Analysis: Citigroup has an emerging markets headache

Tue Jul 16, 2013 9:46am EDT
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By David Henry

(Reuters) - Stronger earnings by Citigroup Inc (C.N: Quote) show it is on the path to recovery but its broad presence in emerging markets, many of which are experiencing slowing economic growth, may temper investors' optimism.

Emerging markets have fueled two-thirds of Citigroup revenue growth for the last two years. The bank operates in about 100 countries globally, far more than most of its U.S. competitors, which means it can be hit by economic factors that shareholders know little about.

"If anything goes bump in the world, Citigroup may well have some exposure," said Fred Cannon, an analyst at Keefe, Bruyette & Woods.

The slowdown in U.S. and European economies has made developing countries as a whole look riskier. So far this year, emerging market stocks, as measured by MSCI's index .MSCIEF, have declined about 12 percent, while the U.S. benchmark Standard & Poor's 500 index .SPX has gained about 15 percent.

China said on Monday its economy grew at an annualized rate of 7.5 percent in the second quarter, the ninth quarter in the last 10 in which expansion has weakened, which could spill over to other Asian nations as well as Latin American countries that sell resources to China.

Some of these growth concerns have started to show in Citigroup's results.

Credit losses in Latin American retail banking rose 51 percent to $204 million. The bank also decided to set aside more money to cover loan losses in markets including Latin America and Asia, in part because of more troubled corporate borrowers there.

The bank's loans to the three biggest Mexican homebuilders are an example of unanticipated risk. Geo (GEOB.MX: Quote), Urbi (URBI.MX: Quote), and Homex (HOMEX.MX: Quote) snatched up large tracts of land in ex-urban areas, but the Mexican government in February said it was more interested in lending to home buyers in urban areas. Now the companies are facing cash shortfalls and lawsuits.   Continued...

Passersby walk in front of a Citibank branch in New York, October 16, 2012. REUTERS/Keith Bedford