* Q4 net 22.08 bln yen vs 14.9 bln yen consensus
* Stock and fixed income trading, mutual fund sales provide boost
* Overseas deal mandates promising sign for banking fees
* Analysts see big profit improvement in year to March 2013
* Insider-trading probe in Japan seen as overhang on brokers (Recasts, adds CFO and analysts' comments)
By Nathan Layne and Emi Emoto
TOKYO, April 27 (Reuters) - Nomura Holdings booked its biggest quarterly profit in 2-1/2 years on Friday, beating expectations on stronger Japanese stocks and trading gains, while cost cuts and overseas deals lay the foundation for an expected jump in profitability this year.
Japan's top investment bank is still struggling with big losses in Europe and remains vulnerable to a pullback in the Nikkei stock average, which has slipped 5 percent since the start of April. It also faces the risk of sanctions in an ongoing insider-trading probe
But its second straight quarterly profit and the largest since July-September 2009 shows Nomura has stabilised its operations after a rocky 2011 when tough conditions prompted it to launch a $1.2 billion cost-cutting plan and Moody's to cut its credit rating to one notch above junk.
Net profit came to 22.08 billion yen ($273 million) in the January-March fiscal fourth quarter, up 86 percent from 11.9 billion yen a year earlier. The result handily beat market expectations for a profit of 14.9 billion yen, according to a Reuters survey of seven analysts.
"The momentum from the fourth quarter is still with us," Nomura Chief Financial Officer Junko Nakagawa told a news conference. "The operating environment is tough but there are several deals that should translate into good business opportunities."
Trading commissions were boosted by the recent uptick in Japanese shares, with daily turnover on the Tokyo Stock Exchange rebounding to above 1.5 trillion yen in February and March from below 1 trillion yen in December, an 8-year low.
The solid quarter also reflects an increase in sales of mutual funds through banks and its nationwide network of 179 branches, including 300 billion yen alone for one Australian bond fund launched by its asset management arm.
Nomura's fixed income operations pitched in as well, echoing trading conditions seen in results from Credit Suisse, Goldman Sachs and some other U.S. banks. Net gains on trading at Nomura came to 99 billion yen, marking that category's best performance since October-December 2010.
PROMISING SIGNS, RISKS
Nomura has pointed to recently secured mandates in a handful of key deals as a sign it is gaining some traction in an overseas expansion built on the purchase of the European and Asian assets of failed Wall Street bank Lehman Brothers in 2008.
Those contracts include advising mining group Xstrata on its mega-merger with commodities trader Glencore , and serving as joint bookrunner on Spanish bank Bankinter's 1.0 billion euro bond in March.
So far in 2012 Nomura ranks ninth globally for advising on mergers and acquisitions, up from 13th in 2011 and a lowly 32nd in 2007 before the Lehman purchase, Thomson Reuters data shows. It remains the top investment bank on Japan-related deals.
"From now on it's important that Nomura continues focusing on incrementally growing revenue in its overseas banking business at the same time as trying to maintain the positivity from Japanese retail returning to the market," said Makarim Salman, head of Japan financials research at Jefferies in Tokyo.
Factoring in the higher fees and the benefits of its cost-cutting, the market expects Nomura to have its best year in six in the current year to March 2013, with 11 analysts forecasting an average 86 billion yen profit.
But like other global investment banks, Nomura has dialed back its risk-taking in the wake of the European debt crisis and to prepare for tougher capital requirements and regulatory restrictions on proprietary trading.
That could hinder the efforts of CEO Kenichi Watanabe to address its relatively weak earnings power. Nomura registered an annualised return-on-equity of 0.6 percent, compared with Goldman's 12.2 percent.
After a blistering rally in the first three months of the year, investors are once again focused on the perceived limits to Nomura's earnings potential. Ahead of the results, the stock closed on Friday at 330 yen, well off the 11-month high of 417 hit on March 19.
Daiwa Securities Group is also thought to be on a recovery path, with analysts predicting a return to profit this year after two years in the red, helped by its recent move to scale back overseas, and firmer Japanese stocks.
On Friday, Daiwa posted a net profit of 10.9 billion yen for January-March, returning to the black after five quarters in the red.
Elsewhere in Asia-Pacific, Australia's top investment bank Macquarie Group reported a second-half net profit of A$425 million, just ahead of analysts' expectations.
ESCALATION OF PROBE
A probe by Japan's Securities and Exchange Surveillance Commission (SESC) into insider trading, launched in 2010 amid suspicious trading around a string of public stock offerings, is seen as a risk for all major brokers in the nation.
On Wednesday the regulator sent officials to Nomura's offices in an escalation of its investigation into the broker's suspected involvement in leaking inside information, sources with knowledge of the matter told Reuters.
The SESC suspects that a Nomura employee tipped off a fund manager client about at public offering of energy firm Inpex in 2010, sources have said. The regulator is also looking into the possibility of insider trading around a share offering by Tokyo Electric Power. Nomura was an underwriter on both of those offerings.
CFO Nakagawa said that so far there has not been a major impact on Nomura's operations, but declined to comment on the specifics of the investigation.
"Earnings beat the consensus mainly due to a strong market recovery in the quarter. But the outlook looks unclear with share prices in a downward trend since April," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management.
"We also cannot be optimistic now because the market is nervously watching the developments of the insider trading investigation. Nomura's business could severely be affected if the probe develops in some serious way." ($1 = 80.7900 Japanese yen) (Additional reporting by Chikafumi Hodo and Antoni Slodkowski; Editing by Muralikumar Anantharaman)
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