Citigroup is unlikely to sell off its Mexican and Brazilian subsidiaries in the near-term due to their stronger relative growth prospects, analysts said this week as the beleaguered US bank unveiled a new business model amid horrific quarterly losses.
Citi saw net profits in 2008 from its Latin American operations drop 41% to $2.14bn compared with $3.60bn the previous year, the bank reported in its latest earnings release. Fourth quarter net income in Latin America dropped to $6m from $939m in the fourth quarter of 2007.
However, these figures compare relatively favourably with global losses of $18.72bn for 2008. The firm made emerging markets history in 2001 by acquiring Mexico’s Banamex for $12.5bn, which was the country’s largest-ever foreign investment. But the firm now plans to do a U-turn from the legacy of former chief executive Sandy Weill who championed the universal and global banking model.
It will create Citicorp to house its main retail and commercial operations and Citi Holdings, for non-core assets to be decimated over time.
Citicorp will include "regional consumer and commercial banking franchises in the US, Asia, Latin America, Central and Eastern Europe, and the Middle East," the bank said.
Given the designation of Citigroup’s Latin subsidiaries as "good banks", analysts are optimistic. "Latin America has been performing relatively well so I think the management can afford to have more of a commitment," said Joe Scott, Citigroup bank analyst at Fitch in New York.
However, one investor said if share price and balance sheet pressure shows little sign of abating then Banamex could be sold off for an estimated $8bn to $12bn.
"I think everything is for sale," he said. "The unthinkable has now become the thinkable over the last couple of weeks."
Its global cards business in Latin America reported a net profit in 2008 of $491m, down 60% from $1.23bn in 2007 due to soaring credit costs. In addition, Citigroup’s consumer banking business in the region posted a 2008 net income of $300m, which was down by 55% from the year earlier. However, its institutional client and wealth management business were more resilient.
Despite the deterioration in asset quality over the last two years, Banamex will remain a strategically important subsidiary, said one Citigroup insider. He said several years of quality earnings generation have allowed for capital and loss reserve accumulation and that a rebound in commodity prices at end-2009 would boost regional growth. "The company is going to lop off non-core, non-strategic assets. Latin America is safe. If you are wounded, you don’t lop off your left arm," he said.
In addition, Banco Citibank in Brazil is under pressure given the declining credit of its parent. With investor aversion to the banking industry, potential buyers for either Banco Citibank or Banamex are limited.
Some speculate that Brazil’s Bradesco could make a bold bid for either subsidiary to re-establish its franchise after the merger of Banco Itau and Unibanco last year.
"Banco Citibank is a good wholesale market player and I think Bradesco would pay a good price for this while perhaps considering also pitting in a good bid for the Mexican subsidiary," said a Brazilian banking analyst in Sao Paulo.