Legal woes and regulatory pressure seems unending for
). Most recently, following the initiation of Federal
authorities' criminal inquiry into the fraud worth $400 million
in Citigroup's Mexico-based subsidiary, the company's shares
crumbled. The stock price toppled 1.16% to $47.68 and continues
remain in the red after-hours.
In late February, following 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 involved 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
FBI and prosecutors from the United States attorney's office in
Manhattan are looking into the matter. They are skeptical about
Citigroup's internal controls over its operations which led to
such fraud. Though Citigroup believes that the fraud is isolated,
the regulators are examining whether the bank was equally
The regulators are also examining whether Citigroup ignored
warning signals related to its controls. According to the law,
following warnings related to any illegal activity, banks must
address such activity and initiate compliance programs to examine
the matter. If the banks fail to abide by such law, it is
considered a criminal violation. Notably, in 2012,
HSBC Holdings plc
) was blamed for substantial lapses in its anti-money laundering
compliance and was fined with $1.9 billion for its misdeeds.
Banamex Case in Detail
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 about 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 merely $185 million
were valid, of the $585 million of accounts receivables payable
to Banamex by Pemex as of Dec 31, 2013. 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.
At present, Citigroup is continuing its review to recover
misappropriated funds and identify persons who are guilty in the
case. Notably, Mexican authorities are providing their full
Capital Plan Rejected
Last week, Federal Reserve rejected Citigroup's capital plan
under the Dodd-Frank Act supervisory stress test 2014 (DFAST
2014). Notably, this is the second time in the last 3 years when
Citigroup's plan has been rejected by the Fed. It had resubmitted
its capital plan in 2012 as well.
Though Citigroup satisfied the stress test requirements, the Fed
objected to its plan to deploy capital to shareholders based on
certain "qualitative" reasons. As a result, Citi will need to
submit a revised capital plan to the Fed later this year.
The Fed did not cite the Mexican fraud as a reason of rejection
but the regulator is concerned over Citigroup's incompetence in
projecting revenue and losses in a severely adverse scenario for
major parts of its global business. These factors along with
other reasons raise questions over the bank's capital-planning
process, which led to the rejection.
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 attractive core business. However,
the prevalent regulatory pressures and litigation issues remain
concerns. Moreover, such inquiries would dent the firm's
reputation and diminish investors' confidence.
Citigroup currently carries a Zacks Rank #3 (Hold). Some
better-ranked major regional banks worth considering include
Wells Fargo & Company
) with a Zacks Rank #2 (Buy).
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