Fitch Ratings has affirmed at 'A-' the Long-Term Issuer Default Ratings (IDRs) on Nomura Holdings, Inc. (NHI) and its wholly owned subsidiaries, Nomura Securities Co., Ltd. (NSC) and Nomura Financial Products & Services, Inc. (NFPS).

The Outlook is Stable. The Viability Ratings (VRs) for NHI and NSC, jointly referred to as Nomura, have also been affirmed at 'bbb+'.

Key Rating Drivers

GSR-Driven Long-Term IDRs: Nomura's IDRs are driven by Fitch's assessment of support from the Japanese authorities, which is reflected in its 'a-' Government Support Rating (GSR). The Stable Outlook reflects our expectation that the GSR will remain at least at 'a-' while Japan's sovereign rating (A/Stable) is in the 'A' rating category. We have assigned the Short-Term IDR at the higher of the two options mapped to the Long-Term IDR to reflect Fitch's expectation that government support is more certain in the short term.

Nomura's VRs are underpinned by its franchise strength in Japan, capitalisation and funding profile. Profitability remains the key rating weakness in the face of a difficult operating environment (OE) and structural challenges.

Sovereign's High Propensity to Support: Fitch believes the Japanese government has a very high probability of supporting the financial system, especially the country's systemically important financial institutions, if needed. Fitch is therefore likely to equalise Nomura's GSRs with Japan's Long-Term IDRs if the sovereign rating is downgraded to 'A-'. However, we expect the one-notch difference to remain when Japan is rated at 'A' or 'A+'.

The GSRs between the parent and subsidiaries are equalised based on the consolidated supervision by Japanese authorities under the Financial Instruments and Exchange Act. This, combined with the interconnectedness of Nomura within the group, leads Fitch to believe the authorities would extend financial assistance directly, if required, to the holding company and that support would flow through to core subsidiaries.

Challenging OE: The Japanese securities industry faces structural challenges with a steady but slower economic recovery than our earlier expectation, in light of inflationary pressure and a very weak outlook on low growth globally. This is reflected in the negative outlook on the 'a' OE factor score, which is also constrained by Japan's sovereign rating.

Profitability a Rating Weakness: The negative outlook on the 'bbb' factor score reflects Fitch's view that NHI's earnings will remain under pressure in the financial year ending March 2023 (FYE23) and FYE24 from low transaction volume and slow capital market activity as rising economic uncertainties around inflation and monetary policies weaken investor sentiment.

Strong Domestic Franchise: Nomura has franchise strength in Japan and a diverse wholesale business with a global presence, which is reflected in NHI's business profile factor score of 'bbb+'. We expect a gradual change in Nomura's business model as it shifts away from a market-sensitive transaction-oriented model to focus on client-centric solutions and advisory businesses to improve its earnings quality.

Strengthening Risk Control: Fitch believes Nomura has a larger risk appetite than its Japanese peers, especially in overseas markets, as reflected in the 'bbb+' risk profile factor score. The company is continuing efforts to strengthen its risk-management framework, control and culture to improve its overall risk profile.

Market-Sensitive Assets: We believe Nomura's assets will remain susceptible to market volatility, as reflected in NHI's 'bbb+' asset-quality factor score. Nomura's strengthening of its risk framework includes measures to reduce risks for its diverse assets. The average value at risk (99% confidence interval, one-day holding period)/tangible equity ratio fell to 0.21% at end-December 2022, from 0.29% in FYE22 and 0.52% in FYE21.

Sound Capital: Fitch expects Nomura to maintain adequate capitalisation, with an 'a-' capitalisation and leverage factor score, relative to its risk profile. We believe it will keep its common equity Tier 1 (CET1) ratio above 16%, from 16.01% at end-December 2022, by controlling risk-weighted assets. This level compares favourably with that of many global universal banks and broker-dealer peers.

Stable Funding Structure: We believe Nomura will maintain a stable funding profile of 'bbb+' with diversified funding sources and a longer debt maturity profile to mitigate its reliance on market-sensitive wholesale funding. Nomura also has a sound liquidity position and access to unsecured liquidity facilities from the Bank of Japan.

NHI's and NSC's VRs Equalised: NHI oversees and centrally manages the group's capital and liquidity. Fitch believes the two companies share a similar risk profile with a flat group structure. NSC is the single core operating subsidiary focused on the domestic market. Fitch applies Bank Rating Criteria and Non-Bank Financial Institutions Rating Criteria to assess Nomura's VRs. This is due to Nomura's important role in the local financial system, domestic regulatory oversight, access to lender-of-last-resort facilities and designation as a domestic systemically important financial institution by the authorities.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

GSR

Any weakening of our assumptions about the sovereign's propensity or ability to provide timely support to Nomura or a downgrade of the sovereign's Long-Term IDR to 'BBB+' or below.

