Citigroup Inc. (C) is planning to vend its profitable Diners Club card business in Japan with the sale of its retail banking operations, Bloomberg reported on Friday. Sumitomo Mitsui Financial Group Inc. (SMFG), Mizuho Financial Group Inc. (MFG), Mitsubishi UFJ Financial Group Inc. (MTU), Sumitomo Mitsui Trust Holdings Inc. and Shinsei Bank Ltd. were the top bidders in the preliminary bidding operations for the sale of the retail unit.
In furtherance of its strategy to shed international operations, Citigroup is eyeing the sale of its retail banking operations in Japan. 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.
Citibank Japan Ltd. is the retail banking unit in Japan, while the card business unit separately offers Citi-branded cards and Diners Club products. The sale of the card business along with retail operations commensurate on the expectation of attracting the Japanese banks as Diners has a strong brand value in Japan. Moreover, credit cards have solid growth potential in Japan.
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 this move. Though recently lending has increased, deposits still beat loan 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.
Similar Moves by Other Banks
In 2012, as part of restructuring of its 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 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 as 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 is working to improvise the loopholes of the rejected 2014 Capita 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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