Trump's anti-Mexico policies threaten Citibanamex, revive divestiture talk

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MEXICO CITY — Last November, Citigroup CEO Michael Corbat told Citibanamex employees that then-U.S. President-elect Donald Trump's anti-Mexico policies wouldn't affect its growth plans in Mexico, where it has its biggest international business.

In a post-election memo, Corbat assured workers that the "Trump Effect" would not disrupt plans to pour roughly $1.2 billion into the unit by 2021. The plan calls for the rollout of 100 branches this year and for efficiency moves such as the conversion of 60% of the ultimately 1,600-branch network into "digital branches."

"We see Mexico as a country and economy poised to expand and diversify over the upcoming years and decades," Corbat wrote.

But after President Trump's more recent threat to impose a 20% tax on Mexican imports to pay for the $12 billion to $15 billion U.S.-Mexico border wall, analysts see life getting harder for Citi. It could revive long-running plans to sell the ailing unit, where revenues have been declining sharply, they said.

"They face significant headwinds because there are fears credit quality will worsen," said one analyst who follows Citigroup, requesting anonymity. "Banamex is clearly not where Citi would like it to be and has not been for some time. There have been increasing calls for Citi to sell the unit."

Mexico's economy is forecast to grow 1.5% to 2.5% this year, down from an earlier estimate of 2% to 3%. It expanded in 2016 but fell short of expectations.

Shortly after Trump won the White House, Fitch downgraded the country's financial institutions to negative from stable after similarly slashing Mexico's sovereign rating. It said the real estate billionaire's threats to upend the North American Free Trade Agreement and slap a duty on Mexican exports (80% of which go to the U.S.) would depress corporate profits and touch off loan defaults. As Trump's 20% tax is still tentative, the higher duty could still be imposed on Latin America's second-largest economy.

Meanwhile, Trump's tough talk has triggered a nationalist uproar, with populist groups calling on consumers to stop supporting American brands such as Walmart, Starbucks and McDonald's.

Citibanamex spokeswoman Gabriela Gallegos said a string of social media campaigns calling for Mexicans to shun U.S. firms has not harmed its business. Citibanamex and Citigroup representatives declined to comment further for this article, saying Trump's administration is "too new to speculate."

Mike Mayo, an analyst with CLSA, said Citigroup's decision to reinvest in Banamex seems to have been misguided.

"They have been talking about a sale for more than a decade and instead of selling, they are investing more and now that seems like the wrong move," he said.

While Citibanamex has a strong balance sheet, a blow to the Mexican economy could hurt credit quality and put a dent in the company's bottom line, Mayo said.

Citibanamex is Mexico's second-largest bank, with roughly 1,500 branches and assets of $93 billion. It was rebranded from Banco Nacional de Mexico or Banamex last October to integrate both brands and stamp out rumors that the bank was on the block, sources said.

The long-awaited action was also expected to help end huge operational and cultural-integration problems that had triggered major complaints, including from U.S. customers who wanted to shift money seamlessly between their Mexican and U.S. accounts. Citigroup bought Banamex for $12.5 billion in 2001.

Aaron Freedman of Moody's in Mexico City, whose firm has a negative outlook on the bank, said Trump's tariffs could hurt Citibanamex more than rivals because one-third of its loan portfolio is focused on Mexican manufacturers, or maquilas, many of which export to the U.S.

"The system has roughly 15% exposure while they have one-third," Freedman said. "They may repace or delay their business plans if things get worse than expected."

Citi's U.S. competitors, which have long envied its strong trade-finance business, said tariffs will hurt all banks, adding that they expect Citi to remain in Mexico.

"A 20% tariff is going to affect all the banks in the same way," said Jay James, senior vice president at Texas Capital Bank, which helps bankroll U.S. exports to Mexico, echoing views that U.S. consumers will end up footing the wall's bill. "This will come from consumers, from our economy. We will pay for the wall."

A top banker at a major U.S. financial institution said Mexican corporates have a strong war chest from years of economic expansion while banks' balance sheets are healthy enough to withstand possible tariffs.

"I have met with 300 companies in the past two years from a broad mix of industries, many of which do business with Mexico, and it amazes me how resilient they are," said the banker, requesting anonymity because of the sensitivity of Trump's policies. "Tariffs are not new. Firms have survived them in the past, and they can now. My feeling is Mexican companies and Citibanamex can survive this."

Yet Alejandro Calvillo, head of consumer watchdog El Poder del Consumidor, said that if Trump-related tensions escalate, the bank will suffer a customer backlash.

"I have heard of some clients already moving their accounts to Banorte," its main Mexican-owned rival, Calvillo said. "I have no doubt that if Trump continues like this many U.S. companies, including banks, will have serious problems."

While analysts say it has a strong balance sheet, Citibanamex has underperformed in the past few years, mainly because of high costs to improve fraud and money laundering controls following a stinging, $400 million penalty in 2014; to streamline technology; and to expand its branch network.

In the January-September period, profits fell 8.7% to $386 million while revenues rose 4.2% to $3.2 billion; the bank blamed one-time provisions linked to "tax contingencies." Nonperforming loans stood at 1.5%, and its Tier 1 capital stood at 13.6%.

Jorge Benitez, a banking analyst at GBM, a brokerage in Mexico City, said Citibanamex's earnings could trail the industry's this year amid the risk of rising corporate-loan defaults.

However, banks in Mexico are seen doing fairly well. Benitez expects overall revenues to rise 10%, compared with 8% in 2015, as Central Bank Banxico is expected to raise interest rates above 6% this year to tame inflation and shore up the battered peso.

Banks are in pretty good shape from a capital perspective, said Enrique Mendoza of the brokerage Actinver, holding 20% to 30% above Basel III requirements while their core Tier 1 capital ranges from 10.5% to 11%.

The Spanish banks BBVA Bancomer and Santander, which control most of Mexico's banking business, say they are unshaken.

"The idea that Bancomer would have a systematic failure because of Trump is out of the question," Tomas Gomez, an investor relations official at BBVA Bancomer's parent firm in Madrid, told American Banker when asked if Trump's tariffs and threats to expel 3 million illegal immigrants would hurt its business.

"We are well capitalized [with a 13.8% capital ratio], and we will have to see what measures Trump actually implements," Gomez added, echoing views that the new U.S. president's policies may be tamer than his harsh, protectionist rhetoric.

Bancomer is Mexico's largest bank, with assets of $108 billion, 1,800 branches and a new $700 million headquarters tower in Mexico City's Reforma office district. The glitzy building faces the billionaire Carlos Slim's Torre Mayor and the new Torre Reforma, creating a skyscraper tripod on the tip of the city's Chapultepec Park.

The bank, which has grown rapidly in the past decade, saw January-September net profits jump 18% to $1.4 billion on revenues that rose 11% to $4 billion, according to a spokesman.

Santander Mexico investor relations director Hector Chavez was similarly sanguine, adding that the firm – which sends nearly 10% of revenues to Spain – continues to operate "business as usual." In fact, it plans to spend $737 million annually by 2020 on its operations in Mexico, where it is the fourth-largest lender, with $61 billion of assets and 1,300 branches.

"These investments show our commitment to the country despite the Trump scenario," Chavez said. "They are significantly higher than in the past three years." The sum will go to modernize branches and flesh out online banking platforms, he said.

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Commercial banking Consumer banking Trade agreements Risk management Donald Trump Citigroup BBVA Santander Mexico