It has been more than seven months since Bank of America bought FleetBoston, and almost six since JPMorgan Chase and Bank One announced their deal. But still Citigroup hasn?t pounced, confounding those who were sure that the world?s largest bank would feel compelled to join the rush to build a national retail franchise in its home market.
Too many, it seems, were so deafened by the noise about US bank mergers that they didn?t hear what Citigroup was saying. As one senior Citigrouper told Euromoney at the start of the year, the US is not where the bank?s executives think the best acquisitions are to be had. ?The best growth prospects come from outside the US, and that?s where you?ll be more likely to see us make a move.?
For a bank with operations in 100 countries, that doesn?t offer much of a guide to Citi?s next move. But some investors and analysts now think enough hints have been dropped for them to have a pretty good idea of where its next big acquisition will be: Japan.
Getting investors comfortable
Sir Deryck Maughan, CEO of Citigroup International, discussed it at an investor meeting in Mexico City last month organized by UBS?s US financial services analyst Glenn Schorr.
According to one of those present: ?It was the third or fourth time he?s brought it up in the past 12 months or so. You don?t tend to do that with the bank?s top 20 investors unless you?re trying to get them comfortable with the idea.?
Schorr wrote up the meeting in a note he sent to clients on May 10 summarizing Citigroup?s overall plans for its international division, which made $2 billion in the first quarter this year. Schorr?s main takeaway is that while other countries are also on the list, Japan is top priority.
That?s going to surprise many people, because Citigroup already has a joint venture in Japan with Nikko. It has been a success, putting Citigroup?s Japanese investment banking operations way ahead of those of its US peers; the company is second only to Nomura in the Japanese market.
But it?s not another securities house deal Citi is looking for, but something much larger. ?We think that a retail bank acquisition in Japan is top of mind right now at Citi,? wrote Schorr. At the Mexico investor meeting, Mizuho?s name came up as a potential competitor to Citi in Japan. One investor at the meeting even wondered whether Citi might also regard it as a potential acquisition target. Mizuho, Maughan told them, is the house bank for 70% of companies listed on the Tokyo Stock Exchange. It also has 30 million retail customers.
That?s been known since the merger that created Mizuho; what makes it a competitive threat now is that next year Article 65 ceases to be. This innocuous-sounding law is the Japanese equivalent of the Glass-Steagall Act, which prevented US commercial banks from owning investment banks. In fact, the law is based on Glass-Steagall; general Douglas MacArthur apparently handed over the US financial code to the Japanese to take a look at after World War II.
Liberalization benefits
Citi?s rationale for placing Japan at the top of its list, rather than, say, China or Brazil, which executives also regard as good targets for expansion, is that the abolition of Article 65 should make it easier for Japan to become its largest single non-US source of earnings in a very short space of time. At present, Mexico contributes the most, with just over $1 billion in earnings last year, but that comes from its dominant position as a result of buying Banamex in 2001.
Elsewhere, says Schorr, ?Citi has a 2% to 3% market share in the most important countries in which it operates.? The plan is to have ?seven to 10 countries earning that level five years from now with a few reaching earnings of $2 billion to $3 billion,? says Schorr.
Citi alreadys earns $800 million a year in Japan, and feels that getting that level to $2 billion in the near term will be easier ? given the regulatory change next year ? than in other countries, such as China. By Schorr?s reckoning, Citi isn?t likely to buy in China in the near term.
?Citi doesn?t regard China as a top-10 contributor in the next five years,? he says, though as the test-case credit-card operation it announced earlier this year proves, Citi is already investing there.
If Citi does buy in Japan, it?s unlikely to prevent it from buying elsewhere. In fact one of the main points of last month?s meeting was for Maughan to lay out the bank?s overall international strategy. It?s 20-60-20: the top 20 countries will receive the most focus for growth in the next five years and acquisitions might figure more prominently than in the past ? aside from Banamex, Citi has only bought two other non-US banks: Bank Handlowy in Poland and Koram in South Korea. In addition to Japan, Brazil could prove fertile ground for an acquisition to boost the building it is already doing in credit cards and consumer finance. The next 60 countries will be nurtured, and grow organically while the bottom 20 will be kept on a short leash.
That?s not to say Citi is ignoring the US. In fact, last month it bought Principal Finance?s mortgage banking operations for $1.8 billion. It?s hardly transformational, but then few deals would be for Citi. In the US it?s these kinds of bolt-on acquisitions that the bank seems to favour. Not that this stops many from continuing to speculate. Rumours at the end of last month had Washington Mutual, a retail and mortgage bank on the west coast, up for sale again. And Citigroup was top of the buyer list.