Executive Summary / Key Takeaways

• Recurring Revenue Transformation: Nomura has engineered a structural shift from transaction-dependent earnings to stable fee-based income, with Wealth Management delivering 14 consecutive quarters of net inflows and Investment Management achieving 10 straight quarters of growth, pushing AUM past ¥100 trillion—this matters because it reduces earnings volatility and supports sustainable ROE above 10% even in turbulent markets.

• International Wholesale Turnaround: The Wholesale division has posted nine consecutive quarters of international profitability, with Equities revenue hitting record highs and Investment Banking generating its strongest Q4 performance since 2017—this implies the division is no longer a capital drag but a genuine growth engine that diversifies earnings away from Japan-centric risks.

• Capital Allocation Inflection: The pending Macquarie (MQG) acquisition will consume ¥278.9 billion in cash and depress CET1 by 0.7 percentage points, testing management's commitment to its 50%+ total payout ratio while maintaining the 11-14% CET1 target range—this creates a clear tension between growth investment and shareholder returns that will define the stock's near-term risk/reward.

• Valuation Disconnect: Trading at 1.0x book value with a 5.15% dividend yield and 10.89% ROE, Nomura trades at a discount to global peers despite superior profitability metrics—this suggests the market has yet to price in the earnings quality improvement, though execution risks around the Banking division and regulatory overhangs remain tangible constraints.

Setting the Scene: Japan's Financial Powerhouse Reinvented

Nomura Holdings, founded in 1925 in Tokyo and incorporated as The Nomura Securities Co., Ltd., has spent a century building Japan's most formidable securities franchise. For decades, the company's fortunes rose and fell with trading volumes and market volatility—a classic wholesale-driven model that delivered feast-or-famine earnings and commanded cyclical valuation multiples. That historical DNA matters because it explains why the market remains skeptical of recent improvements, pricing the stock as if the old volatility still dominates.

The company makes money through four distinct engines: Wealth Management (serving Japan's aging affluent population), Investment Management (institutional and retail asset management), Wholesale (global trading and investment banking), and the newly established Banking division (private markets and bespoke products). This segmentation is not merely accounting; it reflects a deliberate strategic pivot toward businesses that generate recurring revenue streams rather than episodic trading gains. The industry structure supports this shift—Japan's households hold over ¥2 quadrillion in financial assets, and the government's NISA expansion is accelerating the flow from savings to investment, creating a multi-decade tailwind for asset gatherers.

Nomura's competitive position is nuanced. Against domestic peers Mitsubishi UFJ Financial Group (MUFG), Sumitomo Mitsui Financial Group (SMFG), and Mizuho Financial Group (MFG), Nomura maintains superior brokerage market share and execution capabilities but lacks their massive deposit-funded balance sheets. Against global bulge-bracket firms like Goldman Sachs , Nomura trails in absolute IB scale but leads in Asia-Pacific equities and derivatives. This positioning matters because it defines the company's moat: deep local relationships and trading expertise that global firms cannot easily replicate, combined with international capabilities that domestic banks cannot match.

Technology, Products, and Strategic Differentiation

The core of Nomura's transformation lies in its Wealth Management division's recurring revenue model. The division has achieved 14 consecutive quarters of net inflows into recurring revenue assets, which reached ¥26.2 trillion in Q2 2026. This is significant because each basis point of fee on these assets flows directly to pretax profit with minimal incremental cost, creating operating leverage that trading revenue cannot match. The 70% recurring revenue cost coverage ratio means these stable fees now cover more than two-thirds of the division's fixed expenses, providing a buffer that allows the firm to maintain profitability even when transaction volumes collapse.

Investment Management's growth to ¥101.2 trillion in AUM reflects a similar dynamic. Ten straight quarters of net inflows, driven by strong demand for US growth stock investment trusts and private credit products, have pushed asset management fees to record highs. The significance here is that asset management is a capital-light business that generates returns on equity far exceeding those of trading operations. The alternative assets under management reaching ¥2.9 trillion is particularly significant—this is higher-margin business that diversifies away from traditional equity and fixed income products, reducing correlation to market beta.

In Wholesale, the self-funding concept represents a fundamental shift in risk management. Rather than relying on parent company capital, the division is designed to fund its own growth through retained earnings and careful RWA management. This is important as it breaks the historical pattern of wholesale divisions consuming capital during downturns. The division's cost-to-income ratio improved to 81% in Q2 2026, and the revenue-to-modified RWA ratio hit 7.6%, beating the 6% target. These metrics imply the division is now a disciplined allocator of capital rather than a black hole for resources.

The Banking division, established April 1, 2025, leverages Nomura Trust and Banking Co. and Nomura Bank Luxembourg to offer private market products and bespoke solutions. While still small at ¥12.9 billion in quarterly revenue, the division's loan outstanding reached ¥1.09 trillion, and the core banking system upgrade completed in May 2025 positions it to launch sweep accounts in FY2026/27. This matters because it creates a new recurring revenue stream that can cross-sell to Wealth Management clients, deepening relationships and increasing wallet share.

