Citigroup Inc, under pressure to raise capital, agreed to sell its Japanese securities units to Sumitomo Mitsui Financial Group Inc for 545 billion yen ($5.5 billion).
Sumitomo Mitsui is buying the Nikko Cordial Securities Inc brokerage and the underwriting divisions of Nikko Citigroup Ltd, the banks said in a statement. Less than two years ago, Citigroup purchased the businesses and others, including asset- management affiliates that aren’t part of today’s deal, for 1.6 trillion yen.
Chief Executive Officer Vikram Pandit is selling assets after more than $100 billion of credit losses and writedowns that’s led to three bailouts at Citigroup by the US government. The acquisition of Japan’s third-largest brokerage will help Sumitomo Mitsui close the gap with Nomura Holdings Inc, the nation’s largest brokerage, and Mizuho Financial Group Inc in the securities business.
“Sumitomo Mitsui has always been a fairly aggressive bank and this reflects that,” said Michael Wood-Martin, who helps oversee about $1 billion, including Sumitomo Mitsui shares, at Henderson Global Investors in London. “US banks are short of capital and stress tests, which are expected out next week, may further illuminate how much more capital is needed.”
Undoing legacy
Pandit is undoing the legacy of former CEO Sanford “Sandy” Weill by creating Citicorp to house the New York-based company’s global bank, and Citi Holdings, for “non-core” assets, including the Japanese securities units. Citigroup is also seeking bidders for its Tokyo-based asset management unit, four people familiar with the matter said last month.
The deal will contribute $2.5 billion to Citigroup’s core capital, the US bank said today in a statement. The bank’s Tier 1 capital ratio, a key indicator of financial strength, may be boosted by 27 basis points, Citigroup said. A basis point is 0.01 percentage point. Goldman Ties Japan’s largest banking groups, including Sumitomo Mitsui, are seeking to boost fee revenue as bad loans and share losses force them to book their first losses in at least four years.
Sumitomo Mitsui, which has capital ties with Goldman Sachs Group Inc dating back to 1986, invested 500 million pounds ($745 million) to acquire a stake in the UK’s Barclays Plc last July. The Tokyo-based bank will take over the stock and bond businesses, currently operated by Nikko Citigroup, and seek to boost cooperation with Citigroup, the statement said.
“This is the first merger between one of the 3 biggest brokerages and a bank,” said Teisuke Kitayama, president of Sumitomo Mitsui at a press conference. “It’s a turning point.”
Goldman Sachs advised Sumitomo Mitsui on the acquisition, according to Kitayama, who said the his bank isn’t planning to invest in Citigroup.
Citigroup, whose five straight quarterly losses ended in the first quarter, is selling units it deems non-essential to raise capital after the US government agreed to take a 36 per cent stake. The bank posted a $1.6 billion profit for the first quarter on trading gains and an accounting benefit for companies in distress.
In Japan, Citigroup is shifting its resources to retail banking from the brokerage business. Nikko Cordial, formed in 1944, had 164.1 billion yen revenue for the year ended March 31. The brokerage, with 109 branches in Japan, managed 23.5 trillion yen in client assets.
“I’m not sure the best way forward for the megabanks in Japan is to become bigger,” said Kirby Daley, a strategist at Newedge Group in Hong Kong. ‘The environment for the financial services industry to generate profits going forward is going to be difficult.”
Sumitomo Mitsui operates a retail brokerage with 75 branches nationwide. Sumitomo Mitsui and Daiwa Securities Group Inc, Japan’s second-largest brokerage, operate jointly an investment banking unit, Daiwa Securities SMBC Co.
Nomura had 59 trillion yen of retail assets and 172 branches as of March 31. Sumitomo Mitsui will have 64 trillion yen in assets under management after acquiring Nikko Cordial, and will take over about 7,800 of staff from Citigroup, according to a presentation by the bank today.
Citigroup offered to buy Nikko Cordial in 2007 after the Japanese securities firm was battered by an accounting scandal. Nikko faced possible delisting from the Tokyo Stock Exchange after it was accused in 2006 of padding earnings, resulting in a 30 per cent drop in its stock price in the seven weeks ended Feb 1, 2007.
Sumitomo Mitsui, which had a loss of 390 billion yen in the 12 months ended March 31, said it is assessing the impact of the deal on its earnings.
