Lost Bhattal in a bruising industry war

JESSE Bhattal’s departure from Nomura is a moment that shows just how badly wrong things have gone for investment banks even since the financial crisis.

Few banks have escaped the decline, but Nomura’s slide has been exacerbated by the huge cost base it bought by taking on thousands of Lehman staff, as well as giving them sweeteners to stay at the bank.

The bank reported that costs in its global markets division, which absorbed the Lehman acquisitions, ballooned by 30 per cent to ¥417.4bn (£3.5bn) in the year it bought the assets, a rise it has been fighting to reverse ever since.

The case illustrates the perils of failing to recognise that Lehman’s collapse was not a one-off disaster to be followed by a bounce-back, but a fundamental change in the whole industry.

For too long, credit had been too cheap. Regulators have exaggerated the price reversal by applying a swathe of new rules to what had been some of the most profitable activities carried out by Lehman Brothers and its rivals.

Returns on Nomura stock shrank from a dismal 3.6 per cent in 2009 to 1.1 per cent in 2010 and, in the first six months of last year, a loss of 2.7 per cent. The wholesale division recorded a loss of ¥88bn.

Like countless rivals, the bank is reacting by retrenching into more of a focus on domestic retail business.

McKinsey concluded last year that investment banks will have enough difficulty hitting a seven per cent returns target (below their cost of capital), let alone the 13 per cent targets many have floated.

In such an environment, it’s little wonder that Bhattal is cutting his losses and quitting not just the bank, but the industry too.