As I am sure most people know, banks accept deposits from customers, and then pay interest. This costs the bank money.
Banks also typically lend money out for business loans, home loans ,and other types of loans on which they of course charge interest.
Basically, the way banks have historically made profit is that they borrow money from depositors, lend that money out, charge interest, pay some percentage of that back to the depositors, and keep the rest for themselves.
Here are some average numbers from the United States as of the end of 2022.
- Car Loan – 3.3% – 5.99
- Savings Account – 3.3% – 4.35 %
- Standard Home Loan – 5.5% – 6%
- Business Loans (bank) – 4.2% – 4.5%
As an example, an average consumer might put money into the bank, which pays them 3.3% interest. The bank lends that money out as a home loan at 6%. That gives them a 2.7% margin. Since the banks have many millions of depositors, many thousands of home loans, and are operating billions of dollars, this more than covers their cost for renting expensive bank buildings and paying their employees, and leaves plenty of profit for returning to investors, expansion, etc.
Sadly banks in the US have gotten into less honorable, but more profitable operations such as pay day loans, title loans, excessive fees, and credit cards – but we’ll leave that discussion for another day.
The point is: banks in the US, and in most countries, have a large customer base and a wide percentage point spread to work with.
So how about Japan?
I’ll use Mitsubishi UFJ Bank as an example:
- Normal Deposit Account (Futsuu Yokin Kouza): 0.0010%
- Variable Rate Home Loans: 0.345% – 0.475%
Yes, you read that correctly: The interest rate they charge on home loans is less than half a percentage point in the most expensive case! 10 year fixed rate loans are closer to 1%, but that’s still extremely cheap compared to most countries.
These rates aren’t special to Mitsubishi either. As of this writing, Sony bank charges 0.397% (if you put a 10% deposit), and SBI Shinsei Bank charges 0.320%
What that means is that the bank has to lend out the money, collect the payments, pay their rent, employee payroll, IT fees, utility bills, taxes, pay for losses on bad loans, and then pay interest back to the depositors. It’s no wonder the rate on deposit accounts is essentially zero.
If you are willing to lock your money away for a year or more, then you can get an increased rate of return, say.. 0.0020%!
Having to live on a margin of less than 0.5% of interest requires massive scale and low costs. A foreign bank operating in Japan is by its very nature likely going to have a small scale and higher costs.
Difficult Market Conditions in Japan:
- Low Interest Rates: Japan’s prolonged period of ultra-low, and at times negative, interest rates made it difficult for retail banks to generate significant profits from traditional lending and deposit-taking activities.
- Intense Competition: The Japanese retail banking market is highly competitive, dominated by large domestic megabanks (like SMBC, MUFG, Mizuho) with extensive branch networks and deep customer bases.
- Small Market Share: Despite its long history in Japan (entering in 1902), Citibank’s retail banking market share remained relatively small.
- High Operating Costs: Despite efforts, foreign banks often faced higher operating costs in Japan compared to local counterparts, including staffing, real estate, and compliance. Operating in Japan’s highly regulated financial sector still incurs significant compliance costs and requires navigating complex local rules, especially for foreign institutions that may not have the same deep-seated relationships with regulators as domestic banks.
Because of this, the two main foreign banks operating in Japan both closed their retail branches in the past 10 years.
HSBC
HSBC closed all of their retail/consumer operations and fled a number of years back. Their branches were simply closed as they said goodbye to their customers.
Cultural and Operational Mismatches: Some analyses suggest that HSBC struggled with an “ethnocentric” approach in its Japanese retail operations. This includes:
- Language Barrier: HSBC’s internal official language is English, which created challenges for recruiting bilingual local staff and daily communication.
- Centralized Decision-Making: HSBC’s more centralized decision-making process clashed with the more consensual, decentralized, and often slower decision-making culture prevalent in Japanese organizations.
- Employment Practices: Difficulties aligning with Japan’s “lifetime employment” culture and the challenges of dismissing staff. (It isn’t easy to terminate employees in Japan).
- Technical Incompatibility: Issues with standardizing global ATM and internet banking systems to meet specific Japanese market requirements.
- HSBC had also faced global scrutiny and fines related to anti-money laundering (AML) practices, which further underscored the need to consolidate operations and focus resources on core, compliant businesses.
Exit from Japan:
- As part of its exit, HSBC sold its Japanese private banking business (targeting ultra-high-net-worth individuals) to Credit Suisse Group AG in late 2011/early 2012.
- For its broader Premier and retail banking services, HSBC phased out operations, gradually closing its branches and assisting existing clients in moving their assets to other banks and financial institutions.
In essence, HSBC’s exit from Japanese retail banking was a strategic decision to withdraw from a market where it faced intense competition, low profitability, high operating costs, and cultural/operational hurdles, allowing it to reallocate resources to areas like corporate banking and asset management where it believed it could achieve better returns globally.
Citibank
Citibank also operated in Japan, essentially catering to rich foreigners, and also closed. In many retail markets, including Japan, Citibank was a relatively small player compared to dominant local banks. Competing effectively in a saturated, low-interest-rate environment like Japan’s retail banking market was challenging and didn’t align with Citibank’s desired returns. This was not just to profit crunch, Citibank Japan was punished by the Japanese government multiple times for dealing with the Yakuza, as well as deficiencies in its governance, internal control, and business management systems.
In the case of Citibank, though, SMBC Trust Bank took over the operations, absorbing Citibank Japan into SMBC Trust Bank in 2015, and branding it “Prestia”.
Because of this history Prestia is one of the only banks where most everything is available in English, and one of the only banks to charge a monthly fee just for having an account (Depending on your balance).
Strategic Advantage for SMBC Trust Bank:
- Acquisition of Desirable Assets: For SMBC Trust Bank, acquiring Citibank Japan’s retail operations was a strategic move. Citibank had a base of affluent, globally-minded customers, many of whom were expatriates, with significant foreign currency deposits and a preference for global financial products. This niche was attractive to SMBC Trust Bank, which aimed to expand its private banking services and enhance its foreign currency funding base.
- Expertise and Brand: SMBC Trust Bank also gained Citibank’s know-how in foreign currency investment management, product development, and the established “PRESTIA” brand, which was well-known among a specific segment of the Japanese and expat population for its global services.
- In essence, Citibank’s exit from Japanese retail banking was a calculated decision to shed a less profitable, high-compliance-cost segment in a challenging market, allowing it to reallocate resources to more lucrative global wealth management and institutional businesses where it held a stronger competitive advantage. The repeated regulatory issues in Japan likely accelerated this decision.
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