Earlier this month, Citigroup Inc (NYSE:C) announced it will be exiting its consumer, small business and middle-market banking operations of Citibanamex in Mexico.
On Monday, Bank of America analyst Ebrahim Poonawala summarized seven takeaways bank stock investors should have from Citibank's decision to exit Mexico:
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- Poonawala said the Citibanamex exit is a big step in Citi's long-term plan of simplifying its business and should help the bank eliminate unnecessary emerging market risk.
- Unfortunately, Poonawala said Citibanamex is a high-performing bank with a strong card business and a high-quality funding base. Some investors may be concerned about how quickly Citi can replace its lost Citibanamex earnings.
- Mexican banking experts expect Citibanamex to garner plenty of interest from multiple local buyers. An IPO, while seemingly unlikely, would also be well-received, especially given the pending delisting of Santander Mexico from the local stock exchange.
- Poonawala said Banco Santander SA (NYSE:SAN) is unlikely to be a frontrunner to acquire Citibanamex given its limited capital flexibility and weak stock currency. However, a potential wildcard could be some kind of deal in which Santander swaps its underperforming U.S. assets for Citi's Mexico assets.
- Poonawala said Latin American banking analysts highlight Banorte as the best-positioned potential buyer given its strong capital position and track record of successful consolidation. In addition, Poonawala said Mexican government support could give Banorte an advantage over other potential buyers.
- Poonawala estimates Citibanamex is valued at between $10 billion and $12 billion based on 2021 financials. While a potential $10-billion price tag may be too high for smaller banks or banks with challenged balance sheets, Poonawala said there is potential for a competing bid scenario that could price Citi's Mexico assets even higher than $10 billion.
- The Citibanamex sale could apply further pressure on HSBC Holdings plc (NYSE:HSBC) to divest assets in Mexico as well. The Citibanamex sale could help HSBC and others get a clearer picture of the market value for their Mexico assets.
Bank of America has a Buy rating and $100 price target for Citigroup.
Benzinga's Take: Simplifying business and reducing risk seem like two positives for Citigroup investors, especially in the current environment of economic uncertainty in the U.S. Bank stock net interest margins should benefit from rising interest rates in 2022, but an economic downturn could offset those benefits if loan growth slows significantly.
