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El Citi pobre

10 September 2012 By Rob Cox

With Spain’s banking system in full-blown crisis, it’s hard to imagine any of the world’s biggest financial institutions taking lessons from their Iberian cousins. Yet Banco Santander’s methodical spin-offs of various operating subsidiaries around the world, the latest due soon in Mexico, present a reasonable model for an undervalued colossus like Citigroup to consider.

Santander is not Spain’s biggest banking problem, but it is the country’s largest bank. One way the Madrid-based group run by Emilio Botin has stayed out of the worst of the domestic banking mire has been by raising capital through initial public offerings of foreign operating divisions. For instance, it raised $8 billion selling 16 percent of its Brazilian arm a few years ago.

Next up is a 24.9 percent stake in its Mexican business. At the top of the indicated price range, the unit will be valued at $17.2 billion, or just over two times book value, or assets minus liabilities. The offering could bring in $4 billion of capital for the Spanish parent’s coffers. It would also join listed foreign subsidiaries including Brazil, Chile, Argentina and Poland, as well as its Spanish retail network Banesto. Listings of the company’s UK bank and U.S. consumer finance arm are also on the horizon.

The lesson for Citi and other global banks is how this approach in effect sets a floor under Santander’s overall market worth. Combine the Spanish bank’s stakes in just its three largest Latin American units – Mexico at the top of the IPO range, Brazil and Chile – and the total valuation comes to some $49 billion. That’s 67 percent of the parent’s $73 billion capitalization accounted for by unarguable public market prices.

Apply the concept to Citi. For starters, take the New York-based bank’s Mexican operations. At the same multiple Santander Mexico would fetch at the top of the IPO range, Citi’s Banamex arm would be worth over $20 billion – though the unit’s lower return on equity probably warrants something less. Still, that’s more than a fifth of Citi’s $94 billion market cap. And it’s by no means Citi’s only valuable foreign operation. Credit Suisse estimates that Citi’s Asian businesses are worth almost $40 billion on a standalone basis.

There are other ways Citi could showcase its assets. While Santander has chosen to list geographic entities, Citi could opt for a combination of regional and global listed subsidiaries. Citi’s transaction services division, known as GTS – a world-leading financial plumbing business – will generate $4 billion of net income next year, Nomura estimates. At 12 times earnings, around where Bank of New York Mellon trades, GTS would be worth some $48 billion. At Citi’s current valuation, that would imply that its institutional securities and wholesale banking arm plus the global consumer banking empire is only worth just over three times earnings.

There may be some overlap and double-counting in these back-of-the-envelope calculations. And Citi’s current global model has some benefits. Banamex, for example, might bring in Mexican clients who do M&A deals with Citi’s investment bank and then conduct international cash management operations via GTS. Nonetheless, listing foreign units doesn’t seem to have prevented Santander from finding similar synergies between different parts of the bank.

But the Santander model is still instructive for a bank like Citi, trading below book value even now that it’s recovering from its huge problems a few years ago. Spinning off pieces of the empire could bring in cash that Chief Executive Vikram Pandit could return to shareholders – something he wants to do, but has been denied by regulators.

It would create clarity for shareholders, which should lift the company’s overall valuation, and provide a modicum of autonomy that would fire up employees. It might also offer a model for eventually setting problem children free – like, say, an investment bank. And the spun-off companies can more easily use their stock to do deals, as Santander’s Bank Zachodni WBK is doing to acquire rival Kredyt Bank in Poland.

Sandy Weill, the former Citi CEO who is largely responsible for the U.S. company’s sprawl, highlighted the existential conundrum when he recently suggested it’s time to consider breaking banks up. But current boss Pandit’s Spanish counterpart, Botin, may actually have found the workable way to make that happen.


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