Citigroup’s Deal With US Government Could Have Some Undesired Results

The government’s deal to increase up to a 40% its ownership stake in Citigroup (C), could result in the need for less-than-desired divestitures of profitable operations.

With increased government ownership, Citigroup could be required to apply for new charters in the other countries in which it operates. The problem — some governments may deny Citigroup the new charters. This could result in Citigroup being forced to cease operating in those countries and shed those profitable franchise businesses.

For example, Citigroup has consistently denied speculation that it plans to sell its ownership in Grupo Financiero Banamex (one of Mexico’s largest banks). However, Mexican law prohibits any foreign-based institution to operate a bank in its borders that is more than 10% owned by a foreign government. Such required divestitures could negatively result in the company experiencing continued quarterly losses for some time.

We would expect Citigroup will continue to look for additional divestures as the company continues to focus on retaining less traditional banking operations and splinters of its riskier assets or operations. We continue to think a number of other financial institutions will continue to look to divest operations to preserve capital, this would include but not limited to Bank of America (BAC), Wells Fargo (WFC) and US Bancorp (USB).

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