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Citigroup increases investment in Mexico

Citigroup increases investment in Mexico

Posted by Ricardo Vázquez on September 10, 2014

Chief Executive Michael Corbat on Tuesday made a rare public appearance in Mexico, pledging to beef up its local banking unit Banamex, which has been plagued by alleged fraud and losses in market share.

Mr. Corbat, flanked by Mexican President Enrique Peña Nieto and top Banamex executives, said Citigroup would spend $1.5 billion over four years to improve technology systems and back-office support, while also expanding loans in Mexico, the bank's second-largest market outside the U.S.

The announcement, delivered at the 18th century palace that Banamex once used as its headquarters, comes after months of investigation into an alleged fraud in Mexico that forced Citigroup to restate its 2013 earnings.

Mr. Corbat said the bank aims to boost loans to small and medium-size businesses by nearly $4 billion in the next four years, and to boost credit to Mexico's burgeoning energy sector by $10 billion in the same period.

Banamex, Mexico's second-largest bank, is one of Citigroup's most prized assets. In recent years it has produced more than $1 billion a year in net income, even during the global financial crisis, accounting for more than 10% of Citigroup's annual profit. But this year, the unit also has caused big headaches for Citigroup. The third-largest U.S. bank by assets in February accused Mexican oil services firm Oceanografía of duping Banamex out of more than $400 million, highlighting what the bank described as lax internal controls at its Mexican unit. Citigroup fired 12 Banamex employees over the incident, including four managing directors.

After nearly two months under house arrest, Oceanografía Chief Executive and controlling shareholder Amado Yáñez Osuna was released in early June on $6.2 million bail. Mr. Yáñez, who is facing charges of bank fraud in Mexico, couldn't be reached for comment and hasn't made any comments on the matter. His lawyer couldn't be identified.

The timing of the alleged fraud by Oceanografía couldn't have been worse for Citigroup, which already was under pressure to show U.S. regulators it can tame risk in its sprawling global operations. In March, the U.S. Federal Reserve rejected Citigroup's dividend and share-buyback plans for what it said were qualitative reasons related to risk management.

Officials at Citigroup largely have shied away from public appearances in Mexico since acquiring Banamex in 2001 for $12.5 billion. Tuesday's announcement seemed to borrow from the playbook of Spain's Banco Bilbao Vizcaya Argentaria, BBVACOL.BO +11.76% which controls Mexico's biggest bank. BBVA Chairman Francisco González sang Mexico's praises last year in announcing at the Mexican president's official residence a $3.5 billion, four-year investment plan.

Banamex, founded in 1884, for decades has commanded brand loyalty by sticking with clients through tough times, analysts said.

Banamex has experienced steep losses in market share since the merger. In 2000, the year before joining forces with Citigroup, Banamex claimed 22% of loans in the Mexican banking system—25% including Mexican loans on Citigroup's books. Today, the combined bank has just 15% of the loans, and Banamex is no longer the market leader in credit to government entities, private-sector companies or consumers. Mexican banks had extended $240 billion in loans through July, according to government figures.

Banamex has hemorrhaged market share for loans to private sector businesses, a segment that accounts for more than a third of Mexican bank credit. As of July, Banamex claimed 13% of loans to Mexican companies versus the 32% share that Banamex and Citigroup had together in 2000.

Current and former Banamex employees blame the market share declines on a high-stress environment under Citigroup, with growing layers of bureaucracy, multiple lines of reporting and pressure to deliver growth. "The whole organization is very worn down," said a former Banamex managing director.

Since Mr. Corbat became chief executive of the bank in late 2012, Citigroup has dropped its retail operations in countries including Honduras, Uruguay, Paraguay, Turkey and Romania. This summer it agreed to sell its consumer-banking businesses in Greece and Spain.

The bank has said it wants to focus on markets with high growth potential for consumer banking, eschewing some smaller cities and slower-growth countries.

Still, Banamex remains a cash cow with 1,680 branches, more than Citigroup has in the U.S. and Canada combined. Yet Mexico still offers untapped potential. Millions of Mexicans lack credit cards or even bank accounts. Recent reforms aimed at opening the energy sector could stoke growth further.

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