Banorte, Santander emerge as likeliest Citibanamex buyers

Grupo Financiero Banorte SAB de CV and Banco Santander México SA are emerging as frontrunners to buy Citigroup Inc.'s Mexican retail operations, according to analysts and market experts.

U.S. banking giant Citi said in January it will sell the consumer, small-business and middle-market banking operations of its Mexican banking unit, Grupo Financiero Citibanamex SA de CV, putting one of the country’s leading retail banks up for grabs.

However, only the most robust can afford the assets that would add significant market share, and the government has said it prefers a local buyer. In a recent report, Bank of America estimated the value of the franchise at between $12.5 billion and $15.5 billion.

A seller's market

Citibanamex has a massive loan portfolio and huge deposit volumes. "In November 2021, they had a loan-to-deposit ratio of about 65% or 70%," according to Carlos Gómez, equity research analyst at Intercam Banco. "That is a 30% to 35% of deposits potential to become loans, so it is a good driver of interest."

Citibanamex is one of the top three Mexican banks in terms of total deposits, which reached 870.12 billion pesos in the third quarter of 2021, data from S&P Global Market Intelligence shows.

Citibanamex's extensive cultural relevance in Mexico should also come into play. "[It] is a bank with more than 100 years of history in the country," Gómez said. "So they have a lot of cultural value. They even have cultural buildings, monuments — that is another driver of goodwill."

Among the top benefits for a buyer would be cost savings. Analysts from Credit Suisse wrote in a report that synergies could drive bidders to consider an acquisition above book value, noting that "cost synergies justify excess price-to-book multiples from 1.01x to 1.68x."

Breaking away from the pack

In terms of cost synergies, Banorte is "in the best position because it has the same kind of operations [as Citibanamex]," Gómez said. Being one of the biggest financial institutions in Mexico, gaining profit after acquiring a bank and reducing its operations for synergies should not be an issue, the analyst added.

The Mexican administration made it clear that is prefers a local buyer. "They are clearly paying attention to President Andrés Manuel López Obrador's suggestion that Citibanamex assets remain in the hands of a strong Mexican buyer, and Banorte has both the financial position and the domestic credentials to carry this out," Vinay Prabhakar, vice president of product marketing at fintech company Volante Technologies, said in a written statement.

Banorte CEO José Marcos Ramirez Miguel said in a conference call that the bank is looking at the potential acquisition of the Citi assets. "It's our duty to make a full assessment of this opportunity," the executive said.

Gómez is also placing Santander México, owned by Spain-based Banco Santander SA, as a top-tier option for Citi. "The Mexican government can want anything but market is market. There are no laws or rules denying foreign competitors to win."

Santander Executive Chair Ana Botín said they will be "part of the process" when the sale starts, adding that Mexico is one of its core markets. Pretax profit from Santander's North America business, which covers Mexico and the U.S., as a share of total pretax profit has grown steadily to 32.06% in 2021 from 14.95% in 2017, according to S&P Global Market Intelligence data.

Meanwhile, Santander México CFO Didier Mena Campos said the nationality of Citibanamex's ultimate buyer should be "less relevant" for regulators, who should instead focus on the competence of potential bidders.

Budding challenges, extra options

The price tag for the Mexican assets could present a challenge. Most banks are unlikely to be able to afford the entire Citibanamex franchise, Gómez said. Given an estimated price-to-book value of about 1.4x for Citibanamex, a buyer would require leverage or a capital injection.

"I think that potential buyers are doing their due diligence," the analyst said. "It's a bit of pressure in efficiencies and they are going to seek how to discount it because as I said, they are not able right now to buy it as a whole."

But Citi’s unlikely to sell in parts because it won’t profit as much. "I think they are not interested in selling by parts, it's all or nothing," Gómez said.

Valeria Moy, director general at the research center of the Mexican Institute for Competitiveness, or IMCO, believes otherwise, saying that Citi will opt to split the sale of its businesses partly to avoid concentration issues. Although Banorte is very interested in the deal, Citibanamex's pension fund unit could be an issue given that the former has a big pension fund of its own, Moy said.

Citibanamex's impressive art collection and real estate with historical importance add complexity to the matter, because they require high maintenance, are expensive and might become a liability, according to Moy.

Gómez is also not enthused about a possible IPO for the operations if the deal goes awry. "It could be a big mistake. The Mexican market right now is undervalued. An IPO, although attractive, will [fetch] a multiple of, say, 0.8x price to book. It's going to be a lot of value destruction for the shareholders. I don't think that's going to be the optimal choice."

Citi's Mexico legacy

Citi's divestment in Mexico is probably the single most significant move of its broader exit strategy, which includes regions such as Asia and Europe.

Citibanamex is one of Citi's most profitable businesses, with the sale accounting for about $3.50 billion in revenue, $1.20 billion in earnings before tax, $44.00 billion in assets and $4.00 billion in average allocated tangible common equity in the first three quarters of 2021.

But the Mexican unit has been steadily losing ground in terms of market share and loans, among others. "About 20 years ago, they were a giant and first in credit. Right now, they have less than 10% of market share," Gomez said.

However, Citi plans to retain its institutional banking operations and its private banking franchise in the country. "Citi will retain an edge in the segment due to its global reach and deep capabilities," Prabhakar said.

As of Feb. 11, US$1 was equivalent to 20.39 Mexican pesos.