After dumping Smith Barney, some Citigroup Inc. executives are fretting over what to do with another crown jewel.

Executives of the New York company have reluctantly weighed the possibility of selling its Mexican banking franchise, Grupo Financiero Banamex, if Citigroup's financial position continues to deteriorate, according to people familiar with the situation.

Citigroup isn't officially exploring a sale of the Mexican bank and insists it has a bright future as part of a slimmed-down Citigroup. But after $28.55 billion in net losses in the past five quarters and the U.S. government pushing the company to keep shrinking, Citigroup is considering which pieces of the company could be unloaded to generate cash if needed, the people say.

Similar logic propelled last month's agreement to spin off the Smith Barney brokerage unit into a joint venture with Morgan Stanley (MS), generating Citigroup a payment of $2.7 billion. Investment bankers estimate that Banamex, which accounted for roughly half of Citigroup's total 2007 profit of about $3.6 billion, could fetch at least $9 billion in a sale.

Potential suitors have contacted Citigroup to express interest in buying Banamex, but Citigroup rebuffed those overtures, the people say. In addition, representatives of wealthy Mexican families have traveled to New York recently to seek financing for an offer if Citigroup puts Banamex up for sale, according to other people familiar with the matter.

Citigroup spokesman Jon Diat said that "Citi has no intention of selling Banamex," which is "at the center of the core franchise for the future."

With roots dating to 1884, Banamex today has about 2,005 branches scattered across Mexico, and it is second in size by assets, behind BBVA Bancomer. Citigroup paid $12.5 billion to buy Banamex in 2001, making it the only major U.S. bank with a sizable presence south of the border.

With its clout as a full-service consumer and commercial bank in an emerging market, Banamex has been a rare bright spot for Citigroup Chief Executive Vikram Pandit since he took over in December 2007. "We're going to export it around the world," Pandit said in May, referring to Banamex's business model.

As the Mexican economy weakened, the banking unit's push to provide credit cards and other loans to lower-income Mexicans has saddled Banamex with rising defaults. Nevertheless, Citigroup executives and industry analysts still regard Banamex as a gem. Banamex is set to release its 2008 results on Monday.

"I am very confident that they don't want to sell Banamex," says Jeffery Harte, a banking analyst at Sandler O'Neill & Partners LP. But if losses keep piling up at Citigroup and the U.S. government puts more pressure on the bank, "the assets in the highest demand are your strongest assets."

John McDonald, a banking analyst at Sanford C. Bernstein & Co., says it is worth remembering that Citigroup vowed not to sell Smith Barney, but then "about-faced."

"I'm not sure which wins: their need for capital or their strategic roadmap," he says.

In another complication, Banamex's CEO and a former owner of the bank who is a Citigroup director have privately expressed frustration with Pandit's leadership, according to people who have spoken to the two men. Manuel Medina Mora, who runs all of Citigroup's operations in Latin America, and Roberto Hernandez, the director, have said they believe Banamex would be in better shape if it weren't part of Citigroup.

In recent weeks, speculation has swirled inside Citigroup that Medina Mora and Hernandez and another former Banamex owner, Alfredo Harp, were even trying to muster the financing needed to bid for the Mexican bank. That likely wouldn't be easy given the precarious condition of the capital markets.

"I emphatically deny I am looking to raise funds to purchase Banamex," Medina Mora said in a statement. Hernandez called the bid rumors "completely false and unfounded," and Harp dismissed them as "absolutely false."

Medina Mora described his relationship with Citigroup's New York-based management as "close and effective." Diat, the spokesman, said: "We are extremely pleased with our solid working relationship with Manuel and the entire Banamex team."

A sale of Banamex probably could attract interest from Latin American, European and even U.S. banks. Bankers point to Brazil's Banco Ita. and the U.K.'s HSBC Holdings PLC (HBC) as possible candidates.

Citigroup executives say they would consider parting with Banamex only if it commanded a rich price and Citigroup could share in the unit's future profits.

Still, Citigroup would have a less-complicated logistical challenge selling Banamex than some of its other units. Banamex operates largely as an independent entity and isn't fully integrated into Citigroup's other banking operations. By contrast, lucrative Citigroup divisions such as its credit-card business and transaction-services unit are interwoven with other parts of the bank.

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