By Jonathan Stempel and Edwina Gibbs
Reuters
Tuesday, January 9, 2007; 3:19 AM

WASHINGTON/TOKYO (Reuters) - Citigroup Inc. (C.N) will close most of its Japanese consumer finance branches and take a $370 million fourth-quarter loss in that unit, hit by law changes that will 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 also now face a flood of demands to repay interest charges deemed illegal by courts.

The expected fourth-quarter net loss 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 to 20 percent, depending on the type of loan, from the current 29.2 percent.

The industry has also been battered by a Supreme Court ruling which said charges on loans with rates set between 20 and 29 percent, a gray zone between two conflicting usury laws, were illegal. That ruling has forced the beefing up of reserves, plunging lenders deep in the red.

"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's business, which operates under the brand name DIC, ranks around 5th or 6th in the Japanese consumer finance industry. It started closing branches in the second half of last year and plans to be finished in the next few months, said Citigroup spokeswoman Atsuko Yoshitsugu.

Profit from the consumer finance business tumbled 70 percent to $37 million during July-September while revenue slipped 4 percent to $587 million.

Japan's top four moneylenders, which include Acom Co. Ltd. (8572.T), Takefuji Corp. (8564.T), Promise Co. (8574.T) and Aiful Corp. (8515.T), posted a combined 765-billion-yen loss for the first half and see full-year losses at 706 billion yen.

Customers at firms lower down in the industry rankings have often have been turned down at the top three firms, putting those firms, which include General Electric Co's (GE.N) Japanese consumer finance business Lake, under even more pressure than their rivals to restructure after the new laws.

"GE could do the same thing as Citigroup, though its home loan and other retail finance business is now growing. Although it could turn around and decide to buy one of the big 3 firms -- that is possible. In any case, it will have to restructure," said Iimura.

Citigroup Chief Executive Charles Prince has been under pressure from many investors and analysts to lower Citigroup's expenses, and increase revenue faster than costs.

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 January 19. Analysts polled by Reuters Estimates had projected profit of $1.07 per share.

Citigroup shares closed Monday up 28 cents at $55.05 on the New York Stock Exchange. The company announced the charge and reserve increase after U.S. markets closed.

Shares in Japanese consumer firms were higher 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.

But market participants said the rise had less to do with Citigroup's move than investors buying back the sector a bit after it was the worst performer in 2006, sliding 30.4 percent.