Financial Performance & Segment Dynamics

Consolidated results for Q2 2026 tell a story of accelerating momentum. Net revenue reached ¥1,038.8 billion for the six months ended September 30, 2025, with ROE hitting 10.6%—the sixth consecutive quarter achieving the 8-10% target. Excluding the ¥56.1 billion gain from the Takanawa property sale, net revenue was up 10% and net income up 40%, demonstrating underlying earnings power. This matters because it shows the targets are not being met through one-time gains but through sustainable operational improvements.

Wealth Management's Q2 2026 performance validates the recurring revenue thesis. Net revenue grew 10% quarter-on-quarter to ¥116.5 billion, while income before income taxes jumped 17% to ¥45.5 billion—the highest level in nearly a decade. The 39% pretax profit margin reflects both revenue growth and disciplined cost control, with non-interest expenses rising just 1% year-on-year despite inflationary pressures. The division's client assets reached ¥162.3 trillion, up ¥18.5 trillion from March 2025, showing that net inflows are compounding with market appreciation to drive fee growth.

Investment Management delivered a 20% quarter-on-quarter revenue increase to ¥60.8 billion in Q2 2026, with income before income taxes surging 43% to ¥30.7 billion. The investment gain/loss component rose 69% to ¥16.8 billion, driven by valuation improvements at American Century Investments and profits from Nomura Capital Partners. This demonstrates the division's ability to generate both stable management fees and variable performance fees, creating a barbell approach to revenue that captures upside while maintaining a baseline.

Wholesale's Q2 2026 results show the international turnaround gaining steam. Net revenue increased 7% to ¥279.2 billion, with Global Markets up 6% and Investment Banking up 15%. The cost-income ratio improved to 81%, and income before income taxes rose 27% to ¥53.1 billion. Equities revenue hit a record ¥113.8 billion, up 16%, driven by strong derivatives performance in the Americas and higher client activity in Japan. This matters because Equities has become the growth engine within Wholesale, offsetting the more cyclical Fixed Income business and reducing dependence on macro conditions.

Capital ratios remain within target but are tightening. The CET1 ratio was 12.9% at September 30, 2025, down from 13.2% in June due to a ¥660 billion increase in risk-weighted assets to ¥23.5 trillion. Management attributed the RWA growth to "growing business exposure in Global Markets and Investment Banking" and "accumulation of positions commensurate with revenue opportunities." This matters because it signals that the company is deploying capital to capture profitable business, but the 0.7 percentage point impact from the Macquarie acquisition will push CET1 toward the lower end of the 11-14% range, limiting future RWA growth without retained earnings or capital raises.

Outlook, Management Guidance, and Execution Risk

Management's guidance for the Macquarie acquisition remains on track, with closing expected by December 2025. The ¥278.9 billion cash consideration will be funded from internal resources, and integration discussions are proceeding smoothly. This matters because the acquisition adds approximately $180 billion in AUM, instantly scaling Investment Management's global presence and providing cross-selling opportunities to Macquarie's U.S. and European client base. However, management has warned that profit contribution details are under NDA until closing, creating uncertainty about the deal's accretion timeline.

The ROE target of 8-10% is under internal discussion for potential revision upward. CFO Hiroyuki Moriuchi noted that "base earnings power is gradually improving" due to portfolio reforms, but emphasized that "we want to maintain at least the 8%, which is the lower end of the range" even in challenging markets. This suggests management sees the current 10.6% ROE as sustainable through cycles, not a peak. The commitment to a 50%+ total payout ratio while funding the Macquarie acquisition implies confidence in retained earnings generation, but also creates a potential conflict if wholesale revenues normalize faster than expected.

Phishing scam impacts are diminishing but not eliminated. Management reported that "the number and scale of damages have come down greatly from April peak" after implementing a passkey authentication system on October 18, 2025. Q2 2026 included ¥4.8 billion in compensation costs, but management expects "the impact will be much smaller than it has been up through the second quarter." This matters because it removes a material operational risk that could have eroded client trust and increased regulatory scrutiny, though the ¥58 billion maximum potential legal exposure for outstanding proceedings remains a contingent liability.

Market normalization poses a key risk to the Wholesale outlook. Moriuchi acknowledged that "if equities continues to be this strong, then sometime down the road, there will be a point of normalization," but argued that geographical and product diversification makes the division "more tolerant or resistant against downside risk." This matters because Equities revenue has driven Wholesale's outperformance, and any reversion could pressure the division's 81% cost-income ratio if costs don't adjust equally quickly. Management's plan to shift resources back to Fixed Income if Equities normalizes provides a hedge, but the speed of rotation will test execution capabilities.

