Citi bails out of Japanese retail as Morgan Stanley moves in

Since Citi never had time to integrate Nikko Cordial with wholesale businesses – and it’s not clear if it was going to do so – we will never know whether that would have proven to be the right model. There’s little point looking to Merrill and Yamaichi for guidance, since that deal involved Merrill taking on a failed institution and hoping to rebuild it; and while Nomura and Lehman clearly have teething problems in integration, it is too early to judge and the circumstances of the combination are radically different anyway. So, in many ways, Morgan Stanley is going to be in uncharted territory here. It will not be toothless within the venture – it appoints the chairman, MUFG the CEO, then each bank appoints a deputy president/CEO, MUFG for the retail business and Morgan Stanley the institutional. And since it will not be formally launched until the end of March 2010, there is much to negotiate and iron out in the meantime.

The Nikko Cordial sale raises its own host of questions, both at Citi and at Sumitomo Mitsui. The Japanese bank faces much lighter cultural challenges in integrating the business since there is no significant foreign element to it, but there is another issue: the bank already has a securities joint venture with Daiwa, called Daiwa Securities SMBC. “They’ve obviously just got to be put together,” says Church, though that’s not the only view: some consider SMBC could exit the venture or sell it elsewhere, while others think Daiwa itself, something of an outlier in this environment of megabanks, could in time be drawn into the Sumitomo Mitsui family.

Another question is what Citi now looks like in Japan. The single most confusing element of the transaction is that the sale included all of Nikko Cordial – the distinct retail securities business – plus some of Nikko Citigroup, the entity which includes the institutional businesses. Citi insiders say that only about 15% of Nikko Citigroup’s 1,200 employees are affected by the deal, including domestic equity and debt underwriting businesses; consequently most of Citi’s capital markets business remains. But that’s still not the whole picture. The businesses Citi continues to see as core are the retail and corporate banking operation, called Citibank Japan Limited; the Nikko Citigroup investment banking division, including sales, trading and research services; and the credit card business, Citi Cards Japan. Citibank Japan Limited is a lucrative institution in its own right: it is the only localised foreign bank, has one of the highest tier one ratios of any bank in Japan (23.9% as at March 31), and logged Y26.4 billion net income in fiscal 2008. But that still leaves an asset management business, still on the block for sale, and NikkoCiti Trust, whose expected sale to MUFG was axed in May and so is therefore back in play again.

Citi will have an alliance agreement with Sumitomo Mitsui which will give the Japanese bank access to global networks in corporate and investment banking, and – in Citi’s words – “continuing the longstanding partnership between Citi and Nikko Cordial Securities in originating and distributing capital markets products to investors in Japan and globally.” This raises an interesting question too, because the parameters of this partnership will likely have an impact on Sumitomo Mitsui’s long-standing partnership with Goldman Sachs. This is one of many subtleties to be worked out as Japan’s megabanks expand yet again.

For Morgan Stanley, does this change who they think of as competitors in Japan? “Definitely,” says Kindred. “Our vision in this is that we will be the pre-eminent player in the Japanese financial sector in the securities market, defined as domestic market presence, profitability and global reach, all together in one organisation. If you are any client in this country who wants to do business in the securities markets, we want to be the firm of choice.”

Author’s note: to see the article in its published form, visit http://www.euromoney.com/Article/2229330/Foreign-participation-in-Japanese-domestic-brokerage-Can-Morgan-StanleyMUFG-venture-crack-the.html

In the same edition: Japanese banks lead world lenders again. http://chriswrightmedia.com/loans-japan-for-euromoney