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Munshi Ahmed for Asiaweek.
Seegers has half a billion reasons to smile.
Top in Tokyo
How Citibank is changing the face of retail banking in Japan

When you go to the automatic teller machine today, chances are you'll be getting cash out, not putting money in. Unless you happen to be a depositor with Citibank Japan. "For every 10,000 yen customers withdraw from our machines, they deposit 12,000," says Robert Berady, head of virtual banking in Tokyo for the U.S. financial giant. "I don't think any bank in the world comes near this. Our ATMs take far more in than they give out."

That assertion is difficult to swallow considering the country in which Berady makes it. Japan's banking sector is a conservative, cloistered, crowded and politically charged environment, one that is difficult enough for domestic banks and is outright hostile to foreign financial services companies. Over the years, regional powers like HSBC, ABN Amro and Standard Chartered have avoided retail banking in Japan like a platterful of poisonous blowfish. "Returns don't justify the costs of building a Japanese retail network," says Aman Mehta, HSBC's Asia-Pacific CEO. "We'd rather put our resources where we can maximize shareholder value."

Citibank shareholders don't seem to be complaining. Through a combination of endurance, aggressive marketing and a bit of luck, Citibank Japan pretax profits have increased nearly sevenfold since 1995 to a projected $540 million for the year ending next March — this during a protracted recession and lingering banking crisis. Deposits are growing by nearly $9 million a day; analysts expect Citibank Japan to have $25 billion by end-March 2001.

The company's stellar record in recent years can be traced to moves that first looked like a setback but wound up a windfall. In the early 1990s, Citibank pressed Japan for the right to link up its financial network to the cash machines of the country's commercial banks, whose ATMs today number 120,000 nationwide. Not surprisingly, Japan said no — but as a kind of consolation prize it did allow the outsider to connect to the 22,600 ATMs of the government's ancient postal savings bank. That proved fortuitous. As Japan's banks foundered over the next several years, Japanese depositors by the hundreds of thousands moved their savings to the state bank. Citibank found itself with direct access to a wide customer base — one that domestic banks couldn't reach because they had shut the postal savings bank out of their ATM network. In the past five years, Citibank's accounts rose 623%,

Today, with some $1 trillion in postal savings deposits maturing in the year ending next April, Citibank is perfectly positioned to sell investment products to consumers increasingly seeking better returns than the paltry half-percent a year they currently earn. By pushing a few ATM buttons, they can transfer their cash directly into Citibank vaults. "We can grow our deposit base 25% to 30% a year for the next several years," predicts Fritz Seegers, Citibank Japan chief executive.

Good fortune is just part of the success story. Japanese consumers have been demanding a wider range of investment vehicles and financing options than traditional lenders were willing to offer. "They were ready for a bank that was addressing their needs," says Seegers. "There was a clear shift to more consumerism."

The world's most profitable financial group (Citigroup's projected net income: $14 billion) stepped into the vacuum. "Citi has done stuff no other bank has even tried," says James Fiorillo, a bank analyst for ING Barings in Tokyo. One service permits bill-paying through popular i-mode mobile phones. Another allows 24-hour currency switching by telephone for individual clients. "In a country where the yen has swung several percentage points over short periods," Berady explains, "consumers want foreign exchange products." Especially those with lots of money to play with. Citi also pioneered round-the-clock ATMs, which some banks still shun.

Citibank's strategy has been to focus on the consumer. Having been in Japan since 1902, it was a bank of choice right after World War II for Japanese companies and financial institutions doing overseas business. But it lost that niche when domestic lenders began expanding abroad. So in the late 1980s, Citibank went for the retail market. Result: it escaped the avalanche of bad corporate loans after Japan's speculative "bubble economy" burst in 1990. When Japanese depositors worried about local banks looked around for a safe haven for their money, Citibank was among the few credible institutions.

Sandy Weill, chairman and CEO of the bank's parent Citigroup, long ago made Japan a cornerstone of the conglomerate's global strategy. His top man in Tokyo, Seegers, beams: "Despite our phenomenal growth in the past six years there is plenty of room to grow." Japan's total savings market of 44 million households is about $10 trillion, or half the U.S. market. But most of the yen is in liquid assets: an average of $227,000 per household. Japanese holdings of stocks and bonds amount to $1.1 trillion, about one-eighth the U.S. total. Hence, there is plenty of business for institutions offering savers ways of investing that are safe but pay above the 0.5% or less for postal savings.

In going for that market, Citibank has wisely focused on the 15 million high-income households in Japan — with results. In a recent survey, affluent Japanese were asked which bank they would trust their money with. The overwhelming answer: Citibank, which beat even established giants like Bank of Tokyo-Mitsubishi.

Targeting the rich enabled Citibank to leverage its limited 22-branch network, 14 in Tokyo. "With fewer branches and a growing customer base — the most affluent segment — our cost structure is very different from a bank with hundreds of branches," says Seegers. Adds Berady: "We have a lot of interaction with people by phone. We have Internet and i-mode. You won't see long queues of people in our branches. If they queue at all, it is to talk with financial advisers about mutual funds, long-term financial plans or mortgages."

George Bicher, an analyst with Deutsche Banc Alex. Brown in New York, follows Citigroup. He thinks Japan pretax profits can easily grow by 25% a year, to $1.5 billion by 2003: "The opportunity is huge." A key plank for future gains: consumer finance, which is due to be completely liberalized. Also a plus for Citi consumer lending is its takeover of Associates First Capital, a U.S. consumer finance firm with substantial insurance, credit-card, mortgage and consumer lending businesses in Japan. Citibank can then lend much of the funds it gets from postal accounts to Associates clientele.

The other area is retail investing, particularly the selling of mutual funds and other financial instruments to the affluent. That business wasn't even there early last year. "We have gone from zero to over $1.8 billion or so and are still growing phenomenally," says Seegers. Analysts expect Citi's retail investment management business to grow 35% annually over the next three years.

A further boost is Citigroup's purchase of 25% of Nikko Securities, the No. 2 Japanese investment bank and Citi's 51% partner in the Nikko Salomon Smith Barney brokerage house. Those two ventures cost Citigroup $1.6 billion — but are now worth $6 billion. No wonder Japanese savers seeking glittering returns are flocking to the bright Citi lights.

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