Citigroup's Surprise Mexican Marriage

Observers didn't think Banamex would accept a foreign suitor, least of all the U.S. giant, but $12.5 billion brought it to the altar

What a difference two months can make. Last March, a senior exec at Banamex, Mexico's second-largest bank, told


that the bank had no intention of partnering with a foreign bank. Well-capitalized and more profitable than most of its competitors, Banamex saw no need for a linkup. "We think there's real value in being the only major Mexican bank that is 100% Mexican-owned," Jorge Hierro, Banamex' deputy president, said at the time. With nearly all of Mexico's banks controlled by foreigners, Banamex could appeal to nationalistic sentiment in its marketing campaigns.

That was then. This is now: Citigroup's $12.5 billion purchase of Grupo Financiero Banacci-Accival, the holding company that controls Banamex and is known as Banacci, now makes the enterprise a 100% U.S.-owned financial group. Of the 19 state-run banks that the Mexican government privatized back in 1991-92 -- after running them for a decade following the 1982 foreign-debt crisis -- only two small institutions still are Mexican-controlled.


  The rest have been snapped up by the likes of Spain's Banco Santander Central Hispano (BSCH) and Banco Bilbao Vizcaya Argentaria (BBVA), Canada's Bank of Nova Scotia, and others. Says Manuel Medina Mora, CEO of Banacci: "Every day we are competing against bigger and more diversified players.... With the objective of giving the country a strong, competitive, and solid financial system, we decided to associate with Citigroup."

Citigroup will buy Banacci for $6.25 billion in equity and another $6.25 billion in cash. In addition to the bank, Citi is getting a brokerage house, an insurance company, a pension fund, and a stake in a long-distance telephone company. Although Merrill Lynch & Co. analyst Judah Kraushaar estimates that Citigroup is paying a 43% premium on Banacci shares, the price works out to be just 10 times 2002 earnings for one of Mexico's best-managed banks. "We think the management of Banacci is the best in all of Latin America," Citigroup Chairman Sanford Weill said in a conference call.

This is the 15th acquisition Citigroup has made since the financial conglomerate was formed by the merger of Citibank and Travelers Group in 1998, and it's by far the largest overseas. Revenue from emerging markets will total 25% of the bank's overall income after the deal closes.


  Banacci is expected to add 5 cents a share to Citigroup's earnings in 2002 after the transaction closes in the fourth quarter of this year. The deal will fold Confia and Citibank Mexico's operations into Banamex -- and they will all operate under the respected Banamex name. Banacci's Medina Mora will serve as the CEO of the merged operations.

The deal, announced on May 18, represents an unprecedented amount of integration between Citigroup and a foreign bank. Banamex Chairman Roberto Hernandez and Banacci Chairman Alfredo Harp will sit on Citigroup's board. Meanwhile, Citigroup Co-Chairman Robert Rubin, Vice-Chairman William Rhodes, and emerging markets head Victor Menezes will sit on Banamex' board. And Citigroup is planning to list shares on the Bolsa, Mexico's stock exchange. "We really look at ourselves as a local company, and we'd like a lot of Mexican people to own our stock," says Weill.

Ultimately, the terms of the deal are indicative of Mexico's changing place in the global economy. "We've come to a point where we should stop thinking of Mexico as part of Latin America and start to see it as part of North America," says INB Barings analyst Claudio Maulhardt.


 Citigroup executives are hoping to increase lending throughout Mexico. Bank lending is just 15% of gross domestic product there, vs. more than 70% in the U.S. Fewer than 1 Mexican in 10 has a bank account. Analysts expect that the entry of Citigroup could finally spark a much-needed credit recovery. "Mexican banks have not been able to totally satisfy their purpose as a foundation for economic growth," admits Medina Mora. With 97 million inhabitants, Mexico has become far more economically integrated with the U.S. since the North American Free Trade Agreement took effect in 1994, with nearly $300 billion of two-way trade expected this year.

It was perhaps inevitable that foreign banks should eventually take control of most Mexican financial institutions. After the bank privatizations a decade ago, the new owners seriously mismanaged them, extending credit injudiciously, and occasionally engaging in corrupt practices that brought many banks to their knees when the peso collapsed in 1994 and millions defaulted on loans. The government stepped in to prop up the banking system, spending more than $100 million to absorb bad loans and recapitalize the banks so they could be sold. The only viable buyers were foreign banks, which often were given sweetheart terms.

Citibank was one of the banks to take the plunge, but because Mexico's top three banks were initially off-limits to foreigners, it settled on a smaller bank, Confia, which it bought for $250 million in 1997. Even though the bank had been cleaned up by Mexican banking regulators, it was still a mess, industry sources say. And it took several years for Citibank to integrate its operations with Confia. In 1999, Citibank considered bidding for Serfin, a large Mexican bank, but it demurred at the last minute, and Spain's BSCH won the bidding.


 That same year, the Mexican government, in an effort to save money, prepaid money that it owed Citibank for Confia. That prompted Citibank to sue the government, since it had been counting on a steady flow of revenue from the government's obligation to Confia. The suit was settled last year, but few market analysts would have guessed that Citibank would jump enthusiastically into the Mexican market once again.

Although Citibank has had a long history in Mexico, opening its first branch in 1929, its experience in Mexico during the '90s has been checkered. Many Mexicans remember that Citibank was the private banker for Raul Salinas, brother of former President Carlos Salinas. Raul Salinas, who is serving a jail sentence for murdering a political rival, was discovered to have $100 million in offshore accounts. Citibank had moved those funds offshore without ever verifying their origin. Citibank has not been charged with any wrongdoing in the case.


  The most interesting synergies, though, may be found in the banks' joint efforts to woo Hispanic clients in the U.S. The most recent U.S. Census shows there are 33.5 million Hispanics in the U.S., half of Mexican descent. They are the fastest-growing minority group, and their buying power now exceeds $458 billion.

That buying power is increasing 7.6% a year, the fastest growth rate among all ethnic groups, according to the U.S. Hispanic Chamber of Commerce in Washington, D.C. Other U.S. banks, including Bank One, are attempting to target the lucrative Hispanic market through small-business loans. But the hefty Citigroup-Banamex duo will provide formidable competition.

By Geri Smith, with Elisabeth Malkin, in Mexico City

Edited by Heather Timmons

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