are rapidly cut or revenues make a remarkable recovery, the prognosis is not great.  

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