Sumitomo Mitsui Financial Group will buy Citigroup's Japanese broker and key investment banking units for $5.9 billion and look to form a financial services powerhouse through an alliance with Daiwa Securities Group.
Citigroup said the sale of assets to Sumitomo Mitsui (SMFG), Japan's third-largest bank, would bring it $7.9 billion, including about $2.1 billion in retained cash and debt payments.
The U.S. bank will book a net loss on the transaction, but gets much needed-capital as the U.S. government tests the strength of its balance sheet.
SMFG will pay a total of 573.5 billion yen ($5.9 billion) for retail broker Nikko Cordial Securities, and parts of investment bank Nikko Citigroup, including stock and bond underwriting. Included is 28.5 billion yen worth of securities held by Citigroup.
SMFG said it would form an alliance with Citigroup to gain access to its global corporate banking clients, and consider merging Nikko's wholesale businesses with its investment banking venture with Daiwa, Daiwa Securities SMBC.
For SMFG, the purchase is a key defensive move because it prevents the bank's bigger rivals from getting stronger, said Deutsche Securities analyst Shin Tamura.
Mitsubishi UFJ Financial Group and Mizuho Financial Group, Japan's top two banks, had also bid for the Citigroup assets, sources have told Reuters.
Nikko Cordial and Nikko Citigroup have relatively large assets, said Tamura. If the other two took the Nikko Cordial group, SMFG would not be able to catch up with those two for good.
Nikko and Daiwa SMBC would have ranked a close second in the latest quarter in yen bond and stock underwriting to leader Nomura Holdings.
We want to create Japan's No.1 brokerage through our tie-up and an alliance with Daiwa, Masayuki Oku, head of SMFG's core banking unit, told a news conference.
Citigroup said it will book an after-tax loss of about $200 million on the deal, which will generate $2.5 billion of tangible common equity for the struggling U.S. bank.
The transaction does not include Nikko Asset Management, a fund manager set to be sold off by Citigroup in a separate deal.
Citigroup Vice Chairman Stephen Volk said the bank plans to keep about 5,000 workers and its consumer, corporate lending, trading and capital markets businesses in Japan.
The U.S. firm spent about 1.6 trillion yen to acquire Nikko Cordial in a cash and stock transaction completed last year, as it sought to expand aggressively in the world's second-largest economy.
The bank was forced to sell off assets globally to raise cash after suffering more than $85 billion in credit losses.
Sumitomo Mitsui last year paid about $1 billion for a 2 percent stake in Britain's Barclays Plc. Sumitomo Mitsui also has a long-standing relationship with U.S. investment bank Goldman Sachs Group.
Sumitomo Mitsui's president, Teisuke Kitayama, gave few details on how a tie-up with Citigroup could change its existing relationships.
We will consider how to develop these relationships depending on the market condition, he said.
The key to success for Sumitomo Mitsui will also likely depend on the alliance with Daiwa Securities, said Masaru Hamasaki, a strategist at Toyota Asset Management.
It a bit early to tell whether this move would greatly strengthen Sumitomo Mitsui. Acquiring Nikko will be positive, but there are uncertainties about how it could cooperate together with Sumitomo Mitsui's partner Daiwa Securities.
The deal comes as Japanese banks grapple with massive losses on their stock holdings and a rise in bad loans.
SMFG said last month it would book a net loss of 390 billion yen for the year to end-March, and said it would raise up to $8 billion in funds.
Top bank Mitsubishi UFJ warned separately on Friday it would lose 260 billion yen in the past year.
Acquiring Nikko Cordial will give SMFG Japan's fifth-largest brokerage by operating revenue, 109 branches and a familiar brand. SMFG's presence in retail broking has been limited to SMBC Friend Securities, a second-tier firm with 75 branches.
The Nikko Citigroup assets will bolster its position in investment banking at a time when its rivals are also taking aggressive steps.
MUFG and Morgan Stanley are planning to merge their Japanese brokerage units and Nomura strengthened its hand with last year's acquisition of Lehman Brothers' operations in Asia, Europe and the Middle East.
(Additional reporting by Kei Okamura, Editing by Ian Geoghegan and Andrew Macdonald)
($1=97.50 Yen) ($1=.6739 Pound)