To sell whole or in parts: that is the regulatory question for Citibanamex

Citigroup Inc.'s decision to exit the Mexican retail market could go one of two ways: either the bank sells its consumer and small-business assets to a single buyer, or regulators push for a breakup of its assets to different buyers.

The U.S. banking giant is selling Grupo Financiero Citibanamex SA de CV's consumer, small-business and middle-market banking operations in a deal that could reach more than $15 billion. Also included in the sale are the bank's pension fund unit, insurance companies, as well as a culturally important art collection and real estate. Although Citi is likely inclined to sell the businesses as a package to preserve their value, analysts interviewed by S&P Global Market Intelligence said divvying up the assets would lead to a smoother regulatory process.

"Concentration is the name of the game," Valeria Moy, director general at the research center of the Mexican Institute for Competitiveness, or IMCO, said in an interview. Citi "can avoid concentration issues" by splitting the bank into several parts rather than pushing for a sole buyer.

Mexico's banking industry is competitive and, on the face of it, there should be few issues with combining one of the top banks with Citibanamex, according to competition experts interviewed by S&P Global Market Intelligence. But a closer look at individual segments shows areas that could lead to concentration, including credit card and payroll loans and pension funds, which could force Citi to split the assets and sell to different buyers.

A deep dive on concentration

The Mexican banking system has some 50 active banks and not a single one dominating, Jorge Sanchez Tello, a director at financial think tank Fundef, said in an interview. "It is a myth that there is no competition."

"None of the banks interested in buying Citibanamex should have regulatory problems to acquire it," Sanchez said. However, there is "concentration in some segments," and perhaps the devil is in the details.

Regulators use the Herfindahl-Hirschman Index, or HHI, to compute market competitiveness and assess potential antitrust concerns. In Mexico, an HHI of above 2,000 points in a segment or sector could mean concentration problems, Rodrigo Morales, an economist and professor at Facultad Libre de Derecho de Monterrey, said in an interview. Morales calculated the country's total credit market has an HHI of 1,215 points, below the 2,000-point threshold that Mexican competition regulators are looking for.

Based on the HHI criteria, "anyone can buy Citibanamex" as the 2,000-point ceiling will hardly be touched, said Morales, who is a former commissioner at Mexican antitrust body Cofece. Of course, HHI is not the only variable.

Looking at the total market share of banks after the sale is a different story, Morales said.

An acquisition by either Grupo Financiero Banorte SAB de CV or Banco Santander México SA — touted as the two likeliest buyers — could lead to Mexico having just two banks, Grupo Financiero BBVA México SA de CV and Citibanamex plus either Banorte or Santander, holding a share of nearly 50% of the market. That kind of dominance could prompt "a very deep investigation" by the regulator, Cofece, Morales said.

Cofece did not immediately respond to a request for comment. Citibanamex did not respond to a request for comment. Banorte declined to comment, while Santander pointed to the statement made on a recent call by Banco Santander Executive Chair Ana Botín regarding the bank's interest on the sale.

Regulators will also look at loan segments and not just total loans. HHIs for government entity and state and municipality loans are much higher than the HHI for total credit, meaning regulators are more than likely to be concerned if Banorte or Santander buy those portfolios. Credit card and payroll loan segments have HHIs above or very near 2,000, meaning all major banks would have concentration problems, Morales said.

Banorte may also be unable to take on Citibanamex's pension fund unit given that it has a big pension fund business of its own and regulators could frown on a deal, Moy said.

The cultural art pieces that Citibanamex owns "will definitely be an issue" partly because they are expensive and need high maintenance, Moy said. Moreover, buyers "can't do anything" with buildings such as the Iturbide Palace, given their historical importance. "It's an asset, of course, but it might become a liability."

Such challenges could lead Citi to opt for spinning off the assets as a separate company in an initial public offering, ducking the regulatory issues surrounding consolidation. However, that looks unlikely given the time it would take for the valuation and the stock market might not welcome the offering, Moy said.

Branch network, government's stance

Citibanamex has one of most extensive retail networks in the country, Moy said. "That makes it more complicated in a world that is trying to move toward more technology and leveraging or taking out all the physical presence," she said.

A close similarity between the locations, customer profiles and strategies of Citibanamex and its potential buyer will be closely scrutinized by Cofece.

Although the Mexican government has publicly stated that it prefers a local buyer, Moy believes that it won't "eventually play on the final decision."

"There is no sense" in the government's stand, Morales said. "It's not the sort of message that obviously [external] investors want to receive," he said. "The decision will be a very sound technical one."

For Sanchez, the origin country of the ultimate buyer should not matter. "Regardless of the government's position, what really matters is that Citibanamex is bought by a business group that has the experience and financial resources to acquire it," Sanchez noted.

With regulators on close watch of one of the biggest Mexican deals in years, the whole process could take at least nine months, Morales said. Citibanamex "is a very important bank, and the brand has a great value in Mexico."