Citigroup management may find the decision to sell off Banamex difficult, but it aligns with CEO Jane Fraser's new strategy and will free up significant capital.
Citigroup could benefit from selling its division at a premium and help their stock prices recover more quickly.
Why Citigroup Needs to Sell Banamex
Citigroup (C) announced Wednesday it has decided not to pursue plans to sell Banamex, its Mexican consumer unit worth about $7 billion, in a deal which would have garnered $7 billion. This decision allows the company to resume stock buybacks this quarter; previously they had put them off because selling this unit might temporarily damage their capital levels.
Citi CEO Jane Fraser plans to streamline Citi's consumer operations and withdraw from 14 international markets where there are no significant operations or scale. She believes this move will allow Citi to improve expense and capital structures.
Investors have been eagerly awaiting news that the company would sell off non-core assets since initiating a comprehensive review of its operations last year, and their latest step, to dispose of Banamex is indicative of this process.
As a result of Citi's decision, its share price fell more than 6% on Wednesday; however, investors believe the cancellation will allow it to increase dividend payments - one way of rewarding shareholders.
Many potential suitors expressed interest in purchasing the Mexico City-based franchise of Banamex Bank - offering consumer, small business and middle market banking operations - but its sale was complicated by leftist President Andres Manuel Lopez Obrador who insisted no buyer be permitted to reduce costs through mass layoffs and make the art collection national property as reparation for bailouts it received from government during the 1990s.
Grupo Mexico, led by mining magnate German Larrea and owned by Citi Group, is in talks with them about keeping part of Banamex for later sale via an initial public offering (IPO). A percentage has yet to be decided upon and an agreement may never be made, according to sources familiar with the matter.
Citi's sale of Mexican bank Banamex will have a detrimental impact on its profitability. On contract date, Citi will record an FX loss that will appear as an asset-related charge (AOCI), before being reversed as a benefit in CET1. Furthermore, depreciating Banamex brand value will harm earnings further.
It’s Time to Unlock Capital
Citigroup has been one of the world's premier banks since it first started more than 100 years ago, yet as it expanded, more separate businesses emerged that were difficult to manage and analyze by investors, leading to "trapped capital." This refers to money that should be available for investments but has been trapped due to inefficient processes or red tape; freeing this cash may seem like something out of a movie script, yet thousands of corporate treasurers and CFOs face this problem every day.
Citigroup's decision to sell Banamex may have been difficult, but ultimately will benefit their bank in the long run. By selling Banamex they will be able to focus more closely on core operations that matter and free up some much-needed capital.
So it is possible that Citigroup may return more cash to shareholders in the future. With an estimated market cap of $20.5 billion and set to report its fourth quarter earnings later today, more information on their exit from Mexico should be included within this report.
Citigroup's sales of Banamex and other global consumer franchises will help it improve both expenses and capital structures. Each operation consumes an average of $4 billion of capital each year, and Citi has stated its expectation to release $12 billion through these sales and exits.
Citigroup is taking steps to expand their operations outside Mexico through various transactions, with their exit from Mexico just being the start. They intend on selling both consumer and corporate credit card businesses as well as spinning off some investment banking business.
These steps won't be easy for Citigroup, but they are necessary if it wants to return to financial health. By unlocking its capital reserves and unlocking them again, the bank should be able to turn their fortunes around and become attractive investments once again.
It’s in the Bank’s Best Interest
Citigroup, along with JPMorgan Chase, Bank of America and Wells Fargo is one of the Big Four banking institutions in the US. Citigroup is considered a systemically important bank and plays a crucial role in our financial system - as such it must maintain large amounts of capital reserves as part of being "too big to fail."
Citigroup must maintain an ample capital base by law, but in its best interest for its subsidiaries to be profitable as well. Last year when it announced plans to sell Banamex it made clear it would only divest of Mexico operations at an attractive price.
At first, there was widespread interest in purchasing Banamex; however, when Mexico President Andres Manuel Lopez Obrador intervened by seizing control of a railroad line operated by Grupo Mexico - owned by mining magnate German Larrea - Citigroup was eventually forced to discontinue sale talks and move on with their plans.
Once Citigroup decided to move forward, its focus will shift solely toward its core businesses in North America and Latin America, freeing up over $12 billion for share repurchases or other initiatives such as addressing regulatory issues or growing its retail business in America.
Notably, Banamex decided to move forward despite still being profitable; that speaks volumes about their strength as an organization and executive team.
As for why Citigroup took so long to begin the process that ultimately failed, it's easy to understand. They were saddled with the difficulty of integrating Banamex into Citigroup's corporate structure as well as suffering due to more sophisticated competition offering more cost-competitive products and services.
It’s a Step in the Right Direction
Citigroup's decision to forego a sale process will allow it to resume modest share buybacks this quarter, after postponing them due to fears that an estimated $7 billion sale might damage capital levels and cause capital level reductions. Furthermore, Citi's low valuation likely makes this move appealing to shareholders.
Citigroup plans to continue reporting Banamex results within its own results until its ownership drops below 50%, as per a company statement. Meanwhile, they plan on continuing institutional and private banking operations in Mexico.
Banamex boasts 38,000 employees and 1,300 branches, serving more than 12 million retail customers and 10 million pensioners. Their services include credit cards, personal loans, consumer mortgage lending, retirement assets management services as well as bank accounts payroll deposits in Colombia's largest economy and beyond. Furthermore, it ranks third globally in terms of branch count.
One of the main draws for the bank lies in its location within one of the country's biggest economies, while also boasting significant customer retention rates. Customer retention is vital to any bank's success; many consumers had remained faithful customers despite high fees or subpar service over many decades.
Citigroup's decision to halt sale talks falls in line with their plans to exit consumer business in 14 markets across Asia, Europe and the Middle East. CEO Jane Fraser has been working diligently at pruning her bank; on March 2, she plans to present investors with her multiyear strategic vision and multiyear plan for investors' consideration.
Though Fraser has made strides to streamline Citigroup's business, some critics contend it hasn't gone far enough. These individuals express concern over Citi's return on tangible common equity (RTCE), one of its lowest among peers; as well as slow implementation and hiring processes - leading senior managers from Citi to leave in favour of competitors such as Goldman Sachs or JPMorgan Chase.
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