Citigroup (C) Might Vend Japan Retail-Banking Business

In furtherance of its strategy to shed international operations, Citigroup Inc. (C) is eyeing the sale of its retail banking operations in Japan. It has been rumored that the U.S.-based bank has approached around 10 financial institutions, which include Japan's top three lenders and regional banks.

However, Citigroup offering retail services in Japan for a century with 33 branches in the country would retain its commercial and investment banking operations. Aimed at increasing the efficiency of the company’s overall business, the initiatives include streamlining operations and optimizing footprints across geographies.

Regulatory pressure over Citigroup’s global operations and concerns of weak loan demand along with reducing interest margins surrounding Japan's banking industry forced the bank to take such a move. Though recently lending has increased, deposits still beats loans balances, following the cautious nature of businesses and households on spending.

As of Jun 30, 2014, Citibank Japan held total deposits of about ¥3.9 trillion ($38 billion). Moreover, Citibank Japan recorded a loss of ¥910 million during the second quarter as compared with the profit of ¥629 million in the prior-year period. Therefore, as part of its cost-cutting measures, Citigroup planned to vend its unprofitable retail business in Japan.

Over the past few years, Citigroup has been involved in a number of divestitures and restructurings in its Japan operations. Since 2004, Citigroup has been under regulatory pressure to restructure its Japanese operations, when it was forced to shut down its private banking business in Japan, following inadequate money laundering controls.

Citigroup has been under the scrutiny of Japanese regulators due to its lack of communication. Moreover, Japan’s main banking regulator, the Financial Services Agency (:FSA), which had ordered Citigroup to suspend business in 2011, also forced Citibank’s Japan chief executive – Darren Buckley at that time, to step down as the company failed to disclose the level of risks of some financial products such as investment trusts to clients while they were sold.

Therefore, FSA was open to investigate Citigroup's Japan units on a regular basis to keep an eye on internal controls, business model and financial-product sales structure improvement.

Similar Moves by Other Banks

In 2012, as part of its restructuring of global operations, HSBC Holdings plc (HSBC) started reducing private banking in Japan and finally closed down all six of its remaining Japanese branches in July.

Further, Societe Generale divested its wealth management unit in Japan to SMBC in Jul 2013. It followed Bank of America Merrill Lynch’s move to permit Mitsubishi UFJ Financial Group, Inc. (MTU) to take over the private banking joint venture completely, which was announced in 2005. Notably, Bank of America Merrill Lynch is a unit of Bank of America Corporation (BAC).

Our Viewpoint

Citigroup operates in numerous markets worldwide. Therefore, Michael Corbat after taking over Citigroup’s Chief Execution Officer (CEO) in 2012 planned to restructure, reduce or exit some of the operations in 21 markets globally to enhance returns. Though names of such markets were undisclosed, it was intimated that most of these involve consumer businesses.

Since then, Citigroup announced its plans to exit consumer businesses in countries including Honduras, Turkey, Romania, Uruguay and Paraguay. Recently, the bank agreed to vend its consumer-banking businesses in Greece and Spain.

Amid troubled tides, while Citigroup is encountering issues from various fronts including the ongoing investigations related to the Mexican fraud and the Federal Reserve’s rejection of its 2014 capital plan, the deal will give the company some financial flexibility.

On the capital front, Citigroup does not intend to resubmit its 2014 Capital Plan. However, the company is working to improvise the loopholes of the plan and is preparing for the 2015 Capital Plan.

We believe the company is well positioned to resolve its internal inefficiencies and setbacks. Further, we believe these streamlining initiatives will bolster the company’s capital position, reduce expenses and drive operational efficiencies.

Citigroup currently carries a Zacks Rank #3 (Hold).

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