Hi Tom, thanks for the view... Citi is spending big time on their Japanese infrastructure.. They are making a big bet that there is a good future there.
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C- CitiGroup - continues expanding in Japan
April 10, 2002
Citigroup Is Still Dealing in Japan
Even as Competitors Flee Market
By JASON SINGER
Staff Reporter of THE WALL STREET JOURNAL
TOKYO -- Does Citigroup Inc. know something about ailing Japan that its competitors don't?
Merrill Lynch & Co., Charles Schwab Corp., Goldman Sachs Group Inc. and others in recent months all closed parts of their Japanese operations, yet Citigroup -- the biggest financial-services firm in the U.S. -- is carrying on with a spree of acquisitions and joint ventures in what remains the most troubled of the world's big economies.
The company has about $8 billion invested in Japan and now earns about 8% of its global after-tax income from Japan -- nearly $1.3 billion last year. In total, Citigroup is three times as big as it was four years ago, in terms of net income generated for the company.
But Citigroup's Japan push carries risk: Japan's banking sector perennially seems to be on the verge of a meltdown, and the stock market remains 70% below its 1989 peak. What's more, analysts note that growth is slowing at Citigroup's most profitable business in Japan, the consumer-finance unit, which earned an estimated $750 million in profit last year. The fortunes of the consumer-loan business are closely linked to Japan's unemployment rate, which is near a record high and is expected to rise, putting more consumers at risk of default.
Citigroup also faces challenges making its Japan empire work smoothly. Tension has surfaced between Citigroup and one of its most important partners, Japan's third-largest brokerage firm Nikko Cordial Corp., over the stake Citigroup has taken in Nikko.
Citigroup executives say they aren't naive about the potential pitfalls in Japan. They say they have crunched the numbers on various Japan-disaster scenarios, and admit many businesses are exposed to the weak economy. But because Citigroup's operations spread so wide, they say, some units will thrive as others dive. Retail bank Citibank could rapidly gain market share if depositors at Japanese banks panicked, for instance. Overall, the company would remain profitable, the executives say.
In February, Citigroup bought a local consumer-finance business, making the U.S. firm the No. 3 player in one of Japan's most-profitable finance sectors. And the company is establishing a joint venture with a Japanese insurer to sell variable-annuity life insurance across Japan.
Citigroup executives say they also are encouraged by success where rivals have stumbled. Goldman Sachs, Merrill Lynch, Morgan Stanley and other foreign companies have grown to dominate investment banking and other services for corporate clients in Japan. But most foreigners have floundered at wooing individuals. Indeed, from clothing to cosmetics, foreigners for the most part haven't been successful retailing much of anything in Japan.
Citigroup says it is still shopping for deals. The company is looking for a credit-card business to add to its portfolio, and more consumer-loan company acquisitions, says Deryck Maughan, a Citigroup vice chairman. "Japan is a case where we have seen opportunity and others have not," Mr. Maughan said in an interview.
Citigroup's experience speaks volumes about how deregulation and economic distress have -- and haven't -- changed the landscape for U.S. financial firms in Japan. Tokyo threw open its sheltered securities industry in 1998, aiming to make its markets as open as London's and New York's by 2001. Experts assumed Western brokerage firms would trounce less efficient Japanese rivals.
But many of the executives who rushed in to Japan have been jetting back home amid recession. Morgan Stanley's sole retail store, a flashy shop in the Ginza district that opened just a year ago, has been closed. Shops opened in a joint venture between Charles Schwab and Tokio Marine Securities are being boarded up. French securities firm Societe Generale killed a budding online-brokerage venture.
"When the temperature went up, a lot of people left the kitchen," Mr. Maughan says.
Citigroup has won over Japanese consumers in part by trying to convince them it is more local than other foreign firms. It sells stocks and bonds through its tie-up with Nikko Cordial, and has several local brands to sell high-margin unsecured consumer loans, including one company that serves only female customers. That gender division is typical in Japan, because lenders say men and women tend to borrow for different reasons -- women for spending on their families, and men on themselves.
"The company appears to have attained 'local' status in most business lines," says Henry McVey, a financial analyst at Morgan Stanley in New York who met with Citigroup's Japan managers in January.
