Citigroup Restates 2013 Earnings - Analyst Blog

By Zacks Equity Research,

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Following the detection of fraud in its Mexico-based subsidiary, Citigroup Inc. ( C ) announced revised earnings for fourth-quarter 2013 and full-year 2013. Due to the fraudulent activity, the company recorded post-tax $235 million (pre-tax $360 million) as charges, which led its net income for 2013 to fall to $13.7 billion from $13.9 billion.

The fraud involves Banco Nacional de Mexico (Banamex), which is Citigroup's Mexican unit, Oceanografia S.A. de C.V. (OSA), a Mexican oil services company and a key supplier to the Mexican state-owned oil company, Petróleos Mexicanos (Pemex).

As of Dec 31, 2013, through an accounts receivable financing program, Banamex provided short-term loan of $585 million to OSA for financing accounts receivables due from Pemex. Therefore, Banamex had around $33 million as outstanding loans directly aided to OSA or letters of credit issued on the behalf of OSA as of Dec 31, 2013.

Notably, in Feb 2014, after receiving information of OSA's suspension from getting new Mexican government contracts, Citigroup and Pemex performed diligent reviews of their credit exposure to OSA and the above-mentioned program over the past few years. Consequently, a considerable amount of accounts receivables recorded by Banamex related to the accounts receivable financing program with Pemex was discovered to be fraudulent.

Further, Citigroup's investigation, along with documents presented by Pemex revealed that papers of about merely $185 million of the $585 million of accounts receivables payable to Banamex by Pemex as of Dec 31, 2013 were valid. However, the amount of difference worth $400 million has been recorded as operating expense in Transaction Services in fourth-quarter 2013, offsetting compensation expense of about $40 million related to the Banamex variable compensation plan.

Further, Citigroup believes that the fraud is isolated to this client only. At present, the bank is continuing its review to recover misappropriated funds and identify persons who are guilty in the case. Notably, Mexican authorities are providing their full assistance.

Overall, Citigroup is assessing all its operations and intends to punish the perpetrators of such offences, to set an example.

Citigroup has come a long way since 2008, when it had to accept $45 billion as bailout money to survive the economic downturn. One can consider a strong brand like Citigroup to be a sound investment option, given its global footprint and attractive core business. It is also among the best reserved banks. However, the prevalent regulatory pressures and litigation issues remain concerns.

Citigroup currently carries a Zacks Rank #4 (Sell). Some better-ranked major regional banks worth considering include Fifth Third Bancorp ( FITB ), The PNC Financial Services Group, Inc. ( PNC ) and BB&T Corporation ( BBT ). All these stocks have a Zacks Rank #2 (Buy).

BB&T CORP (BBT): Free Stock Analysis Report

CITIGROUP INC (C): Free Stock Analysis Report

FIFTH THIRD BK (FITB): Free Stock Analysis Report

PNC FINL SVC CP (PNC): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Earnings , Stocks
Referenced Stocks: BBT , C , FITB , PNC

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