Citibank (NYSE: C) has decided to sell its retail business in Japan. Another in a lengthening list of Abenomics casualties?
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By spring 2002, Japan had experienced a full year of the Bank of Japan’s then much applauded, innovative new policy of 量的金融緩和, ryōteki kin’yū kanwa, translated and forever enshrined in the world’s central banking lexicon as “Quantitative Easing.”
What QE meant in practical terms, and for the banking business, was “zero interest rates.”
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Traditionally, the basic profit model of branch banking had been accumulating consumer deposits in the form of savings deposits and time deposits at a cost lower than the prevailing rate for funds in the interbank money market. Such low cost funds were “purchased” at a profit for the branches by a bank’s internal Treasury department and provided to the bank’s corporate lending department to be lent to customers with another mark-up to compensate for risk and the need for profit.
Suddenly, in 2002, the BOJ’s celebrated innovation of QE had blown up this model. Retail branches, rather than profit centers, became a loss-leading albatross. What to do?
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Citibank had been the earliest and most aggressive bank to promote retail foreign currency deposits. It was by 2002 by far the market leader, and had clearly differentiated its “brand” as the bank offering the highest rates on USD, EURO, AUD, SGD, HKD and other foreign currency deposits. But especially USD, the currency most desired by Japanese consumers.
What made this such a great business for Citibank is that they were able to offer interest rates significantly higher than Japanese banks for USD deposits because Citibank was able to deploy these deposits much more profitably than Japanese banks. How? While Japanese banks generally could only lend USD to their corporate customers at an international market-determined spread of perhaps one percent, Citibank was shipping Japanese consumer deposits back to New York to fund Citi’s credit card loan portfolio where the spread over cost of funds was 8-9 percentage points or higher.
What seems clear now that Citibank has decided to withdraw from Japan’s retail market is that even the USD deposit business has stopped being profitable enough to carry the rest of the retail operations’ costs. This is surely because competitors have found ways to emulate Citi’s model.
Very likely, too, the Fed’s QE has been undermining Citibank’s USD business, while the monetary incontinence being implemented by BOJ governor Kuroda as Abenomics’ “First Arrow” ensures that there will be no improvement in domestic currency economics for the foreseeable future.