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Citi (C) to Sell Entire Stake in Chinese Securities Venture

Zacks Equity Research

Citigroup C has sought the option of selling the entire stake in its Chinese securities venture to its Chinese partner, per Reuters. The Wall Street biggie will end its stake in Citi Orient Securities joint venture (JV) and will work on establishing its majority-owned brokerage venture in China.

In December 2018, Citigroup Global Markets Asia Ltd expressed its intention to sell its entire stake in the joint venture and informed Orient Securities Co, its Chinese partner. Though the deal has received approval from Orient’s board, regulatory nods from China's securities regulator, the China Securities Regulatory Commission (CSRC) and state asset regulator, are pending.

Citigroup is expected to decide on a new partner by the end of 2019.

"On the back of recent regulatory changes, Citi wants to pursue ownership of a domestic JV with a wider scope of business across banking and markets to support our clients in China," the bank said in a statement to Reuters.

"As result, Citi and OS (Orient Securities) have mutually agreed to end the JV."

Notably, indicating its readiness to allow global banks greater access into the country’s financial markets, the Chinese securities regulator allowed foreign companies to increase majority stake to 51% in securities JVs, up from the existing ceiling of 49%. Regarding this, CSRC detailed the guidelines and experience mandatory for foreign shareholders along with the scale of businesses that can be recognized.

What Drives Citigroup?

Citigroup works globally. China-based clients record revenues of more than $1 billion for the bank.

Notably, in 2012, the Chinese government permitted foreign banks to boost their stakes in JVs with a local firm to 49%. Citigroup opened a JV in the same year, succeeding after years of efforts to enter China’s securities market. Later on, the bank expanded its onshore operations and sought various licenses for fixed-income trading apart from JV.

Other Global Banks Making Similar Moves

In December 2018, Swiss bank — UBS Group AG UBS — became the first foreign bank to get approval from CSRC to increase majority stake in its securities joint venture. Among other global banks, Nomura Holdings Inc. NMR and JPMorgan JPM are also  permission for majority stake.

Our Viewpoint

Global investment banks’ expansion has been limited in China for the past few years due to restrictions imposed on ownerships. With easing regulations for global banks and a growing Chinese economy, major foreign banks are likely to expand their footprint.

For Citigroup, this is expected to be a step in the right direction for enhancing profitability. The company has restructured many of its global operations.

Amid troubled financial currents, Citigroup is likely to gain some financial flexibility from such moves. We believe the company is well poised to address its internal inefficiencies and setbacks. Further, we anticipate that the company’s streamlining initiatives will boost its capital position, reduce expenses and drive operational efficiency.

Over the last two years, shares of Citigroup have lost around 18.7% compared with 12.6% decline registered by the industry.



Currently, Citigroup carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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