Citigroup Banking on Japan - Competing For Growth in a Shrinking Market

Jul.16.07 | About: Citigroup Inc. (C)

The Citigroup (NYSE:C) flailing continues. From Thursday’s Wall Street Journal ($):

As part of its international growth strategy, Citigroup Inc. is banking on Japan.

Earlier this year, Citigroup paid $10 billion for Nikko Cordial Corp., Japan's third-largest retail brokerage. That purchase, along with a growing presence of Citigroup's small-but-popular retail-banking operations, comes as the bank embarks on an ambitious expansion into Japan's potentially lucrative market for retail financial services. . . .

Japanese savers, who have salted away $12.5 trillion in personal assets, are tiring of low-yielding bank accounts and are looking for assets with better returns, such as stocks, bonds and mutual funds.

Citigroup hopes to fill that need. The big bank already offers some investment services in Japan, like foreign-currency deposits that have proved popular with international customers. But it sees an even bigger business selling a range of products from mutual funds to alternative investments it has access to through its operations in more than 100 countries.

Japan could become an important part of [Prince’s] goal to boost profits from overseas markets to 60% from the current level of just under 50% -- and to raise Citigroup's stagnant stock price. As part of that effort, Citigroup has recruited Howard Baker, a former U.S. ambassador to Tokyo, to serve on an advisory board to the company's senior management in Japan. . . .

Let me see if I have this straight. Citigroup is pursuing a retail growth strategy in a market whose population not only isn’t growing, but has actually begun to shrink. And to better help it better get inside the head of the Japanese consumer, it’s gone out and signed up an American ex-pol. Brilliant! But wait, it gets worse:

[C]ompetition from Japanese banks will be stiffer than it has been in more than a decade. The country's biggest banks have paid off their public debt and are trying to expand again. Many realize they have to offer better service to attract more business -- a direct challenge to Citigroup.

That has prompted many Japanese banks to cut charges for using automated teller machines and to bring down fees on mutual funds in order to attract more investors. Some banks also are trying to attract higher-income clients, like those Citigroup hopes to get, through partnerships with investment banks. . . .

Mr. Prince says Citigroup can compete with the Japanese banks because it has a big local presence and the reach of its global operations. It hopes to have 200 retail locations in the next few years, compared with 137 now. [Emph. added]

So the market isn’t just getting smaller—it’s getting more competitive too! I suspect Citi’s going to have to offer something more than “the reach of its global operations” if it’s going to beguile the Japanese retail banking customer and put up the kind of numbers there that Chuck Prince has in mind. . . .

The company needs to be broken up. Tell me again why that’s such a “dumb idea”?

Tom Brown is head of