(Adds analyst comment, Citigroup stock price)
By Jonathan Stempel and Edwina Gibbs
WASHINGTON/TOKYO, Jan 9 (Reuters) - Citigroup Inc. (C.N: 株価, 企業情報, レポート) will close most of its Japanese consumer finance branches and suffer a $370 million fourth-quarter loss in that unit, hit by law changes that cut the maximum interest rates on loans.
The largest U.S. bank will take a $40 million fourth-quarter charge, including costs to close 270 out of 320 branches and 100 of 800 automated loan machines. Citigroup will also increase reserves by $375 million, as Japanese personal-loan firms face a flood of demands to repay interest charges that courts have deemed illegal. The bank's shares fell as much as 1.1 percent on Tuesday.
"We were surprised by the magnitude of the branch closings and negative impact on 2007 earnings," wrote Jeff Harte, a Sandler O'Neill & Partners LP analyst.
The expected fourth-quarter net loss for the unit is equal to 7 cents per share, Citigroup said. It expects the Japanese consumer finance unit to roughly break even in 2007 and thereafter be profitable as costs decline.
Amid a public and political backlash against the industry, changes in Japanese law have cut the maximum allowable interest charge on loans to 15 percent to 20 percent, depending on the type of loan, from 29.2 percent.
The industry was also battered by a Supreme Court ruling that said charges on loans with rates between 20 percent and 29 percent, a gray zone between two conflicting usury laws, are illegal. The ruling forced many lenders to beef up reserves.
"The likelihood of Citigroup selling its consumer finance business has increased, though that will depend on how well they restructure the business," said Nomura Securities analyst Shinichi Iimura.
Citigroup Chief Executive Charles Prince has been under pressure from many investors and analysts to lower Citigroup's expenses and to increase revenue faster than costs.
LOWER PROFITS
The Citigroup business, which operates under the brand name DIC, ranks around fifth or sixth in Japanese consumer finance.
It started closing branches in the second half of 2006 and plans to finish in the next few months, spokeswoman Atsuko Yoshitsugu said.
Profit from the consumer finance business tumbled 70 percent to $37 million in the third quarter, while revenue slipped 4 percent to $587 million.
Japan's top four money lenders -- Acom Co. Ltd. (8572.T: 株価, ニュース, レポート), Takefuji Corp. (8564.T: 株価, ニュース, レポート), Promise Co. (8574.T: 株価, ニュース, レポート) and Aiful Corp. (8515.T: 株価, ニュース, レポート) -- posted a combined 765 billion yen loss for the first half and see full-year losses at 706 billion yen.
Customers at lower-ranked companies have often been turned down at the top three firms. This puts those lower-ranked companies, which include General Electric Co.'s (GE.N: 株価, 企業情報, レポート) Lake business, under even more pressure than rivals to restructure.
"GE could do the same thing as Citigroup, though its home loan and other retail finance business is now growing," Iimura said.
In 2004, Japanese regulators revoked Citigroup's private banking license, citing a breakdown in internal controls.
The bank is scheduled to report fourth-quarter results on Jan. 19. Analysts polled by Reuters Estimates had projected profit of $1.07 per share.
Citigroup shares were down 44 cents to $54.61 in morning trading on the New York Stock Exchange, after earlier falling to $54.43.
Shares in Japanese consumer firms rose on Tuesday, with Acom ending up 2.5 percent at 4,500 yen, Takefuji rising 3.5 percent to 5,270 yen and Aiful climbing 2.7 percent to 3,820 yen.
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