For some top Citigroup executives, it was a kind of little black book: an informal tally of Mexican companies that they feared could imperil the bank’s “crown jewel†â€" a sprawling retail lender called Banamex.
Using that list, which one top executive referred to as the “book of redlined clients,†the bank severed ties to multiple companies in Mexico in the financial crisis year of 2008, part of a broad scrubbing of risk throughout Citigroup, former executives said.
But a $400 million fraud at its Banamex unit that was discovered last month highlights the limitations of that kind of culling, and more broadly points to the challenges of finding solid lending clients in a country where the line between big business and political cronyism can become blurred.
The loss is also drawing attention to the longtime leadership of Citigroup’s Mexico chairman, Manuel Medina-Mora, 62, a star at the bank, where he is known for his dapper suits and corner-office polish.
Citigroup officials have largely blamed recent problems at Banamex on a combination of bad luck and bad actors. But a closer look at Banamex’s lending business reveals potentially more systemic challenges: The bank has been placing large bets on a few risky corporate borrowers.
The $400 million fraud involving an oil services company, OceanografÃa, for example, erased 19 percent of the Banamex banking unit’s profits last year, according to one analyst’s estimate. OceanografÃa, which is known in Mexico and in the corporate bond market for its checkered financial history, is one of Banamex’s 10 largest corporate clients, a person briefed on the matter said.
The bank’s problems, though, go beyond the troubled OceanografÃa loans. Banamex officials were also caught short last year after roughly $300 million in loans to a handful of Mexican home builders suddenly soured. The loans, according to Moody’s Investor Services, amounted to about 3 percent of Banamex’s Tier One capital, a metric that regulators watch to determine a bank’s financial health. Many of the home builders’ assets are likely to have been “wiped out,†a lawyer for one of the troubled developers said. Citigroup officials say that they have built reserves to cushion any ensuing losses, noting that Banamex remains well capitalized.
The Mexican home builder setback, in which other banks also suffered losses, illustrates one of the peculiar challenges of doing business in emerging markets, where investments are often tied to decisions by government leaders. The problems for the Mexican builders, for example, began after a policy shift effectively killed the developers’ suburban projects, threatening their ability to pay back the loans.
Through his long career as one of Mexico’s top bankers, Mr. Medina-Mora has proved adept at navigating the political challenges, according to his former and current associates.
But the bank he built has been considered something of a “black box†â€" a highly profitable but not especially transparent unit that was run with great autonomy by its leader, according to current and former bank executives. Sometimes, though, that autonomy rankled other executives in New York, the people said.
Ever since Citigroup acquired Banamex in 2001, Mr. Medina-Mora made it clear that “I will take care of Mexico,†said one of the former executives who, like the other current and former executives interviewed for this article, declined to be identified.
Through a spokesman, Mr. Medina-Mora declined to comment.
“We dispute assertions that the management team is autonomous,†a bank spokesman said in a statement. “While Banamex is a subsidiary of Citigroup, it is absolutely subject to the same risk, control, anti-money laundering and technology standards and oversight which are required throughout the company.â€
The relationship has worked well for more than a decade for Banamex, Citigroup and Mr. Medina-Mora personally. Mr. Medina-Mora has climbed to the top of Citigroup’s ranks: He was named the bank’s co-president last year. Yet with each new set of responsibilities he assumes at Citigroup â€" head of Latin America, head of consumer banking for North America, head of consumer banking worldwide â€" Mr. Medina-Mora has always retained a leadership role at the Mexican banking unit, raising questions about whether he is stretched too thin.
Mr. Medina-Mora is no longer running Banamex’s day-to-day operations, but as the bank’s Mexico chairman he broadly oversees Citigroup’s franchises in that country, including Banamex. Day-to-day operations are handled by Banamex’s chief executive, Javier Arrigunaga.
Serious concerns about oversight at the Mexican unit have rarely surfaced, at least in part because a fairly stable national economy has helped Banamex generate strong returns. In fact, Banamex has better returns than Citigroup as a whole, with a 2 percent return on assets, compared with about 1 percent at Citi, according to Michael Mayo, an analyst with CLSA.
But lending to corporations is not a big growth area for Banamex or other banks. Corporate lending has been growing at a far slower pace than consumer loans, according to analysts.
The bank has also faced increasing competition in recent years, as Mexican businesses found willing lenders in the corporate bond market.
More fundamentally, there are a limited number of borrowers that the banks deem creditworthy in Mexico, and many of those companies do business with the government.
“It is a reflection of the oligopoly we have in the Mexican economy,†said David Olivares Villagomez, a senior credit officer at Moody’s in Mexico City.
The 2008 efforts by Citigroup executives to reduce risk among corporate clients in Mexico led to a further consolidation of Banamex’s lending book, according to several former executives with knowledge of the matter.
As the book of so-called redlined clients filled up, there were fewer clients to whom Banamex was willing to lend, the former executives said.
That may help explain why Banamex had such a large exposure to a single oil services company, OceanografÃa. But it does not explain how the bank ended up extending $585 million in short-term credit to a company that had warned its own bond investors that it was “from time to time subject to various accusations, including accusations of corrupt practices.â€
OceanografÃa has long been the subject of speculation in Mexico over its quick rise after 2002, which some suspected was a result of ties to high-ranking Mexican officials. These connections, however, have never been proved. Since then, the company has won multiple contracts to become an important supplier of marine engineering services to Mexico’s state oil monopoly, Pemex.
OceanografÃa provides construction, maintenance and vessel-chartering services to Pemex’s exploration and production subsidiary.
OceanografÃa’s fortunes, however, changed sharply last month after it became the subject of a new government review that resulted in a suspension of government contracts to OceanografÃa for the next 20 months. Banamex had advanced as much $585 million to OceanografÃa through an accounts receivable program.
The program was supposed to work like this: Banamex would advance money to OceanografÃa to provide services to Pemex. The oil giant would then pay back Banamex, verifying invoices provided by OceanografÃa to confirm that the work had been completed. In theory, Banamex was relying on Pemex’s ability to pay back the bank.
Similar to the home builders, which relied on government subsidies to finance their suburban developments, OceanografÃa’s business relied on government contracts from Pemex. But when those ties were cut, the problems quickly surfaced. Shortly after the suspension of government contracts to the oil services company, Citigroup said it discovered the fraud at its Mexican unit, involving OceanografÃa.
The bank said Tuesday in a statement: “While we continue to investigate what took place in Mexico, we are working to identify any areas where we need to strengthen our controls through stronger oversight or improved processes.â€