Citigroup's breadth in Japan is partly an accident of history. When Travelers Group merged with Citicorp in 1998, each had a huge presence in Japan. Citibank, the only foreign retail bank in Japan, has been operating here for 100 years. Travelers had become the biggest shareholder in Nikko Cordial, and the two had already formed an investment-banking joint venture.
Citigroup's purchase of Dallas-based consumer-finance powerhouse Associates First Capital for $27 billion in 2000 gave the company a huge presence in the Japanese consumer-finance business. Through two more local consumer-loan acquisitions -- Unimat Life in 2000 and Taihei Co. in February -- Citigroup grew to have a combined business with a total of more than two million customers and about 1.5 trillion yen ($11.41 billion) in consumer loans, the third-highest figure in the industry.
Now it must make this conglomerate work. Because it owns a bank, Citigroup can funnel deposits into its credit-card and consumer-finance units. Citigroup's consumer-finance companies all charge borrowers the maximum legal interest rate of 29.2% -- far higher than the rate Citibank pays Japanese depositors, which is less than 1%.
To keep an eye on its Japan colossus, which now has the same range of business groups Citigroup runs in the U.S., the company has installed a manager to oversee all its businesses here, the only country with such a position. "The platform Citigroup has erected globally is mirrored here locally," says Charles Whitehead, the company's chief in Japan.
Keeping Citigroup's many partners happy is another reason he is around. The 1998 tie-up with Nikko Cordial has been a success, but tensions have surfaced.
The source of the strife was a deal reached in March 2000 between Citigroup Chief Executive Sanford Weill and his Nikko counterpart, Masashi Kaneko.
Seven days before Nikko was to close its books on its best fiscal year in a decade, Citigroup announced Nikko had allowed Mr. Weill to increase Citigroup's 9.5% stake in Nikko to a bit more than 20% -- one year earlier than its contract permitted. The change would allow Mr. Weill to consolidate Citigroup's share of Nikko's big profit into Citigroup's own results.
In return, Citigroup would sell back convertible bonds that gave it a right to buy an additional 4.2% of Nikko by 2008. Neither firm disclosed at the time another unwritten part of the deal: Mr. Weill had convinced Mr. Kaneko to make the sale contingent on Nikko's share price reaching a lofty target of 1,500 yen.
Nikko's stock had been rocketing up, but soon started to sink along with the Japanese economy. It now trades at less than 600 yen, and so Mr. Weill has a firm grip on a 4% stake that Nikko expected to get back.
"The difference ... is not important legally or technically," said Nikko executive Junichi Arimura, who has overseen the relationship with Citigroup, in an interview last year. "But emotionally, we wouldn't want Citigroup to buy" that much.
Citigroup executives say they plan to hold onto the convertible bonds, but don't plan to exercise them soon, and that their relationship with Nikko remains solid.
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Mirror Images
Citigroup now operates in Japan all of the same business lines that it runs in the U.S. Below, the businesses and when they were established in Japan.
Citibank (1902): Consumer banking; 21 branches; credit cards include Diner's Club Japan and Citi Visa and Mastercard.
Citibank Corporate Bank (1902): Arranges syndicated loans, foreign-exchange transactions, custody services and trade finance for multinational companies.
Citigroup Private Bank (1986): Banking services for wealthy customers. Has dedicated Japanese client service teams in Japan, New York, Hawaii, Hong Kong, Singapore and Geneva.
Nikko Cordial Corp. (1998): Japan's third-largest securities firm. Citigroup became biggest shareholder with a $1.6 billion investment. Citigroup currently owns 20.8%* and holds convertible bonds that can be exchanged for another 4.2%.
Nikko Salomon Smith Barney (1999): Joint-venture investment bank with Nikko Cordial.
NikkoCititrust (2001): Joint venture trust bank, 50% owned by Citigroup and 50% by Nikko Cordial. Has 6 trillion yen ($45.64 billion) in assets under administration and custody.
Citigroup Asset Mgmt. (1998): Retail and institutional investment management; 390 billion yen in retail assets and 2.66 trillion yen in institutional assets.**
CitiFinancial (2000): Japan's third-largest consumer-finance business; makes unsecured loans, real-estate secured home-equity loans and credit-card and wholesale loans to other consumer-finance firms. Has more than 2 million customers and operates three local brands one of which exclusively handles female customers.
CitiInsurance (2002): Joint-venture; CitiInsurance plans to sell variable-annuity life insurance later this year.
* Became biggest shareholder in 1998 |