Long-Term IDR

A downgrade of the GSR.

Short-Term IDR

A downgrade of Long-Term IDR to 'BBB' and below.

VR

Nomura's VRs are sensitive to challenges in the OE, such as negative GDP growth with a substantial delay in recovery and disruptions in the financial market. A material impact could lead us to revise the OE factor score by two notches to 'bbb+' and would likely result in a downgrade of the VRs. However, this is not our base case, given the current 'a/negative' OE factor score.

The VRs are likely to remain resilient in the absence of a downward revision to the OE score.

Developments that could lead to negative rating action include a combination of non-financial and financial key rating drivers: 1) an inability to improve profitability on a sustainable basis, measured by an operating profit/average equity ratio consistently below 7.0% (5.0% at 3QFYE23, 5.8% at FYE22 and 7.6% at FYE21); 2) a deterioration in capitalisation, as reflected in a CET1 ratio consistently below 14.0% (16.0% at end-December 2022); and 3) a material downward revision of our assessment of Nomura's business profile, such as a shift to a more volatile business model and an increase in risk appetite.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

GSR

An upgrade of the sovereign rating.

Long-Term IDR

An upgrade of the GSR or an upgrade of the VR to above the GSR.

VR

A combination of the following: improvement in stability and level of profitability, evident from the operating profit/average equity ratio remaining above 15%; maintaining sound risk buffers, such as a CET1 ratio above 15%; and sound liquidity such as a net adjusted leverage ratio - defined as tangible assets less reverse repo and securities borrowed over tangible equity - of below 10.0x (end-December 2022: 9.47x).

DEBT AND OTHER INSTRUMENT RATINGS: KEY RATING DRIVERS

The ratings of NHI's senior unsecured notes are driven by its Long-Term IDR.

The ratings on Nomura Bank International plc's (NBI) and Nomura International Funding Pte. Ltd.'s (NIF) guaranteed senior notes and programme are aligned with the IDRs of the guarantor, Nomura.

The rating on NBI's senior unsecured euro commercial paper and euro certificate of deposit programme is aligned with the IDRs of Nomura, the guarantor.

DEBT AND OTHER INSTRUMENT RATINGS: RATING SENSITIVITIES

A downgrade or upgrade of NHI's Long-Term IDR would lead to a similar rating action on the ratings of NHI's senior unsecured notes.

A downgrade or upgrade of the guarantor's IDRs would lead to a similar rating action on the ratings of NBI's and NIF's guaranteed programme and notes. Any change in Fitch's view on the contract of guarantee from Nomura could lead to a downgrade on the notes.

SUBSIDIARY AND AFFILIATE RATINGS: KEY RATING DRIVERS

Equalised with Parent: The Long-Term IDRs of NFPS are equalised with the IDRs of its ultimate parent. NPFS's Shareholder Support Rating of 'a-' takes into account Fitch's belief that there is a very high probability of support from Nomura, if necessary, given the high degree of integration between NFPS and key entities within the group.

NFPS performs a critical role by providing a platform to book multiple-currency transactions in the group's global wholesale unit. The government is very highly likely to provide support to Nomura if the group were to face severe financial difficulties, and such support is likely to flow through to NFPS in light of its critical role.

SUBSIDIARY AND AFFILIATE RATINGS: RATING SENSITIVITIES

NFPS's Shareholder Support Rating

A downgrade or upgrade of Nomura's Long-Term IDR would lead to a similar rating action on NFPS's Shareholder Support Rating and the Long-Term IDR.

A deterioration in Nomura's ability or propensity to support NFPS, including due to a decline in ownership or strategic importance to the group, would lead to a downgrade on NFPS's Shareholder Support Rating and the Long-Term IDR.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

Public Ratings with Credit Linkage to other ratings

The ratings of NIF's and NBI's guaranteed senior note programme and notes are directly linked to the Long-Term IDRs of Nomura, the guarantee provider.

The rating of NBI's senior unsecured euro commercial paper and euro certificate of deposit programme is directly linked to the Short-Term IDRs of Nomura, the guarantee provider.

NFPS's ratings are directly linked to the IDRs of Nomura, its 100% parent, based on shareholder support.

Nomura's GSRs, which support the IDRs, are linked to Japan's sovereign rating.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONS

Entity / Debt

Rating

Prior

Nomura Holdings, Inc.

LT IDR

A-

Affirmed

A-

ST IDR

F1

Affirmed

F1

LC LT IDR

A-

Affirmed

A-

LC ST IDR

F1

Affirmed

F1

Viability

bbb+

Affirmed

bbb+

Government Support

a-

Affirmed

a-

senior unsecured

LT

A-

Affirmed

A-

Nomura Securities Co., Ltd.

LT IDR

A-

Affirmed

A-

ST IDR

F1

Affirmed

F1

LC LT IDR

A-

Affirmed

A-

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VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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