Nomura Holdings <8604.T>, Japan's top brokerage, reported its biggest profit in three quarters after gains in Tokyo stocks gave a boost to revenues, but higher costs to expand overseas limited earnings growth.

Nomura is expanding rapidly in Asia, Europe and the United States after buying a big chunk of Lehman Brothers in 2008, taking a riskier path than its main domestic rival, Daiwa Securities Group <8601.T>, which is focused on Asia.

Compensation and other costs continue to weigh on Nomura, which is still a far way from matching the elite investment banks, such as Goldman Sachs and Morgan Stanley , in terms of profitability.

They're (Nomura and Daiwa) expanding overseas so they're building their operations which means it takes a while for their revenues to flow in. But meanwhile the costs stay high, said Ehan Syed, an analyst at Fitch Ratings.

Nomura posted a net profit of 13.39 billion yen ($164.6 million) for the three months ended December 31, compared with a 10.2 billion yen profit in the same quarter a year earlier.

In the previous quarter ended September 30 the brokerage eked out 1.1 billion yen in net income.

The quarterly result fell short of the consensus forecast of a 17.4 billion yen profit from four analysts surveyed by Thomson Reuters I/B/E/S. For the full business year to the end of March, the average net income prediction of eight analysts is 36.7 billion yen. Nomura does not release its own outlook.

Japan's benchmark Nikkei average gained 9.2 percent in the most recent quarter compared with a 7.3 percent rise in New York's Dow industrials <.DJI> and a 6.3 percent increase in London's FTSE benchmark <.FTSE>.

Nomura's asset management business posted a 34 percent quarter-on-quarter rise in income, as the Tokyo market's solid performance encouraged investors to put money into stock funds.

For all its recent overseas expansion, Nomura still generates almost 60 percent of its revenue in its homiest market. Only by staying profitable in Japan is it able to fund expansion overseas.

Nomura offered many of its new employees guaranteed bonuses to keep them from leaving after the Lehman deal and must now look for ways to control costs as tighter financial capital requirements loom and in order to match the profitability of U.S. securities houses such as Goldman Sachs, analysts say.

Reflecting a rise in compensation and benefits, Nomura's non-interest expenses rose 6 percent from the prior quarter to 268.1 billion yen.

Nomura's shares closed 4 percent higher before the earnings announcement, in line with a rise in the securities subindex. <.ISCEU.T>

($1=81.34 Yen)

(Additional reporting by Chris Gallagher and Junko Fujita; Editing by Michael Watson and Nathan Layne)