Risks and Asymmetries

The Macquarie acquisition presents a capital allocation asymmetry. While it expands Investment Management's global footprint, the 0.7 percentage point CET1 impact will leave Nomura with "slightly thin" capital buffers, in Moriuchi's words. At 12.2% pro forma CET1, the company would have minimal buffer above the 11% lower bound, potentially limiting Wholesale's ability to capture "high-quality deals" in volatile markets. This matters because it creates a trade-off: the acquisition improves long-term earnings quality but reduces short-term risk-taking capacity, which could cause Wholesale to miss revenue opportunities if market conditions remain favorable.

Wholesale's concentration risk in structured products and private credit (SPPC) requires selectivity. Moriuchi stated that "concentration risk on SPPC is something we have to be mindful of" and that "the SPPC portion is not going to be grown rapidly from where it is now." This caps growth in a high-margin business but also reduces tail risk. The First Brands failure had "very small" impact and "negligible" exposure, demonstrating effective risk management, but the broader implication is that Nomura must be increasingly selective as the portfolio grows, potentially ceding market share to less disciplined competitors.

Regulatory and legal overhangs remain material despite recent progress. The EU competition law infringement decision from May 2021 regarding European Government Bonds activity and the CFTC civil enforcement action from February 2021 concerning a 2015 interest rate swap transaction represent ongoing regulatory risks. Additionally, Nomura International plc faces investigation by German authorities for possible tax fraud related to "cumex" and "cumcum" trading strategies from 2007-2013. While management has not quantified potential fines, the ¥58 billion aggregate maximum loss estimate for outstanding legal proceedings suggests material downside if these cases escalate.

The Banking division's profitability is being pressured by infrastructure investments. Q2 2026 income before income taxes fell 12% quarter-on-quarter to ¥3.2 billion despite flat revenue, due to depreciation from the core banking system upgrade. This matters because the division's KPIs (loans outstanding, investment trust balance) remain buoyant, but near-term profitability is sacrificed for the FY2026/27 sweep account launch. If the deposit sweep service fails to generate expected fee income, the division could become a drag on group returns rather than the intended growth engine.

Valuation Context

At $7.58 per share, Nomura trades at 1.0x book value and 9.84x trailing earnings, with a 5.15% dividend yield and 10.89% ROE. These metrics matter because they price the stock at a discount to both domestic and global peers despite superior profitability. Mitsubishi UFJ trades at 1.34x book with 6.00% ROE, Sumitomo Mitsui at 0.72x book with 4.80% ROE, and Goldman Sachs (GS) at 2.37x book with 13.53% ROE. Nomura's valuation implies the market still views it as a cyclical trading house rather than the stable asset-gathering franchise the financials demonstrate.

The price-to-sales ratio of 1.97x is lower than that of Japanese megabanks (typically 3.52x-4.19x) and Goldman Sachs (4.26x), reflecting Nomura's hybrid model. However, the operating margin of 26.51% exceeds all Japanese peers and approaches Goldman's 37.20%, suggesting the market underappreciates the cost discipline that has driven the cost-to-income ratio down to 79% in Wholesale and boosted Wealth Management pretax margins to 39%. The 29.39% payout ratio, while below the 50%+ target, still provides a meaningful yield that should support the stock if earnings growth moderates.

Enterprise value of $8.71 billion represents just 0.77x revenue, indicating minimal goodwill or intangible value is priced into the stock. This matters because the Macquarie acquisition will add significant intangible assets and goodwill, potentially creating book value dilution but also establishing a clearer earnings base from asset management fees. The market's focus on tangible book value suggests skepticism about the acquisition's return profile, creating potential upside if integration delivers promised synergies.

Conclusion

Nomura has engineered a fundamental transformation from a volatility-driven trading house to a stable asset-gathering franchise, with recurring revenue streams now covering a majority of fixed costs and international wholesale delivering consistent profits. The 10.6% ROE achieved in Q2 2026, the sixth consecutive quarter hitting the 8-10% target, demonstrates that this is not a cyclical peak but a new baseline of earnings power. The pending Macquarie acquisition will test management's capital allocation discipline, but if executed well, it could accelerate Investment Management's globalization and provide a durable source of fee income.

The stock's valuation at 1.0x book value and 9.84x earnings suggests the market has not yet recognized the quality improvement in Nomura's earnings mix. However, the thesis faces clear execution risks: the CET1 ratio will tighten post-Macquarie, limiting Wholesale's risk-taking capacity; Equities revenue may normalize from record levels; and the Banking division's profitability remains pressured by infrastructure investments. For investors, the critical variables are whether net inflows continue in Wealth and Investment Management, and whether management can maintain ROE above 8% while integrating Macquarie. If these hold, Nomura's quiet revolution should command a premium valuation commensurate with its improved earnings quality.