CITIGROUP IS selling its Japanese domestic securities business to Sumitomo Mitsui Financial Group in a Y774.5bn (€5.8 billion) deal that gives the US bank a vital capital boost and alters Japan’s financial sector significantly.

SMFG, Japan’s third largest bank, is paying Y545billion for Citi’s Japanese securities business – mainly the brokerage Nikko Cordial Securities – and a further Y28.5 billion for Japanese-listed securities held by Citi. It is the first time a Japanese mega-bank has merged with a large broker. It catapults SMFG into the top rank of the Japanese securities sector.

The deal ends one of Citi’s most ambitious overseas forays – the $13 billion purchase of Nikko Cordial and some Nikko assets two years ago – but comes at a time when the bank needs to boost both its capital and the US government’s confidence in its ability to sell businesses.

Citi, which has already agreed to sell a 36 per cent stake to the US authorities, is in the midst of discussions over the government’s “stress test” of its financial health.

The exercise, results of which will be released next week, is believed to have shown that Citi needs to raise more capital, most likely from the government. But Citi has argued that disposals should help to repair its balance sheet without further capital.

Yesterday it confirmed the Financial Times report that the Nikko sale would boost its tangible common equity – a measure of financial health – by $2.5 billion, but would result in a $200m after-tax loss. – (Copyright The Financial Times Ltd 2009)