Japanese brokers reeling from scandals, market slide

March 19, 1992|By Bloomberg Business News

TOKYO -- Plagued by scandal and plunging stock prices, Japan's top brokerages said yesterday that they expect the year ending this month to be their worst in decades.

Three of Japan's "Big Four" brokerages led the list of 13 houses announcing steep profit declines or losses at a series of bleak news conferences at the Tokyo Stock Exchange.

Yamaichi, Japan's fourth-largest brokerage, said it expects a current loss of $255 million -- its first since 1965. Nomura, the world's largest brokerage, sees its current profit falling 79 percent to about $338 million. Nikko, the third largest, forecast current profit to fall 66 percent to nearly $19 million. The second largest, Daiwa, said last week it expects to lose $323 million.

Whether the worst has passed depends on a recovery in the stock market, analysts said. Low turnover in the past year damaged the commission-dependent Japanese brokerages. Commission income declined about 40 percent for the securities firms.

A pickup in market volume will bring a swift recovery in their profits, said Alicia Ogawa, a financial analyst at S.G. Warburg Securities.

In the meantime, the "Big Four" firms, which take a third of their profits from stock commissions, will be supported by bond trading, futures and options trading, and underwriting activities, analysts said.

Smaller companies, with at least half of their revenues from equity commissions, will have to wait out the stock slump, cutting costs and closing branches. Kankaku Securities, a midsize broker, said it will close down some of its branches to trim costs.

Average volume on the Tokyo Stock Exchange's first section has fallen to 215 million shares a day from 1.9 billion shares a day in February 1989. Stock volume would have to rise to 500 million shares a day before commissions can cover expenses for most brokerages, said an analyst at Daiwa Securities.

The grim earnings forecasts follow the collapse in stock prices to half their December 1989 value. As the benchmark Nikkei 225 ZTC sinks further, analysts are lowering their estimates of where it will stop. Last week, Nomura Research Institute lowered its estimated market bottom to 15,000. In early trading today the Nikkei average was up 37.87 points, or 0.19 percent, to stand at 19,802.18. Yesterday the average lost 153.23 points, or 0.77 percent, to close at 19,764.31.

The stock slump has not only sapped brokerages of their revenues but also tarnished their reputation. Last summer, Japan's top 17 brokerages admitted paying $1.5 billion to

favored customers to compensate them for investment losses.

The cozy relationships that Japanese brokerages have with their clients leads to the expectation that brokers will somehow make up for clients' stock losses.

Just as the memories of the stock-compensation scandal were passing, a new scandal broke last month involving brokerages who helped clients dress up their books to avoid showing stock losses. Several brokerages have been forced to pay clients millions of dollars to settle book-cooking plans that went awry.

Daiwa has agreed to pay $780 million to three companies for investment losses related to the scandal. Yamatane Securities agreed yesterday to pay $120 million to clients for losses. Cosmo is being sued for about $263 million in losses, and Maruman Securities for $15 million.

The full damage from the scandals won't likely be reported until the end of the financial year March 31 so brokerages may face more lawsuits than they've admitted so far, traders said. The costs of those lawsuits would be likely recorded in the next financial period, which ends in March 1993.

While the Japanese brokers suffer, foreign brokerages have stepped in to the Tokyo market with sophisticated computer programs that churned out profits through arbitrage trading.

In the six-month period ending September 1991, Salomon Brothers and Morgan Stanley outpaced both Nikko and Yamaichi in pre-tax profits, largely because of profits made in arbitrage-related futures and options trading, analysts said.

Because foreign firms have flourished while their Japanese peers have emerged poorer and less respectable, some analysts say Japan's securities industry needs to be restructured.

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