Citigroup’s Losses on Loans to Mexico Homebuilders May Increase

Citigroup Inc., the third-largest U.S. bank, may face more losses on loans to Mexico’s three largest homebuilders as defaults mount and officials of the Latin America nation dash hopes for a bailout.

About half of the $168 million in loan-loss reserves Citigroup set aside in the third quarter for Latin America will be used to cover souring loans made to those firms, Chief Financial Officer John Gerspach said today on a conference call. At the end of September, the bank had less than $300 million of the assets, mostly construction loans, he said.

The added reserves were “driven by further deterioration in the financial and operating condition of these companies and decreases in the value of our collateral,” Gerspach said, adding the firms have breached credit agreements. “We will continue to monitor the performance of our homebuilder clients, as well as the value of our collateral, to determine whether additional reserves or charge-offs may be required.”

The three firms -- Corp. Geo SAB, Desarrolladora Homex SAB and Urbi Desarrollos Urbanos SAB -- missed debt payments after getting stuck with remote land valued below their cost. While subsidized developments sprawled far outside Mexico’s cities during the six-year term of former President Felipe Calderon, residents weary of long commutes began abandoning the neighborhoods. President Enrique Pena Nieto’s government has said it would make urban location a priority and continue to subsidize housing even without the biggest builders.

Consumer Division

The loans fall under the consumer division since they’re commercial loans made through the retail bank. Mexico is the company’s second-biggest market for consumer loans, with $29.6 billion at the end of September, or 10 percent of the total $293.1 billion held at Citicorp, the division that holds the bank’s ongoing businesses, according to a firm presentation.

Citigroup’s rate of non-current consumer loans in Latin America rose to 4.18 percent in the third quarter, a 0.15 percentage-point increase over the prior quarter and the highest rate of the bank’s four regions, according to the presentation.

The rate will stay about the same in the fourth quarter unless the lender incurs “any material losses on our exposures to homebuilders in Mexico,” Gerspach said.

Citigroup’s Mexico lender, Banco Nacional de Mexico, is the nation’s second-largest bank with almost 1,700 branches, according to its second-quarter securities filing.

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