Citi faces revenue hit if Mexico eliminates ATM fees

Citigroup's consumer bank in Mexico could lose a key source of revenue if the country's incoming president is able to make good on his pledge to eliminate ATM fees at banks there.

Under legislation introduced Thursday, banks in Mexico would be prohibited from charging fees for ATM withdrawals, bank transfers and printouts of bank balances, among other retail services. The proposal was introduced by Ricardo Monreal, the majority leader in the Senate, and is being championed by President-elect Andres Manuel Lopez Obrador.

News of the proposal, which reportedly caught bankers by surprise, sent shares of banks in Mexico — including BBVA and Banco Santander — tumbling. (Both banks are based in Spain but have large retail operations in Mexico.)

Shares of Citigroup, which has invested heavily in expanding its Mexican operations, were down just over 2% in late trading Friday.

The proposal’s legislative prospects remain unclear. Similar measures have failed in the past, said Mike Mayo, an analyst with Wells Fargo, in a research note to clients. Still, the leftist Morena party — of which both Monreal and Lopez Obrador are members — hold a majority in both houses in Congress.

Speaking to reporters Thursday, Monreal said that the legislation would be passed in consultation with the banking sector.

“We are not going to pass [the law] in an abrupt, fast, hasty way,” Monreal said, according to Reuters. “We are going to listen and we will take enough time to be able to listen to all sectors.”

A spokesman for Citi declined to comment.

Citi stands apart among large U.S. banks for its commitment to Mexico. After exiting retail banking in other Latin American markets — including Brazil, Argentina and Colombia — Citi two years ago announced plans to invest $1 billion in its Mexican retail bank, known as Citibanamex.

Citibanamex is Mexico’s second-largest bank, with roughly 1,500 branches.

Any attempt to curb retail banking fees would clearly have a financial impact on Citibanamex, which is struggling to grow revenue. Excluding a one-time gain on sale, total revenue increased by just 2.3% in the third quarter from a year earlier and fee revenue was up less than 1%.

Still, analysts said that the financial impact on the parent company would be minimal.

The legislation “seems manageable to Citigroup at first pass,” said Brian Kleinhanzl, an analyst with Keefe, Bruyette & Woods, in a research note to clients.

Kleinhanzl estimated that the elimination of all fees at Citibanamex would reduce annual earnings per share for the overall company by between 1.3% and 2.5%.

So far this year, the Mexican retail bank has generated approximately 8% of Citi's total revenue, according to Mayo. He estimated that, worst-case scenario, the proposal would reduce total revenue at the company by less than 1%.

Mayo, notably, has previously pushed Citi to consider a sale of its Mexican banking division, particularly in light of the tension over trade issues following the election of President Donald Trump.

Shortly after the 2016 presidential election, CEO Michael Corbat reiterated his commitment to Mexico, telling employees that protectionist or anti-Mexico policies from the administration wouldn’t affect Citi's growth plan in the country.

Citi has also taken steps in recent years to bolster its anti-money-laundering controls, after paying millions in settlements to U.S. regulators for failing to provide sufficient oversight of its Mexican operations.

Mayo, in his note, said the proposal to eliminate fees should push Citi executives to take another look at divesting its retail operations in Mexico.

“The mere direction by Mexican lawmakers gives yet one more reminder why Citi may want to consider selling its Mexican retail business,” he wrote.