Desperate times call for desperate measures. But just how desperate has it got for US and European financial institutions reeling from the credit crisis? Desperate enough to contemplate selling their most prized emerging market assets in the hope of raising capital quickly to shore up ailing balance sheets?
Consider Citi. In the past two months the biggest bank in the US has raised $20 billion from a liquorice allsorts of investors including sovereign wealth funds, private accounts and fund managers to maintain liquidity. It has also announced a public offering of $2 billion in convertible preferred securities and an additional offering of $3.5 billion of straight preferred securities. Throw other measures into the mix and the bank has raised almost $30 billion in recent months.
Citi has also cut its quarterly dividend by 41% to 32 cents a share and has said that it will continue to sell non-core assets. All of this is in response to the $18.1 billion write-down it has made because of its exposure to the leveraged loan and sub-prime markets.
Still, some analysts believe this is not enough and, with the US economy seemingly heading for a recession, Citi’s domestic consumer banking business is increasingly vulnerable. The bank might have to raise more cash in a hurry.
One rumour doing the rounds is that Citi is considering selling Banamex, the Mexican bank it bought for $12.5 billion in 2001. Citi declines to comment.
Analysts believe that such a sale is unlikely, as it would severely dent Citi’s credibility as a leading emerging markets financial institution. Banamex, moreover, contributes almost $2 billion of profits each year, so Citi’s board would be loth to sell it. Yet the very fact that there is such a rumour is testimony to how bad things have become for Citi.
Banamex has an inherent value of about $35 billion to $40 billion based on the market capitalizations of other leading Latin American banks. A sale, therefore, could reap $50 billion or more – roughly the equivalent of what Merrill Lynch would fetch – and so provide Citi with a more than comfortable cushion in the face of any further potential credit write-downs. Even if the prospect of a full-scale sale is unpalatable, Citi could partly list Banamex and raise funds that way.
Citi is not the only international bank in dire straits that could consider selling an emerging markets asset. Merrill Lynch, for example, could offload its Indian brokerage, DSP, in which it holds a 90% stake. UBS could dispose of subsidiaries in Brazil and Russia. Who would be a potential buyer? Ironically, in a role reversal, other emerging markets financial institutions whose valuations have surged over the past few years.
For the time being there is no suggestion that either Merrill Lynch or UBS is considering any such thing. UBS in particular has invested heavily in the emerging markets over the past two to three years. Any sale of these assets would be a last resort. But such is the parlous state of the world’s most high profile banks that nothing can be discounted any more.
