DEALTALK-SMFG/Citi deal could expose Daiwa bank venture
* SMFG could buy more of Nikko Citigroup, and end Daiwa jv
* Or buy less Nikko ... and go for Daiwa Securities
* To take on Nomura as securities industry powerhouse
* SMFG shares up 2.6 pct, Daiwa off 5.5 pct
By Junko Fujita
TOKYO, April 27 (Reuters) - A reshaping of Japan's retail broking industry may hinge on how much of Nikko Citigroup goes to Sumitomo Mitsui Financial Group (8316.T) as part of a likely $5 billion deal between Citi (C.N) and Japan's third-ranked bank.
SMFG outbid its rivals and is in exclusive talks to buy Citigroup's retail broker Nikko Cordial and part of investment bank Nikko Citigroup, sources have told Reuters. [ID:nBNG444715]
The deal casts doubt over the future of SMFG's partnership with Daiwa Securities Group (8601.T). SMFG owns 40 percent of an investment banking joint venture Daiwa Securities SMBC.
"One of the possible scenarios is that SMFG will cut its ties with Daiwa Securities," said Azuma Ohno, a brokerage analyst at Credit Suisse in Tokyo.
Ohno said SMFG would likely end its relationship with Daiwa if its acquisition of Nikko Citigroup includes those operations that overlap with Daiwa Securities SMBC, such as stock underwriting, merger advisory and sales and trading.
SMFG shares rose 2.6 percent on Monday as investors bet the acquisition would strengthen its retail network and investment banking business. But Daiwa Securities slid 5.5 percent, reflecting worries that SMFG could alter or end its ties with Daiwa Securities SMBC.
Sources have told Reuters that Citi has offered to sell the part of Nikko Citigroup that handles small and medium companies, but may also be open to letting go of a bigger chunk of the investment bank.
Buying most or all of Nikko Citigroup would give SMFG control over an investment bank -- as opposed to its minority stake in the Daiwa SMBC venture.
By some measures, Daiwa SMBC is a stronger investment bank.
It ranked second in January-March in managing stock sales in Japan, was third in yen bond underwriting, and seventh last year in advising on Japanese acquisitions, well ahead of Nikko Citigroup.
But some investors and analysts say SMFG may be better off buying just the part of Nikko Citigroup that complements Daiwa SMBC, and then buying Daiwa Securities as well.
The operations would all then be placed under the SMFG umbrella, creating a powerhouse better equipped to compete with securities industry leader Nomura Holdings (8604.T).
Daiwa's retail unit had 24.4 trillion yen in client assets in December, while Nikko Cordial held 24.9 trillion yen. Combined, the two would approach Nomura's 58.3 trillion yen.
"If such a brokerage were created, it would become a strong competitor to Nomura in terms of the retail business," said Wataru Kasatani, a financial analyst at MDAM Asset Management.
Retail broking is a weak spot for SMFG. It owns SMBC Friend Securities, a second-tier broker that had about 60 billion yen in sales in the past business year and has 75 branches.
Combining Nikko Cordial, Daiwa Securities and SMBC Friend would give SMFG 298 branches. Nomura has 172.
Keeping close ties with Daiwa is important to ensuring SMFG builds a presence in the retail sector.
"If Daiwa runs away from SMFG and finds a stronger partner, that may weaken SMFG's standing in the industry," said a Tokyo-based banking analyst, who asked not to be identified because of the sensitivity of the issue.
Nor are SMFG's rivals just sitting on their hands.
Mitsubishi UFJ Financial Group (8306.T) and Morgan Stanley (MS.N) plan to merge their Japanese brokerage units, a move that follows MUFG's $9 billion investment in the U.S. bank last year.
Mizuho Financial Group (8411.T), which along with MUFG also bid for Nikko Cordial and Nikko Citigroup, plans to combine its broker unit with affiliate Shinko Securities (8606.T). [ID:nT5288] [ID:nT315067]
Nomura, meanwhile, has its hands full integrating the operations of failed U.S.investment bank Lehman Brothers (LEHMQ.PK), which it bought late last year. (Editing by Ian Geoghegan)
