Tokyo: Sumitomo Mitsui Financial Group will buy Citigroup’s Japanese broker and key investment banking units for $5.9 billion and look to form a financial services powerhouse through an alliance with Daiwa Securities Group.
Citigroup said the sale of assets to Sumitomo Mitsui (SMFG), Japan’s third-largest bank, would bring it $7.9 billion, helping it shore up its finances ahead of a US government ‘stress test´ of its balance sheet.
SMFG will pay 545 billion yen ($5.6 billion) for retail broker Nikko Cordial Securities and parts of investment bank Nikko Citigroup, including stock and bond underwriting, and another 28.5 billion yen for securities held by Citigroup.
SMFG said it would also form an alliance with Citigroup to gain access to its global network of corporate banking clients, and consider merging Nikko’s wholesale businesses with its investment banking venture with Daiwa, Daiwa Securities SMBC.
Deutsche Securities senior analyst Shin Tamura said the deal was a key defensive move as it prevented Mitsubishi UFJ Financial Group, Japan’s largest bank, and Mizuho Financial Group, Japan’s second-largest bank, from getting stronger.
MUFG and Mizuho had also bid for the Citi assets, sources have told Reuters.
“Nikko Cordial and Nikko Citigroup have relatively large assets,” said Tamura. “If the other two took the Nikko Cordial group, SMFG would not be able to catch up with those two for good.”
Combined Nikko and Daiwa SMBC would have ranked a close second in the latest quarter in yen bond and stock underwriting to leader Nomura Holdings.
“We want to create Japan’s no.1 brokerage through our tie up and an alliance with Daiwa,” Masayuki Oku, head of SMFG’s core banking unit, told a news conference.
For Citigroup, the deal includes 201 billion yen in retained cash and debt payments, and will generate $2.5 billion of tangible common equity, the struggling US bank said.
The transaction does not include Nikko Asset Management, an asset management arm set to be sold off by Citigroup in a separate deal.
Citigroup also said it plans to keep its consumer, corporate lending, custodial services, trading and capital markets businesses and about 5,000 workers in Japan.
Citigroup spent about 1.6 trillion yen to acquire Nikko Cordial in a cash and stock transaction completed last year, as it sought to expand aggressively in the world’s second-largest economy.
The bank was forced to sell off assets globally to raise cash after suffering more than $85 billion in credit losses.
The deal comes as Japan’s banking sector struggles to absorb massive losses on its stock holdings and a rise in bad loans.
SMFG said last month it would book a net loss of 390 billion yen for the year ended in March and unveiled plans to raise up to $8 billion in funds.
MUFG warned separately on Friday it would lose 260 billion yen in the past year.
The acquisition will give SMFG Japan’s fifth-largest brokerage by operating revenue, 109 branches and a familiar brand, significantly strengthening its position in retail broking.
It will also bolster its position in investment banking at a time when its rivals are also taking aggressive steps.
MUFG and Morgan Stanley are planning to merge their Japanese brokerage units and Nomura strengthened its hand with last year’s acquisition of Lehman Brothers’ operations in Asia, Europe and the Middle East.