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CITI PREPARES TO LEAVE MEXICO

Ene 31, 2022
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As Citi Prepares to Leave Mexico, the Hunt Is On for Its Assets

— Big global lenders, including Spain’s Santander and Canada’s Scotiabank, are interested, but Mexico’s President Lopéz Obrador would prefer the country’s third largest bank to pass back into the hands of Mexican owners.

By Nick Corbishley

Last Wednesday (Jan 12), Citigroup broke the news that it was putting up for sale its Mexican retail banking business after almost a century of operating in the country. The U.S. lender said it will retreat from consumer and small and medium-sized business banking in Mexico, which it mostly does via its Banamex subsidiary, which it acquired in 2001. Banamex itself is 137 years old.

The move is part of Citi’s CEO Jane Fraser’s “strategic refresh” of the lender. The bank had already announced plans to withdraw from most of its consumer businesses in Asia, Europe the Middle East and Africa as it focuses its model on wholesale and corporate banking and investment. Citi said it could exit its Mexican operations by selling them or spinning them off into a new listed company. It will keep its investment bank and private bank in Mexico, along with its unit that serves institutional clients in the country.

Big Implications

Citi’s sale of Banamex, Mexico’s third largest lender by assets, will have big implications for Mexico’s financial system. The bank has assets worth around $70 billion, including its consumer and business banking operations, fund management arm, insurance division, branches, and up to $2 billion worth of Mexican art. The private collection is one of the most valuable in Mexico and includes works by Frida Kahlo, Remedios Varo and Leonora Carrington as well as the muralists José Clemente Orozco and Diego Rivera.

J. P. Morgan closure of its private banking in Mexico

Citi is not the first big global lender to leave Mexico in recent times. In 2021, JPMorgan announced the closure of its private banking operations in Mexico,  as wealthy clients in some of Latin America’s largest economies did what they always do during crises: they shifted their money to international financial capitals. In 2020, the bank did exactly the same with its operations in Brazil.

Fears are now rising that Mexico may be going through the beginnings of yet another bout of capital flight. According to data published by the Bank of Mexico, foreign investors cashed out €12.63 billion dollars from Mexican bonds on 2021. It is the highest amount since figures began being collected in 1992, even surpassing the total for 2020.

The move coincides with a slowdown in Mexico’s post-2020 economic recovery as well as an anticipated shift in the Federal Reserve’s monetary policy, As I warned in my December 10 article,  “Inflation Continues to Soar in Latin America, Even As Central Banks Intensify Their Rate Hikes,” this is one of the biggest fears in Latin America: “if financial conditions in the U.S. and other advanced economies were to suddenly tighten, as the Fed and other major central banks begin hiking rates to stifle inflation (which isn’t beyond the realms of possibility), it could spark sharp asset sell offs and capital outflows in their own economies.”

Analyst Gabriela Siller, from Mexican investment bank Banco Base, put the capital outflow down to “risk aversion regarding the Mexican economy:”

“This is due to low growth but also government initiatives. This year we have the debate on electricity reform, so it is very likely that risk aversion and capital light will continue.”

On the same day that Citi announced it was leaving Mexico, Mexico’s Ministry of Finance issued a statement trying to dampen fears: “Citigroup’s decision does not reflect a lack of confidence in Mexico,” it said. Citigroup “notified the country’s tax authorities in a timely manner of its decision to exit the retail and corporate banking business, which forms part of its global strategy.”

The Hunt Is On

The question now is: who gets to buy the bank’s assets, and for how much?

Citi posible buyers

The answer to the second question depends on whom you ask. According to Bank of America analysts, it could be worth between $12.5 billion — the price Citi paid for Banamex in 2001 — and $15 billion. BBVA, which hasn’t ruled out bidding for Banamex, put the price tag at between  $9.5 billion and $14 billion. Some analysts believe it could be worth a lot more, perhaps even as much as $30 billion, if Citi were to spin off the bank and list it on a stock exchange, most likely in Mexico or the U.S..

There are certainly plenty of interested buyers. They include Spain’s biggest lender, Grupo Santander, which already has a strong presence in Mexico, as well as Canada’s third largest lender, Scotiabank, which has been in Mexico since its purchase of the struggling Grupo Financiero Inverlat in the 1990s. If Santander were to acquire Banamex, it would mean that two Spanish lenders would essentially dominate Mexico’s banking system, the other being BBVA which owns Mexico’s largest lender, BBVA Mexico, with roughly 20% of the market.

