Citigroup Beats a Hasty Retreat From Japan

Less than 18 months ago, Citigroup CEO Vikram Pandit was touting the company’s joint venture with Japanese financial giant Nikko Cordial and sounding bullish about business prospects in Japan. “Citi and Nikko both have demonstrated a long-term commitment to Japan, and we intend to grow our tremendous franchise there in order to serve clients better,” he said in a March 2008 statement. “The plans we are announcing today will provide us with the right foundation for growth in this important market.”

Then, the deluge. Citi has been on the retreat since the global economy came unglued, divesting its Japanese ops like mad in order to cut costs, raise capital to re-pay a $45 billion TARP loan and focus on its core strengths. The company on Thursday said it will sell its majority stake in Nikko Asset Management to Sumitomo Trust and Banking Co. for 75.6 billion yen ($795 million). Citi in recent weeks also struck deals to sell NikkoCiti Trust and Banking Co. to Nomura Trust & Banking Co. for $197 million and brokerage Nikko Cordial, along with parts of investment bank Nikko Citigroup, to Sumitomo Mitsui Financial Group for $5.6 billion.

The asset sales are part of a broader streamlining effort under way at Citi. In contrast to its days as a one-stop shop for financial services, the company now wants to be a “plain-vanilla bank,” Pandit said recently. That’s a far cry from Citi’s aggressive global expansion during the 1990s under then-CEO Sandy Weill, who used acquisitions to drive overseas growth.

The retrenchment in Japan also marks a second setback for Citi in the country in recent years. Japanese banking regulators in 2004 shuttered the company’s private banking business for failing to crack down on money laundering by clients and for misleading customers about the risk of certain investments, among other violations.

But by 2006, Citi’s fortunes had improved in Japan. Keying that turnaround was the company’s cross-selling of banking, investment and insurance products, the “financial supermarket” strategy that had worked well for Citi in the U.S. and Europe, but that was not widely used by Japanese customers. The idea was to use basic banking services, such as cash management and currency trading, as a platform for building relationships with clients in need of other services, such as M&A advice.

The strategy worked. In 2005, Citigroup’s Japan units generated $1.1 billion in net earnings, compared with the company’s overall net profit of nearly $25 billion. Citi also topped the M&A league tables in Japan, rising from No. 11 in 2005 to No. 1 in 2006, according to industry data. Encouraged, Citi doubled down. In 2007 bought a majority stake in Nikko Cordial, Japan’s third-largest brokerage at the time, for $7.7 billion, which at the time was the biggest acquisition of a Japanese firm by a foreign company. Later that year it would pay an additional $4.4 billion to buy the rest of Nikko Cordial.

In announcing the sale of Nikko Asset Management, Pandit today reiterated Citi’s commitment to doing business in Japan. The U.S. company can “now shift our focus from reshaping our franchise in this very important market to building our core businesses and better serving clients,” he said in a news release.

Nice try. Make no mistake — Citi’s forced withdrawal from Japan marks another defeat for a company that remains very much in turmoil.