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OPINION

Who will buy Citibanamex?

The chance to acquire Citi’s Mexican business could attract some unexpected bidders.

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Citi’s sale of its Mexican bank – and who will buy it – is the hot topic of conversation in Latin American banking circles. And for good reason: not only is it probably the last chance for international banks that have smaller Mexican franchises to grab a seat at the top table in the country, but it is also a now-or-never moment for any large Latin American retail banks that have lingering aspirations about establishing themselves as a regional power.

Firstly, Citibanamex is big – with $44 billion in total assets and $4 billion in equity. It contributed $1.2 billion in pre-tax profit for Citi in the first nine months of 2021. This means only the big regional banks, such as Itaú or Bradesco in Brazil, have sufficient scale to consider entering Mexico via Citibanamex.

Secondly: Citibanamex has been struggling in recent years. The bank has lost market share – 408 basis points in total loans during the past five years, for example – taking it to 10%. In the consumer segment it has lost 567bp over the same period. And the story is the same on the funding side, with a 229bp loss in retail deposits. The bank has also fallen behind in terms of return on equity (from 13.5% to 9.8%) and return on assets (1.5% to 1.28%).

This takes Itaú out of the equation. While Itaú was very much interested in buying Citi’s Mexican bank in 2010 and 2011, that was largely an opportunistic play resulting from the historically high exchange rate of the Brazilian real, which at its peak was valued at $1.54. Today it is around R$5.5 to the dollar.

Synergies

In 2019, Itaú chairman Roberto Setubal told Euromoney: “When you have scale in Brazil, then acquiring something can be very profitable because of the synergies that you can create. But when you go into new countries you have no synergies at all. So it’s more difficult to buy something in a competitive way that makes sense from a shareholder perspective. Without synergies you are buying and paying a premium, believing that you will run the bank better than the previous controller – otherwise, how does it make sense to pay the premium?”

The rationale from Itaú’s chairman almost certainly speaks against making a move for a bank that is in decline – a decline that recent Citi investment has failed to arrest. Itaú may surprise the market, but there is very little expectation around Brazil's Faria Lima that it will be interested.

That lack of synergy is also why I don’t expect Bradesco or any non-banking Mexican buyer to step up either.

Mexican president Andrés Manuel López Obrador has said he would like Citibanamex to become Mexican again... logic suggests a Banorte acquisition

So that takes us to Citibanamex’s Mexican competitors.

BBVA is out due to scale – a combined organization would have a 45.9% share of total consumer loans, which would be challenging for regulators to endorse.

Nevertheless, the greater the scale of the acquirer, the greater the synergies the deal will generate, and therefore the higher the valuation that can be achieved. That places Banorte in pole position. Research from Credit Suisse suggests that Banorte could justify a potential equity value of $10.9 billion, compared with $10.7 billion for Santander Mexico (SanMex) and $8.1 billion for Inbursa.

The acquisition would also seem a little off-brand for Santander Mexico, whose digital-heavy growth strategy has been paying off in recent years. HSBC’s local management haven’t ruled out a bid, but buying a large non-Asian EM retail bank seems a little against the current as a strategy.

Mexican president Andrés Manuel López Obrador has said he would like Citibanamex to become Mexican again. So, when all is said and done, logic suggests a Banorte acquisition.

Surprise in store?

But I have a hunch that there could possibly be another outcome. Scotia’s patient and coherent Pacific Alliance focus has been creating great international diversification, and differentiation, for the Canadian bank. This is a golden opportunity for it to get scale in a bank market that its senior management team thinks has huge potential. Combined with Citibanamex, the new Scotiabank would triple its total loans – and quadruple its consumer loans. It would still be behind BBVA, Banorte, SanMex and HSBC in terms of market share. But only just, and it would undoubtedly have momentum.

So, I don’t think the Canadians will want to let this opportunity pass. Yes, they will have a challenge to justify a valuation that competes with Banorte’s. But Scotia’s excellent local management team could embolden an aspirational set of growth assumptions.

It is the consistent level of the bank’s ambition in the region that makes me think this. While wise heads will say that Banorte will end up buying Citibanamex, there could possibly be a Canadian surprise in store.

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