Citigroup Sells Japan Retail Operations To Sumitomo Mitsui Banking Corporation
Citigroup (NYSE:C) detailed plans to sell its retail banking operations in Japan to the Sumitomo Mitsui Banking Corporation (SMBC) on Christmas Day, in what comes as the latest move by the globally diversified banking group to streamline its business model. [1] The deal was announced roughly four months after reports indicated a possible sale of the unit in August. [2] Citigroup named Japan as one of 11 countries where it sought to exit retail banking operations due to low profitability (see Citigroup Follows Strong Q3 Results With Plans To Exit Retail Banking In 11 Countries). While financial details of the sale were not disclosed by either party, the deal will be completed by late 2015 and is expected to bring in roughly 40 billion yen ($330 million) in cash for Citigroup. [3]
We maintain our $58 price estimate for Citigroup’s stock. This figure is roughly 10% ahead of the current market price.
See our full analysis for Citigroup
Since the economic downturn of 2008, Citigroup’s primary focus has been on shrinking all the loss-making and non-core operating units housed under the Citi Holdings division. Over the years, the banking giant has done well to shrink these assets from almost $900 billion at the peak of the economic crisis (more than 40% of Citigroup’s total assets) to just over $100 billion now (around 6% of total assets) – including the sale of its retail banking operations in Greece and Spain earlier this year (see Citigroup Inks Deals To Dispose Of Retail Units In Greece and Spain). This has allowed the bank to shift its focus in recent years to improving the profitability of its core operations.
The starting point for an improvement in profit margins in Citigroup’s diversified business model was quite clearly the group’s retail (consumer) banking operations, which accounts for more than half its total operating expenses. Citigroup has done well in the past to leverage its strong retail banking presence across the globe – particularly in emerging markets – to access cheap funds in the form of low interest rate deposits worldwide. But the retail banking units in several countries have been a drag on Citigroup’s retail banking results instead of being a source of value. This is why the bank announced its decision to get rid of retail banking operations in Costa Rica, Czech Republic, Egypt, El Salvador, Guam, Guatemala, Hungary, Japan, Nicaragua, Panama and Peru, as well as its consumer finance business in Korea in a bid to boost profitability. [4] Taken together, these operations contribute less than 5% of Citigroup’s total consumer banking revenues and are only marginally profitable.
Reports of the Japan retail banking operations going on the block surfaced months before Citigroup officially announced its decision to exit the country in October. [2] Citigroup has a network of 33 branches in Japan, which reported net income of just 1.34 billion yen ($12.9 million) in the last fiscal year. [5] While Citibank Japan’s loan-to-deposit ratio of less than 10% was already putting pressure on interest margins, the country’s monetary stimulus measures were expected to shrink the margin figures further in the near term.
Citigroup has been rumored to have been in exclusive talks with Sumitomo Mitsui for the sale of the unit – which includes 1,600 Citi Japan employees, about 740,000 customer accounts and approximately 2.5 trillion yen ($21.0 billion) in deposits – for well over two months. ((Sumitomo Mitsui Said to Agree to Buy Citigroup Japan Unit, Bloomberg, Dec 9 2014)) Notably, Citi Japan represents roughly 6% of Citigroup’s total global deposit base in dollar terms (see chart above). The eventual sale of the unit is expected to have a positive impact on the operating margin of Citigroup’s retail banking operations in the long run. You can see how a reduction in consumer banking expenses impacts the banking giant’s share value by making changes to the chart below.
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- Citi Announces Agreement to Sell Retail Banking Business in Japan to Sumitomo Mitsui Banking Corporation. Citigroup Press Releases, Dec 25 2014 [↩]
- Citigroup Considers Sale of Retail-Banking Business in Japan, The Wall Street Journal, Aug 20 2014 [↩] [↩]
- Sumitomo Mitsui Said to Agree to Buy Citigroup Japan Unit, Bloomberg, Dec 9 2014 [↩]
- Citigroup Reports Third Quarter 2014 Earnings per Share of $1.07, Citigroup Press Releases, Oct 14 2014 [↩]
- Citigroup Earning Less From Tokyo Than CEO Salary, Bloomberg, Aug 21 2014 [↩]