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Citigroup Gives Priority to Sumitomo Mitsui to Buy Japan Bank

Among several bidders lined up for buying Citigroup Inc.’s (C) Japanese consumer-banking business, the bank plans to offer the right of first refusal for the deal to Sumitomo Mitsui Financial Group, Inc. (SMFG), according to Bloomberg. Citibank Japan Ltd., the retail banking unit in Japan is expected to be vended to Sumitomo Mitsui’s lending arm for about ¥40 billion ($345 million) to ¥50 billion.

Further, if the deal is consummated, Sumitomo Mitsui would take over all of Citigroup’s retail banking employees and branches in Japan. The bank expects the sale of its retail banking operations to be completed by the end of 2014. However, the deal is anticipated to delay the planned sale of Citigroup’s profitable Diners Club card business in Japan till the end of 2015.

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.

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).

Conclusion

Citigroup operates in numerous markets worldwide. Concurrent with the third-quarter 2014 earnings release in October, in continuation of the streamlining of its international operations, Citigroup announced “strategic actions.” The company stated that it proposes to exit the consumer banking business in 11 markets. The global footprint will now cover 24 markets that represent more than 95% of Global Consumer Banking’s (:GCB) current revenues.

The 11 markets include Costa Rica, Czech Republic, Egypt, El Salvador, Guam, Guatemala, Hungary and Japan. Citigroup expects to significantly complete its strategic actions by the end of 2015. The move comes in line with the company’s strategy to focus on markets where it has a strong presence and long-term growth prospects.

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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