Investing In Emerging Markets

Wednesday, October 11, 2006

Citigroup, on the hunt for takeover candidates again, is most likely to make big acquisitions in emerging markets, which offer faster growth and the chance to be more than a marginal player, analysts said on Tuesday.

Citigroup Chief Executive Charles Prince said in an interview with the Financial Times on Monday that the financial services group is looking at acquisitions outside the United States as it tries to boost earnings from foreign countries to 60 percent from 45 percent in the next few years.

The stakes are high for Citi, whose shareholders are clamouring for lower costs and higher returns three years into Prince's reign as chief executive.

The financial group has looked at acquisitions in Western Europe, according to the Financial Times, and speculation and other media reports have suggested Citi is looking at various banks across the United Kingdom, France, and Spain, among other countries.

But most major Western European banks are slow-growing, and would boost the proportion of Citi's overseas earnings to well over 60 percent.

"It's about growth and for people in America that probably means Latin America, Asia and Eastern Europe," said Simon Maughan, analyst at independent research firm Blue Oak Capital.

Determining which banks are likely targets is tricky, analysts said, but there are deals that have already been made public. A Citi unit is part of a consortium bidding for an 80 percent stake in China's Guangdong Development Bank for about $3 billion. There are two other rival bids, and the results of that deal should be disclosed soon.

Citi plans to increase its stake in China's Shanghai Pudong Development Bank <600000.SS> to 19.9 percent from less than 5 percent soon.

Taiwan's Bank of Overseas Chinese <5818.TWO> is in advanced talks to be bought by Citigroup, a source at the Taiwan bank said last week, and a deal could be announced this month. The Taiwan bank had assets of about 270 billion Taiwan dollars ($8.2 billion) at the end of 2005.

In Turkey, local bankers have said Citi is looking at state-owned Halkbank, the sixth-largest bank there with assets of about 32.6 billion lira ($21.7 billion) at the end of the first half. Stakes of Akbank and Oyakbank are also up for sale in Turkey.

In Central and Eastern Europe, one analyst said Citi may be interested in Austria's Erste Bank der oesterreichischen Sparkassen, in part because of its portfolio of assets across the region.

But buying the entire bank, whose market capitalization is about 15.5 billion euros ($19.5 billion), would be difficult because its largest shareholder is a foundation owned by Austrian savings banks that is unlikely to sell.

Rob McIvor, a Citigroup spokesman in London, said he couldn't comment on possible takeover candidates, but that Citigroup does see acquisitions and organic growth as key to its strategy.

NIX ON WESTERN EUROPE

Rumors that Citi might be in the market for Barclays and Lloyds TSB have helped lift the UK banks' shares this month.

Various media reports have also said Citi may be looking at BNP Paribas and Societe Generale in France and BBVA in Spain.

But these acquisitions are unlikely, in part because of their size--BNP Paribas, for example, has a market capitalization of about 80 billion euros ($102.2 billion).

Citigroup's Prince has said he is not interested in "transformative" acquisitions, which some analysts have interpreted to mean very large deals.

To account for an extra 15 percent of Citi's 2005 earnings, a bank would have to earn about $3.7 billion a year. Most major Western European banks earned far more than that last year.

Wherever Citigroup buys, it had better boost earnings and keep expenses under control, investors said. Citigroup's second-quarter revenue grew 10 percent to $22.18 billion, but expenses rose 16 percent to $12.77 billion. The bank's $5.27 billion profit trailed the $5.48 billion reported by Bank of America Corp., the second-largest U.S. bank.

The company's shares are showing weak growth, too. Since Prince took over on Oct. 1, 2003 through Monday, Citi's shares have risen 8.7 percent, compared with a 26.7 percent increase for the broader U.S. bank sector.

"They keep saying that revenues will grow faster than expenses, but they never seem to get there. I would give Prince another 12 to 18 months to fix things," said Lee Delaporte, research analyst at Dreman Value Investors, which owns Citigroup shares.

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