Citigroup’s dismal financial state doesn’t grant its chief, Vikram Pandit, much leverage in negotiations these days.
He conceded defeat to Washington on Phibro, deciding that it was simpler to sell the profitable commodities trading unit rather than argue for keeping a risk-taking, capital intensive business that pays megabonuses. But Mr. Pandit has no reason to cave so easily if Citi’s ownership of the Mexican bank Banamex is threatened.
For now, that’s just a possibility. Mexico’s high court is set to decide this week whether to hear a case brought by a contingent of Mexican senators that Citi must offload Banamex because a foreign government owns more than 10 percent of its stock. They want the court to decide whether the finance ministry had the constitutional right to decree in March that the United States government’s 34 percent slice of Citi was acceptable because it was intended to be short term.
FiNETIK Note: The Banamex- Citi cases could also extend to other banks with foreign government holdings like AIG, Bank of America, Bank of New York Mellon, Royal Bank of Scotland. However the strong nationalist sentiments about Banamex do set it above the others.
So Citi is hardly up against a wall just yet — and it reckons any decision to force a sale would breach the North American Free Trade Agreement anyway. But if push comes to shove, the bank should be prepared to put up more of a fight than it did for Phibro.
For starters, Banamex is a full-service bank, not just a trading operation, so Citi has a stronger claim for keeping it. Second, it turns a pretty handy profit. It earned about $750 million in the first half of the year, about half of Citi’s profits from Latin America. As a whole, Citi lost money in the first six months of 2009, omitting one-time items.
And Banamex’s relative success as a retail, commercial and investment bank has turned it into a celebrity within the bank’s corridors of power. At last year’s investor day, Mr. Pandit held the Mexican unit up as an example for how the rest of Citi ought to look.
That makes it a powerful business worth holding on to. And Citi, in large part because of $45 billion in United States taxpayer aid, no longer has to sell profitable businesses just to bolster its balance sheet. Should decisions in Mexico start going against it, the bank has every reason to hunker down for a standoff.
An Alternative View
Just because Banamex is good for Citi doesn’t necessarily mean ownership by Citi is great for Banamex. The United States bank doesn’t help Banamex’s financing costs much, and non-United States ownership could help it attract previously reluctant customers.
Banks in emerging markets can benefit from foreign ownership through lower financing costs, access to an international network and the adoption of proven and trusted processes and technology. It’s not obvious how any of these apply to Banamex.
Its obligations receive no guarantee from the Citi parent company, and its access to financing could even suffer as a result of Citi’s troubles. Moreover, as the second largest bank in Mexico, it is big enough in its own right to get access to international services and acquire the staff and technology needed to be at least as up to date as Citi.
Mexico is a big enough market that its bigger banks are fully competitive, even internationally, without needing help from multinational groups as banks in smaller markets often do. The country is also intensely nationalist, particularly in relation to its neighbor to the north.
Hence, while an independent Banamex might see little difference in relationships with large and sophisticated Mexican companies, it could well benefit from having greater appeal to small businesses, consumers and, from time to time, the Mexican government.
There would be other advantages to Banamex from independence. As a stand-alone bank, it could decide its own strategic goals, organizational priorities and structure. That would most likely be an improvement on fitting in with Citi’s plans, which are currently heavily influenced by its recent losses and government bailouts. Its senior management would have more independence, which might help in attracting the best people.
A ruling forcing Citi to divest Banamex would be hugely disruptive for the bank, but it’s still a possibility. It is in Citi’s interest to object, and there’s a risk any new Banamex owner might not develop the franchise properly. Even so, for Banamex independence could offer attractions.
Source: New York Times, 19.10.2009
Filed under: Latin America, Mexico, News, Risk Management, Services, AIG, Banamex, Banking System, BoA-Merrill, Citigroup, Mexican Bank Assets, Mexico, RBS Royal Bank od Scotland, Regulation, Retail Banking, Risk Management