Last updated: February 28, 2014 7:19 pm

Citigroup: Banamex bother

Investors are alert to evidence big banks are too big to manage
Pedestrians walk outside a Banamex bank branch©Bloomberg

The fraud was linked to Banamex loans to Oceanografia

Good news, Brady Dougan! It took a few days for dirt to kick up around another big bank, after Credit Suisse got in trouble over clients and tax evasion – but Citigroup delivered eventually. The bank said on Friday that 2013 earnings would take a retroactive hit after fraud in its prized Mexican unit, Banamex.

These unpleasant situations have, first, a financial cost. Banamex lent about $585m to an oil services company to finance receivables from Pemex, the state-owned oil company. According to an internal memo from Citi, it appears that the invoices from Oceanografia – processed by a Banamex employee – were falsified to show approvals from Pemex. It is unclear how many people were involved but as much as $400m was misappropriated. The fraud will reduce 2013 net profit by $235m after taxes, or 1.7 per cent to $13.7bn. (The cut in the fourth quarter is about 9 per cent.) Return on equity was thus 12 basis points lower at 6.9 per cent.

A few hundred million dollars does not break a bank the size of Citi. But it is not inconsequential either, given the bank’s low level of profitability (though Citi, depending on the ensuing investigation, may be able to recover some damages).

But there are broader implications. True, banks extend risk and sometimes they get burnt. But the issue here is not one of lending to a company that fails; it is fraud. And that raises questions about the bank’s controls and credibility. The inquiry is ongoing and Citi believes the fraud is isolated. But naturally as part of the post mortem, Citi has begun a review, throughout Banamex and the rest of bank, of programmes similar to the one at issue. That raises the question of what else may be found, and the cost of that in both dollars and perception. Citi already faced questions over souring loans to housebuilders in Mexico.

The Oceanografia loans are a tiny part of Citi’s loan book. But the financial crisis has made everyone alert to evidence big banks are too big to manage: allegations of brokers in Switzerland helping US clients avoid taxes or questionable and costly trading within a bank’s own investment office; fraud in Mexico; and so on. This stuff adds up.

Email the Lex team in confidence at lex@ft.com

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