Following the detection of fraud in its Mexico-based
) 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
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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
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
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
Citigroup currently carries a Zacks Rank #4 (Sell). Some
better-ranked major regional banks worth considering include
Fifth Third Bancorp
The PNC Financial Services Group, Inc.
). All these stocks have a Zacks Rank #2 (Buy).