A bad experience with a retail operation in Mexico may sour Citigroup Inc. against making a bid for Banca Serfin, Mexico's third-largest bank, local banking analysts said.

Citigroup chairman John Reed confirmed this week that the New York financial services company has looked at Serfin, which is being auctioned by the government, but said Citi has not decided whether to go forward with a bid.

A Reuters report quoted him as saying that "the Mexican banking system is wounded, and there's no doubt that it will take some years to break out of its rut."

Banking analysts in Mexico City said Mr. Reed's concerns were not surprising, given the performance of the 250-branch Banca Confia, which it bought two years ago for $45 million.

They said Confia's track record makes it unlikely Citigroup will bid for an operation as troubled as $15 billion-asset Serfin.

Unlike Citigroup's corporate banking business in Mexico, which is run by country head Julio de Quesada, Confia is run as part of Citigroup's Latin American consumer banking operation out of Fort Lauderdale, Fla. Citigroup has pumped more than $400 million into the bank, including $150 million in capital, according to Citi officials in Mexico.

Sources said both the difficulty in trying to integrate the Mexican retail banking operation into Citigroup's global consumer banking unit and high operating costs still pose a major challenge for the U.S. financial group.

"They bought into a black hole in Confia and still haven't figured out how much it's going to cost them," said a Mexican banker, who asked not to be identified. "Either they underestimated the extent of the problems or they overestimated their abilities to solve them."

To win Serfin, Citi would have to compete with Banco Bilbao Vizcaya Argentaria and Banco Santander Central Hispano, both of Spain, and London-based HSBC Holdings PLC, which already has a 19.9% stake in Serfin from a capital-raising program by the Mexican bank.

"There's a long way between paying $25,000" to look at the bank's books "and ponying up what the government wants," said one source.

Mr. Reed was speaking in the northern Mexican city of Monterrey. Local press reports cited Mike Contreras, Citigroup's regional director for Latin America, as saying that the U.S. financial group has set up a 15-person team to study possible acquisitions across Latin America. Mr. Contreras was also reported as saying that the biggest attraction of Serfin was its large size and network of branches.

Mr. Reed also said in the reports that Citigroup's decision on Serfin would "depend a lot on how the problems that exist within the bank are going to be solved."

Citi recently has shown an appetite for foreign deals. In January it agreed to pay $2.2 billion to buy the investment banking operations of London-based Schroders PLC, and this month it offered $1 billion to purchase at 75% stake in Poland's Bank Handlowy in Warsaw.

In December, Citi expanded in Mexico and paid its government $179 million to acquire 51% of Afore Garante, a pension fund management company that Serfin set up two years ago. The move raised the U.S. company's combined stake in the Mexican fund manager to 91%.

Serfin, Mexico's No. 3 banking group after Banco Nacional de Mexico and Bancomer, ran into severe capital shortages in the wake of a Mexican financial crisis in 1995.

The group was taken over last year by Mexican regulators, who have estimated that Serfin will need at least $1 billion in fresh capital and as much as $1.5 billion more to cover other liabilities.

As of Sept. 30, Citigroup had more than $7 billion of assets in Mexico, up from $4.5 billion two years earlier. Its Mexican banking operations reported $153 million in net earnings for the first nine months, up from $28.5 million in losses in all of 1998.

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