Citigroup Earning Less From Tokyo Than CEO Salary

Citigroup Inc. earned less from running a bank in Japan than its global chief executive officer’s salary last year, helping explain why the U.S. lender is considering selling the consumer business as Abenomics crushes loan returns.

Citibank Japan Ltd.’s net income of 1.34 billion yen ($12.9 million) in the year ended March compared with CEO Michael Corbat’s total 2013 compensation of $14.5 million. The U.S. bank has begun approaching Japanese companies including the three biggest lenders, trust banks and regional lenders, a person familiar with the matter said this week.

Unprecedented monetary stimulus has cut the spread between lending rates and deposit rates at Mitsubishi UFJ Financial Group Inc. to a record low in the first quarter. Cash and deposits at the nation’s biggest bank and its two closest rivals piled to 82 trillion yen last quarter. Citigroup is considering a retreat from Japan after pulling back from retail banking in markets with low returns, including Spain, Greece and Turkey.

“It is very difficult to make money from lending in Japan unless you’re in higher-margin consumer lending or if you’ve got a very large scale of operations like the megabanks have,” said David Marshall, an analyst at CreditSights Inc. in Singapore. “In an environment in which interest rates are very low and investors are still somewhat risk adverse despite economics, it is hard to make money.”

Falling Rates

Ten-year Japanese government bond yields have fallen 21 basis points this year to 0.525 percent as the Bank of Japan buys about 7 trillion yen of JGBs a month as part of Prime Minister Shinzo Abe’s stimulus. That compares with 2.41 percent for equivalent Treasuries. The spread on what Mitsubishi UFJ charges for domestic loans over deposit interest rates fell to a record 0.96 percent in the first quarter.

For all Japanese lenders, the spread fell 11 basis points on average to 1.38 percent in the year ended March, according to the Japanese Bankers Association. Even with a 4.3 percent increase in total loans in the period to 499.3 trillion yen, revenue from managing funds fell 3.2 billion yen to 9.65 trillion yen, it said. A basis point is 0.01 percentage point.

Years of deflation and monetary stimulus have left Japanese banks with a net interest margin of 1.25 percent, the lowest in Asia, according to data compiled by Bloomberg.

“There are too many banks in Japan and that’s causing stiff competition which leads to interest rates declines,” said Nozomi Kokubun, a Tokyo-based banking analyst at SMBC Nikko Securities Inc. The Topix Banks index has 87 members.

Japan Profit

Citigroup Japan, whose 33 branches represent less than 1 percent of its global total, had net income of 1.1 billion yen during the past three years. Its loans totaled 356.1 billion yen, or about 10 percent of its deposits at end of March.

The lender’s companies in the country also include Citigroup Global Markets Japan Inc., an investment banking unit, credit card operator Citi Cards Japan Inc. and Citigroup Japan Holdings Corp., according to its website.

Citigroup’s investment banking unit in Japan had a net loss of 3.5 billion yen in the year ended March compared with a profit of 1 billion yen a year earlier, according to earnings statements on the company’s website.

Selling the consumer-banking operations is only one option and nothing has been decided, two people said, asking not to be identified because the matter is confidential. Japan’s Financial Services Agency has been pressing Citigroup to build a sustainable and profitable business model in the country, one of the people said.

Mika Nemoto, a spokeswoman for Citigroup in Tokyo, declined to comment.

Possible Bids

Shinsei Bank Ltd. plans to bid for Citigroup’s retail banking operations, the Nikkei newspaper reported, without saying where it got the information. Other lenders including Mitsubishi UFJ are also considering a response, the paper said. Shizuyo Eguchi, a spokeswoman at Shinsei, declined to comment on the report.

“It is hard for the foreign banks to develop a customer base, they may be well-known overseas but that is not necessarily the case in Japan,” said Marshall of CreditSights. “People may be willing to trust the local institution because they are the names they know and because they think that the Japanese government will stand behind Japanese major financial institutions in a crunch.”

Citigroup’s history in Japan dates back to 1902, when a predecessor opened its first branch in Yokohama, according to its website. Apart from consumer banking, Citigroup does corporate and investment banking and trading in the country.

Past Sales

The U.S. firm exited the Japanese retail brokerage business in 2009, selling its Nikko Cordial Securities Inc. unit and part of its investment-banking operations to Sumitomo Mitsui Financial Group Inc. It also sold its 64 percent stake in Nikko Asset Management Co. to Sumitomo Trust & Banking Co. that year.

HSBC Holdings Plc and Standard Chartered Plc have scaled back their operations in Japan as well. Reluctance by individual Japanese to move into riskier investments has hamstrung the consumer-oriented operations of overseas banks in the country, according to SMBC Nikko Securities.

Japanese households held 53 percent of their 1,630 trillion yen in financial assets in cash and deposits at the end of March, according to BOJ data. Shares made up 9.1 percent of the total, compared with 33 percent in the U.S. and 17 percent in the euro area, the data show.

“Individuals in Japan haven’t changed their asset holdings much even though low interest rates have continued for so long,” said Yutaka Ban, a credit analyst in Tokyo at SMBC Nikko Securities. “It can be argued that there are structural reasons why you can’t expect to make much profits here.”

Before it's here, it's on the Bloomberg Terminal.