Citigroup Inc.'s surprise move to sell its large, profitable Mexico unit has analysts wondering whether management could take similarly bold action on its lagging U.S. retail business.
Citi has been aggressively paring back its operations in an effort to close a profitability gap with big bank peers. The Mexico sale — which includes Citi's consumer, small business and middle-market operations with about $44 billion in assets and $4 billion of capital — follows its April 2021 decision to exit 13 markets in Asia and Europe.
Management said the European and Asian exits were done, in part, because the bank's operations were "subscale" in those markets. That's not the case in Mexico, where Grupo Financiero Citibanamex SA de CV is one of the country's largest banks. Citi's Mexican consumer business also posted a strong 2.41% return on average assets in the first nine months of 2021, though the figure was boosted by low credit expenses after heavy loss provisioning during the early part of the pandemic.
Citi's resolve to make such difficult decisions raises the prospect that it might consider a strategic change in its U.S. retail business. The company reports 2021 fourth-quarter earnings Friday and has described an upcoming investor day in March as a venue to outline its vision and key performance targets.
Citi's U.S. retail business, which excludes the bank's credit card businesses, is relatively small compared to peers Bank of America Corp. and JPMorgan Chase & Co. To gain scale, the bank could consider an acquisition. But as one of the world's largest banks, it would face a tough regulatory road closing a deal that would need to be large to make a difference, RBC Capital Markets analyst Gerard Cassidy said. On the other hand, if the bank could accelerate its organic growth trajectory in the U.S., it could gain the scale necessary to become more profitable.
"That's a possibility, but that's a very long-term solution," Cassidy said in an interview. "Or do you just exit the business?"
Cassidy noted that the bank's U.S. retail unit reported a net loss of $73 million in the 2021 third quarter. While banks typically focus on delivering growth, right-sizing operations to improve returns makes sense, Cassidy said. "There's a strategy out there that we are big supporters of called: shrinking to profitability."
Cassidy was not the only analyst pondering what the Mexico sale could mean for those U.S. operations. Citi's statement that it is focusing on a "targeted retail presence in the U.S." could imply "further optimization in Citi's U.S. retail footprint," Wolfe Research analyst Steven Chubak wrote in a Jan. 11 note.
Citi CEO Jane Fraser promised a "dispassionate" review of the bank's businesses after taking the helm at the beginning of 2021. In a news release on the Mexico exit, Fraser, who was Citi's Latin America CEO from 2015 to 2019, said it would simplify the bank and allow it to focus on core strengths and competitive advantages. Citi said it plans to continue to invest in its institutional clients and private banking operations in Mexico.
The Mexico move "suggests a more serious restructuring effort with businesses not protected by prior decisions, which is required due to Citi's recent low returns and the stock trading at 85%" of tangible book value, Keefe Bruyette & Woods analyst David Konrad said in a Jan. 11 note.
The immediate financial impact of a sale or spin-off will come down to pricing. Citi is still working on its exits from other markets, and as of the third quarter, it recorded a pretax loss of $680 million associated with the sale of operations in Australia. It is simply winding down its consumer operations in South Korea, generating estimated cash charges of $1.2 billion to $1.5 billion.
"We have been disappointed with the recent execution of Citi's other asset sales," Konrad wrote.
But Konrad and other analysts believe that the Mexico business could attract a premium based on its profitability and multiples for Mexican peers. Konrad estimated a sale price of perhaps $4.3 billion. Jefferies analysts estimated a range of $5 billion to $6.5 billion in a Jan. 12 note.
Citi's shares gained 0.25% the day after the Mexico announcement, compared with an increase of 0.50% for the KBW Nasdaq Bank Index.