That is unlikely to please Mexico’s President Andrés Manuel Lopéz Obrador (AMLO for short), who announced last Thursday that he would much prefer Banamex (which stands for Banco Nacional de Mexico) to pass back into the hands of Mexican owners. Mexico’s banking system is largely controlled by big global lenders, which were able to pick up struggling or collapsing domestic lenders for next to nothing in the wake of the Tequila Crisis (1994-5).

“I am pleased that Ricardo Salinas Pliego has expressed an interest in buying it; he already owns Banco Azteca and I believe he has sufficient resources to do so. The same could be said of Carlos Slim, who owns Inbursa, and Carlos Hank González, of Banorte, among others.”

Mexico’s third richest man, Salinas Pliego owns a suite of companies including the retail chain Elektra, which sells electrical appliances in instalments to low-income consumers; Banco Azteca, which is also focused on consumers of modest means; and TV Azteca, Mexico’s second largest broadcaster.

A Controversial Choice

Salinas Pliego would be a controversial choice given he has already clashed with Mexico’s central bank, Banco de Mexico (Banxico for short), on more than one occasion. A vocal supporter of cryptocurrencies, he recently announced that his Elektra store chain will become the first retailer in Mexico that will allow consumers to buy products with bitcoin, despite the fact that Banxico has stated that cryptocurrencies are not legal tender in the country.

Salinas Pliego has also butted heads with Banxico over cash remittances, as I reported for WOLF STREET in January 2021:

Salinas Pliego y AMLO

Banco Azteca… is sitting on a growing mountain of (paper) dollar bills. But the bank’s owner, Ricardo Salinas Pliego… wields a lot of influence, particularly with Mexico’s current government. Three weeks ago, the government unveiled a new draft law that will force Bank of Mexico… to become the buyer of last resort of U.S. dollars that commercial banks cannot return to their country of origin. Banxico would be forced to buy those paper dollars, regardless of how these banks had obtained them.

Defenders of the law say it would help Mexicans shut out of the financial system, such as illegal migrants and hospitality sector workers paid in dollars, to save cash. They also argue that it is necessary after a crackdown on money laundering in the US led some U.S. banks to cut ties with their Mexican counterparts, which are now struggling to offload their surplus paper dollars.

But the law’s critics, including Banxico’s Deputy Governor Jonathan Heath, argue that it could undermine the central bank’s independence and risked tarnishing Mexico’s reputation with international financial authorities. Plus, it is only really intended to benefit one bank: Banco Azteca.

“There are plenty of arguments against the proposed central bank reforms,” tweeted Heath. “One of the most important is that it’s wrong to change the law only for the sake of one company, especially one that has already had a run in with the SEC.”

In the end, the AMLO government backed down and the draft law was rescinded.

Another potential buyer of Banamex is the business association Empresarios por la Cuarta Transformación (Entrepreneurs for the Fourth Transformation, or E4T), which is led by Monterrey-based magnate José Javier Garza Calderon and is extremely close to the AMLO government. A few days ago, Garza Calderón called on other native businessmen in the country to join forces, so that Banamex can be “truly Mexican, where Mexicans and migrants can really buy shares and invest.” Like AMLO, Garza Calderón was at pains to emphasise that foreign investors should not be excluded from the bidding process.

Another Mexican company that has put its hat in the ring is Monterrey-based blockchain firm Isatek, though it’s unlikely to be a serious contender given that its $16 billion bid for Banamex is denominated in its own cryptocurrency, the so-called “Amero.”

Moody's Investors Service

Ratings agencies could also play a role in determining who gets to own Banamex. Less than a week after City announced the sale of its Mexican subsidiary, both Fitch and Moody’s revised down the ratings and evaluations of Citibanamex. Moody’s placed all ratings and assessments of the consumer banking arm of Citigroup in Mexico on review for downgrade, “in order to incorporate the uncertainties that will come out of this divestiture and the implications on the bank’s standalone credit profile.”

Fitch, meanwhile, placed on “rating watch negative” not only Citibanamex but many of its subsidiaries including the Multiple Purpose Financial Society (Sofom) Citibanamex Cards, Citibanamex Insurance and Citibanamex Pensions. Fitch said its decision reflected “the uncertainty about the potential credit implications for these rated subsidiaries from their parent company’s decision to exit the consumer, small business and middle market financial businesses in Mexico. This could reduce Fitch´s assessment of the strategic importance of the financial services in Mexico for Citi and limit the role of the subsidiaries.”

The ratings agency said it would resolve the bank’s RWN status once detailed information on the exit process is available, “including the potential buyer’s creditworthiness if the exit involves a sale of the Mexican subsidiaries or other market alternatives.”

Source: nakedcapitalism.com

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