Citigroup’s Sale Of Hungary Retail Banking An Important Step Towards Streamlining Operations
Earlier this week, Citigroup (NYSE:C) announced plans to sell its consumer banking operations in Hungary to Austria-based Erste Bank, in the latest step by the globally diversified banking towards shrinking its retail presence in low-profit areas worldwide. [1] Talks about a potential deal between Citigroup and Erste first surfaced in June – several months after Citigroup put the Hungarian unit on the block as a part of its larger plan to exit retail banking in 11 countries (see Citigroup Follows Strong Q3 Results With Plans To Exit Retail Banking In 11 Countries). [2]
Financial details of the sale were not disclosed by either party, but the deal is expected to close by Q4 2016 – subject to regulatory approvals that will likely be secured by the end of this year. It should be noted that the move does not impact Citigroup’s corporate operations in Hungary, as the bank aims to continue to expand its relations with corporations, financial institutions and public sector clients in the country. We expect the deal to reduce the size of Citigroup’s assets held as a part of Citi Holdings by roughly $3.5 billion once it goes through.
We maintain a $63 price estimate for Citigroup’s stock. This figure is roughly 20% ahead of the current market price, with the recent equity market swoon over weak global cues being responsible for a bulk of the difference.
See our full analysis for Citigroup
Since the economic downturn of 2008, Citigroup’s primary focus has been on shrinking all the loss-making and non-core operating units housed under the Citi Holdings division. Over the years, the banking giant has done well to shrink these assets from almost $900 billion at the peak of the economic crisis (more than 40% of Citigroup’s total assets) to $116 billion at the end of Q2 2015 (around 6% of total assets).
Over recent months, a bulk of the reduction in assets has come from the sale of retail banking units in countries where profit margins were too low to justify the bank’s presence. Citigroup took the first step in this direction last June by announcing the sale of its retail banking operations in Greece and Spain (see Citigroup Inks Deals To Dispose Of Retail Units In Greece and Spain). Within months, it laid out a plan to get rid of consumer banking units in Costa Rica, Czech Republic, Egypt, El Salvador, Guam, Guatemala, Hungary, Japan, Nicaragua, Panama and Peru, as well as its consumer finance business in Korea in a bid to boost profitability. [3] Taken together, the operations in these 11 countries contributed less than 5% of Citigroup’s total consumer banking revenues and were only marginally profitable.
The bank moved these operations under its non-core Citi Holdings division at the beginning of the year, and the positive impact on expenses becomes immediately evident from the chart below which captures non-interest expenses for Citigroup’s retail banking operations as a percentage of the division’s revenues.
Over the first half of the year, Citigroup completed the sales of its consumer businesses in Peru and Nicaragua, and inked deals for the sale of retail operations in Japan, Egypt, Costa Rica and Panama. With the recently announced deal with Erste Bank, Citigroup has worked through its retail units in 7 of the 11 target countries – leaving the Czech Republic, El Salvador, Guam and Guatemala. With talks underway with potential suitors for each of them, the bank looks set to achieve its goal of reaching agreements for all these non-core units by the end of this year.
According to its website, Citigroup has a network of 10 branches in Hungary – 9 in Budapest (including Citigold branches) and 1 in Székesfehérvár. [4] Although data for 2014 is not available, the retail banking operations in Hungary had HUF 943.1 billion ($3.4 billion) in assets at the end of 2013. Assuming that this figure has grown modestly to $3.5 billion since then, the eventual sale of the unit will help reduce the size of non-core assets in Citigroup’s Citi Holdings division by $3.5 billion.
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- Citi Announces Agreement to Sell Consumer Bank in Hungary, BusinessWire, Sep 2 2015 [↩]
- Erste Group on track to buy Citi’s Hungary retail portfolio, Reuters, Jun 12 2015 [↩]
- Citigroup Reports Third Quarter 2014 Earnings per Share of $1.07, Citigroup Press Releases, Oct 14 2014 [↩]
- Find My Citi, Hungary [↩]