This Day On The Street
Continue to site
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Why Citigroup Mexico Fraud Is So Serious

NEW YORK (TheStreet) -- Citigroup's (C - Get Report) Mexico unit, Banamex, has been the subject of negative news of late and the importance of the division to the bank's overall operations is not to be underestimated.

Mexico is Citigroup's largest international market, according to a KBW report Wednesday. Since fraud at Banamex was first disclosed by Citigroup Feb. 28, shares are down nearly 2% versus a roughly 6% gain in the KBW Bank Index. Shares were down 1.43% to $47.55 Thursday afternoon, after The New York Times reported U.S. authorities have opened a criminal inquiry into Citigroup tied to the issue.

The fraud involves a $585 million loan Citigroup made to an oil services company called Oceanografia that was secured by accounts receivable from Pemex that turned out to add up to just $185 million instead of the promised $585 million, according to The New York Times' report Thursday. As part of its Feb. 28 announcement of the fraud, Citigroup revised 2013 and fourth quarter earnings downward by $235 million, including a $125 million tax write-off resulting from the loss.

While $235 million is a small number in the context of Citigroup's more than $13 billion in 2013 profits, it may be indicative of deeper cracks within the institution, which is still trying to put itself together after it required a $45 billion government bailout during the financial crisis.

Must Read: Big Bank Downgrades Gaining Steam

"Mexico is important to Citigroup because Manuel Medina Mora operates out of there and he runs the whole consumer finance business for Citigroup worldwide so if there's real problems in Mexico City it could be well beyond what is happening in just the Banamex operation," said Rafferty Capital Markets analyst Richard Bove in an interview Thursday.

The fraud may have been a factor in the Federal Reserve's rejection of Citigroup's plan to raise its dividend and increase its authorized share repurchase last month, according to a report from CLSA analyst Mike Mayo. Mayo also reiterated a suggestion that Citigroup consider selling the unit.

The Fed did not mention Mexico specifically in its rejection of Citigroup's capital plan. The regulator's somewhat elliptical announcement expressed concerns over "Citigroup's ability to project revenue and losses under a stressful scenario for material parts of the firm's global operations, and its ability to develop scenarios for its internal stress testing that adequately reflect and stress its full range of business activities and exposures."

The troubles with the Oceanografia loan come after Citigroup was forced to increase loan reserves in the third quarter over exposure to the troubled Mexican homebuilder sector, an issue KBW analyst Christopher Mutascio brought up in Wednesday's report.

"Mexico is Citi's largest international market, so if we see a material slowdown in Mexico affecting Citi's Global Consumer Business (GCB) unit, then we believe forward estimates could come under pressure as well. Altogether, we are becoming more cautious on [Citigroup's] emerging market focus as growth projections outside the U.S. appear to be slowing and volatility is increasing," wrote Mutascio.

Follow @dan_freed

Disclosure: TheStreet's editorial policy prohibits staff editors, reporters and analysts from holding positions in any individual stocks.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Real Money

More than 30 investing pros with skin in the game give you actionable insight and investment ideas.

Product Features:
  • Access to Jim Cramer's daily blog
  • Intraday commentary and news
  • Real-time trading forums
Only $49.95
14-Days Free
14-Days Free
C $44.41 0.41%
AAPL $92.69 -0.59%
FB $119.49 1.40%
GOOG $711.11 1.40%
TSLA $214.84 1.60%


Chart of I:DJI
DOW 17,740.63 +79.92 0.45%
S&P 500 2,057.14 +6.51 0.32%
NASDAQ 4,736.1550 +19.0610 0.40%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs