Citigroup Inc. on Friday said it would further retrench its consumer finance operations in Japan, though the New York company stopped short of announcing a plan to quit that business entirely.
Analysts said keeping some kind of consumer finance presence there makes sense given Citi's other businesses in Japan and that its problems in Japanese consumer finance are unrelated to broader credit woes that have caused it to lose money in recent quarters.
In 2006 a legislative change in Japan limited the interest rates lenders can charge customers with risky credit histories. This opened the door for customers to claim refunds on loans. That is a uniquely Japanese problem which made the unit unprofitable, said Roger Lister, the chief credit officer of the U.S. financial institutions group at the credit rating agency DBRS Inc.
In January Gary Crittenden, the $2.2 trillion-asset company's chief financial officer, seemed to hint that Citi might quit those operations as it began reviewing all its businesses with a view to divestitures that would help shore up profits.
"The situation in Japan consumer finance remains difficult," Mr. Crittenden said at the time, "and we continue to appraise or evaluate the prospects of that business."
On Friday Citi said it would close 32 consumer finance branches and 540 automated loan machines in Japan during the next 12 months and "suspend" its consumer finance brand there. But it also said it may continue making certain loans in Japan, including mortgages and at least some unsecured consumer loans.
In January 2007, the company had announced plans to close 270 of its roughly 700 consumer finance branches and 100 automated loan machines in response to the legislative changes.
In a press release heralding the latest changes, Citi said it "will also focus on leveraging" its consumer finance "infrastructure and consumer lending expertise to support growth initiatives in stronger-performing segments of consumer lending and other businesses in Japan." Further, it said it remains committed to retail and wholesale banking in Japan, as well as to asset management.
(Citi has 31 retail bank and 110 brokerage branches in Japan.)
"This really isn't about mismanagement," said DBRS' Mr. Lister.
Given the significance of Japan to the world economy, keeping a foot in the door on consumer lending might be a good strategy, said Frank J. Barkocy, the director of research at Mendon Capital Advisors Corp. However, he added, consumer finance in Japan "has worked so much against them."
Citi's Japanese consumer finance business lost $69 million in the first quarter, compared with a $9 million profit a year earlier. For all of 2007, Citi lost $480 million on this business — compared with a $505 million gain two years ago, just before the Japanese legislation instituted the stricter rules.
Citi's problems in Japan have not been confined to consumer finance.
In 2004, it was forced to shutter its private bank there, after regulators said the unit's accounting was inadequate. This was one of several legal setbacks under then-chairman and CEO Charles Prince. (Mr. Prince resigned last October and was succeeded by Vikram Pandit in December.)
However, Citi has also been expanding in certain business lines in Japan.
Last month it expanded its brokerage presence when it closed its purchase of Nikko Cordial Corp., a company in which it had held a controlling stake.
At the same time, it said it would consolidate all its Japanese operations and rename its legal entity in Japan Nikko Citi Holdings Inc. It said it expected these initiatives to take 18 to 24 months to complete.
In March, Citi changed the structure of its business units companywide, breaking the global cards operation away from the global consumer business and installing CEOs for each of its four foreign regions. Ajay Banga, who was the head of all Citi's consumer operations outside the United States, moved to Asia to lead operations there, including those in Japan.
Two weeks ago Citi announced a slew of management changes in Japan, and Doug Peterson, the chairman, president, and CEO of Nikko Citi, said Friday that these were "designed to drive meaningful and sustained growth in our banking and securities operations."
