Among many other murky developments on Monday came the contradictory stories about the fate of Citigroup’s Japanese retail brokerage operations, Nikko Cordial Securities, formed just a year ago after a long and costly negotiation with Nikko Securities. After paying a top price of Y1,600bn ($18bn) for the broker, Citi’s former CEO Chuck Prince featured the Japan operation as a key plank in Citi’s global expansion strategy.
The Wall Street Journal reported Monday that Citi had earmarked Nikko Cordial for sale, “in an abrupt reversal that underscores the severity of its plight”:
Citigroup, which revealed an $8.3 billion quarterly loss on Friday, said Nikko Cordial Securities, Japan’s No. 3 brokerage in assets, will be categorized as a noncore asset alongside other peripheral or ailing businesses globally. Just three days earlier, the US bank said it wasn’t including the Japanese brokerage in the spinoff of its other retail broking business, Smith Barney, to Morgan Stanley.
People familiar with the matter say Citigroup hadn’t planned to sell Nikko Cordial until the eve of its earnings. But after spinning off Smith Barney, Nikko Cordial Securities was left as the only major retail brokerage business within the group and didn’t fit into Citigroup’s plans. The final decision was made by a tight cadre around Chief Executive Vikram Pandit, these people said.
Citigroup also figured it might be easier to find a buyer for its businesses in Japan than elsewhere since Japanese financial institutions, while bruised by the global economic downturn, are still relatively sound financially.
On the weekend, various papers including Japan’s Nikkei business daily reported that Citi might sell Nikko Cordial and that Mitsubishi UFJ Financial Group (which recently invested $9bn in Morgan Stanley) was considering buying the broker from Citi – reports that were later vehemently denied. The top-circulating Yomiuri newspaper also said Mizuho Financial Group as well as MUFG were seeking to acquire the brokerage, and that MUFG would inform Nikko’s executives of its intentions as early as Monday.
All the more striking, then, to see a report on Bloomberg early Monday with the headline: Citigroup is ‘committed’ to Japan unit Nikko Cordial. In a statement, Citi denied all reports it was considering the imminent sale of its Japanese retail brokerage business, insisting it remained “committed to maximizing the value of Nikko Cordial over the next few years”.
Besides, one Tokyo-based analyst told Bloomberg: “It would be difficult for one of Japan’s big banks to buy Nikko Cordial with available cash… If they did want to buy it, they would have to get it cheap.”
Despite Citi’s denial, however, S&P decided the group’s designation of its Japanese retail brokerage operations as part of its “non-core” business was enough to downgrade the Nikko Citi business:
On Jan 16, Citigroup announced plans to reorganize its operations. The group’s brokerage and asset management arms, including Nikko Cordial Securities and Nikko Asset Management, both fully owned by Nikko Citi Holdings, were designated as noncore businesses and are subject to restructuring. The ratings on Nikko Citi Holdings and Nikko Cordial Securities have traditionally been higher than the stand-alone assessments of their credit quality (stand-alone ratings), as they incorporated potential financial support from Citigroup, based on their status as strategically important subsidiaries. However, Standard & Poor’s has decided to eliminate this ratings notch-up following Citigroup’s announcement, and the ratings on these firms now reflect their stand-alone credit quality.
The ratings on Nikko Cordial Securities reflect the credit quality of Nikko Citi Holdings on a consolidated group basis. Nikko Cordial Securities’ credit quality is high compared to other group companies, given its relatively limited exposure to risk and its ability to maintain positive earnings amid a flagging stock market. However, since Nikko Cordial Securities is a fully owned subsidiary of Nikko Citi Holdings, it shares the risks faced by Nikko Citi Holdings and other subsidiaries engaging in businesses including wholesale and principal investments, given the potential transfer of capital and funds among Nikko Citi Holdings and its subsidiaries. The stand-alone credit quality of Nikko Citi Holdings is lower than that of Nikko Cordial Securities due to its structurally subordinated nature as a holding company and its retention of high-risk assets, such as equities.
The negative outlooks suggest that the ratings on both companies could come under downward pressure if their asset portfolios deteriorate or if their profitability remains stagnant due to global market turmoil. Nikko Citigroup Ltd. (NR), the wholesale arm of Nikko Citi Holdings, posted net losses for two consecutive quarters in April-June and July-September 2008, due to worsening performance in its trading and underwriting operations. Earnings from the retail business of Nikko Cordial Securities may also come under increasing pressure if the securities markets continue to slacken. The outlooks also reflect securities firms’ high dependence on financing from the capital markets and their vulnerability to degradation in the financing environment.
Perhaps, however, none of the flip-flopping is suprising coming from a group whose then CEO, back in July 2007, insisted the bank was “still dancing” — just weeks before it all began going horribly wrong. As the FT noted back then: “The problem with throwing a big party is cleaning up after the music stops.”
Related link:
MS/Smith Barney – tough questions answer sheet – Long Room