Citigroup Inc. is selling its Japanese retail brokerage Nikko Cordial Securities Inc. for $7.9 billion to Sumitomo Mitsui Financial Group. Said another way, by selling the operation, Citigroup is buying 27 basis points of Tier 1 capital ratio improvement.
Nevermind the $200 million loss Citi is to take on the sale; analysts said the deal looks to be a good one for Citi, which expects to book an extra $2.5 billion of tangible common equity at a crucial time as a result of the transaction.
"As part of Citi's strategy to shed noncore assets in order to raise capital levels, this comes in advance of the government's stress-test results, and we believe it could help persuade the government that Citigroup does not need to raise additional capital," Standard & Poor's equity analyst Stuart Plesser wrote in a research note.
Along with Nikko Cordial, Citi will sell Japanese-listed stocks valued at 28.5 billion yen.
But Citi will retain its ownership of Nikko Asset Management Co., Nikko Citigroup Ltd. and Nikko Principal Investments Japan Ltd., and will keep a partnership with Nikko Cordial to originate and distribute capital markets products to investors in Japan and globally.
Banks large and small are feeling inordinate pressure to raise cash by slimming down, even if it means shedding lucrative businesses.
For example, United Western Bancorp Inc. of Denver agreed last month to sell its trust business for $61.2 million, boosting its tangible common equity ratio by 1.5 percentage points from its yearend ratio of 4.5%.
And Fifth Third Bancorp of Cincinnati agreed to part with a majority stake in its payments processing unit, a growing business with $913 million in annual revenue, to raise $1.2 billion of Tier 1 capital. The deal, set to close by the end of the fourth quarter, was expected to boost Fifth Third's Tier 1 capital ratio by about 90 basis points, to 11.5%.
For Citi, the deal in Japan should be just a small taste of things to come.
Earlier this year the New York banking company put all of the assets it considers noncore into a division it calls Citi Holdings.
In Friday's announcement of the deal, Vikram Pandit, Citi's chief executive, said, "We will continue to look for additional opportunities to maximize the value of businesses and assets as we rationalize and restructure Citi Holdings."
And while this is hardly an ideal time to be a seller of assets, banks, especially those, like Citi, that are being propped up by the government, have little choice but to cut the best deals they can find.
"You can't take a breather in an environment like this," said Gary Townsend, the CEO of Hill-Townsend Capital LLC. "You've got the regulators banging at the door, and shareholders are an angry mob as we saw" at Bank of America's annual meeting in Charlotte.
"Hopefully," Townsend said, "the government gives them enough runway, and Citi can do enough sales, to eventually repay the taxpayers."
And if, in the process, it can increase the percentage of Tier 1 capital consisting of tangible common equity, all the better.
Tangible common equity accounts for 60% of Citi's Tier 1 capital, better than the 53% average for large banks, according to a report last week by FBR Capital Markets analysts led by Paul J. Miller Jr.
But that's down from an industry average of 85% for the first half of this decade, before a combination of bank losses, preferred stock issues and money from the Troubled Asset Relief Program began to erode the proportion of Tier 1 capital attributable to tangible common equity, the report said.
