Citigroup Inc earned less from its banking business in Japan than its global chief executive officer’s salary last year, helping to explain why the US lender is considering selling the consumer business as “Abenomics” crushes loan returns.
Citibank Japan Ltd’s net income of ¥1.34 billion (US$12.9 million) in the year ended March is less than chief executive officer Michael Corbat’s total compensation last year of US$14.5 million. The US bank has begun approaching Japanese companies including the three biggest lenders, trust banks and regional lenders, a person familiar with the matter said this week.
An unprecedented monetary stimulus cut the spread between lending rates and deposit rates at Mitsubishi UFJ Financial Group Inc to a record low in the first quarter. Cash and deposits at the biggest Japanese bank and its two closest rivals rose to ¥82 trillion last quarter. Citigroup is considering a retreat from Japan after pulling back from retail banking in markets with low returns, including Spain, Greece and Turkey.
“It is very difficult to make money from lending in Japan unless you’re in higher-margin consumer lending or if you’ve got a very large scale of operations like the megabanks have,” CreditSights Inc analyst David Marshall said. “In an environment in which interest rates are very low and investors are still somewhat risk-averse despite economics, it is hard to make money.”
Ten-year Japanese government bond yields have fallen 21 basis points this year to 0.525 percent as the Bank of Japan buys about ¥7 trillion of government bonds a month as part of Japanese Prime Minister Shinzo Abe’s stimulus package. That compares with 2.41 percent for equivalent treasuries. The spread on what Mitsubishi UFJ charges for domestic loans over deposit interest rates fell to a record 0.96 percent in the first quarter.
For all Japanese lenders, the spread fell 11 basis points on average to 1.38 percent in the year ended March, according to the Japanese Bankers Association. Even with a 4.3 percent increase in total loans in the period to ¥499.3 trillion, revenue from managing funds fell ¥3.2 billion to ¥9.65 trillion, it said. A basis point is 0.01 of 1 percentage point.
Years of deflation and monetary stimulus have left Japanese banks with a net interest margin of 1.25 percent, the lowest in Asia, according to data compiled by Bloomberg.
“There are too many banks in Japan and that’s causing stiff competition which leads to interest rates declines,” SMBC Nikko Securities Inc analyst Nozomi Kokubun said.
Citigroup Japan, which has 33 branches in Japan representing less than 1 percent of its global total, had net income of ¥1.1 billion during the past three years. Its loans totaled ¥356.1 billion, or about 10 percent of its deposits at the end of March.
Citigroup’s investment banking unit in Japan had a net loss of ¥3.5 billion in the year ended March compared with a profit of ¥1 billion the previous year, according to earnings statements on the company’s Web site.
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