Citigroup Bond Swoon Exacerbates Loan Fraud Sting: Mexico Credit

Citigroup Inc.’s Mexico unit is headed for its worst year as a bond underwriter in more than a decade, crimping revenue at operations that already have suffered a $400 million loan-fraud loss.

Citigroup, the top underwriter of peso-denominated bonds last year with an 18 percent share, has fallen to fifth place this year after managing just 9 percent of the $4.8 billion issued, according to data compiled by Bloomberg. The bank, which shared the top spot before the fraud was disclosed at the end of February, has since been leapfrogged by London-based HSBC Holdings Plc and Spain’s Banco Bilbao Vizcaya Argentaria SA.

The slide compounds the challenges for Citigroup because Mexico is the biggest contributor to its revenue in Latin America, which equals about 20 percent of the New York-based firm’s worldwide total. Top executives of Citigroup’s Mexican bank, known as Banamex, have been grappling with regulatory and criminal probes stemming from the fraud, with at least 12 employees dismissed in recent months.

The underwriting slowdown “is part of an aggregation of things that is affecting Citigroup all at once,” Roy Smith, a finance professor at New York University’s Stern School of Business and a former partner at Goldman Sachs Group Inc., said by telephone. “The effort to impose a big increase in internal controls is one that is clearly very labor-intensive.”

‘Same Levels’

Paulo Carreno, a Banamex spokesman based in Mexico City, said that bank officials “don’t see a connection” between the slide in underwriting and the Oceanografia case. “We are confident that to end the year we’re going to be at same levels in terms of numbers of transactions that we had last year and in previous years,” he said.

Citigroup has also slipped this year in the business of underwriting dollar-denominated bonds by Mexican issuers, dropping to sixth from first at this point in 2013, according to data compiled by Bloomberg.

Banamex is Mexico’s second-biggest bank by outstanding loans. Since 2006, Citigroup has finished first or second among underwriters of peso-denominated debt. Corporate and investment banking at the Mexican unit provided 5.8 billion pesos ($400 million) of profit last year, according to financial statements released after the alleged fraud was discovered.

Compartamos Sale

Citigroup said Feb. 28 that $400 million of loans to oil-services company Oceanografia SA were backed by collateral that didn’t exist. The bank reduced its previously reported 2013 profit by $235 million because of the fraud.

Chief Executive Officer Michael Corbat called the episode a “despicable crime” and vowed to punish anyone responsible. The matter is under investigation by Mexican banking regulators and federal prosecutors.

Citigroup was not among the underwriters on Mexican lender Banco Compartamos SA’s sale of 2 billion pesos of bonds this month. The lender had used Citigroup for a similar sale in September.

Patricio Diez de Bonilla, the chief financial officer of Compartamos’s parent Gentera SAB, said in an e-mailed statement that Citigroup wasn’t hired for the recent sale because of an “internal business decision.” He said the decision not to hire Banamex had nothing to do with the Oceanografia case, according to the firm’s press office.

‘Come Back’

Compartamos said that Bancomer, a unit of Bilbao, Spain-based BBVA, along with units of HSBC and Banorte served as an underwriter in the deal. The firm’s September deal was organized by units of HSBC, Banorte and Banamex.

“Our relationship with Banamex is very long-term and solid,” Diez de Bonilla said.

Mexico’s peso advanced 0.8 percent to 13.0055 per U.S. dollar at 2:28 p.m. in New York.

Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine, who rates Citigroup stock outperform, said the slowdown in underwriting is likely to be temporary.

“Once the controls and procedures are reconfirmed, then I think you will see the business start to come back,” he said by phone. “I do not believe it is a permanent decline for the company in this area and is more of a temporary pause.”

The fallout may have created a distraction for management, said David Knutson, a senior research analyst at Legal and General Investment Management America, which manages $42 billion in assets.

“If you’re putting out fires, you are not building a house,” Knutson said by phone from Chicago.

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