Citigroup Inc: Huge Opportunity or Massive Pitfall?

The news from Citigroup only seemed to get worse this week, as possibilities of more fraud continued to rise for the massive bank.

Jun 12, 2014 at 6:00AM

Citigroup (NYSE:C) has a history of giving its investors figurative stomach ulcers. And this week, one more reason was added to the list.

Various media outlets this week are reporting the possibility of fraud resulting from loans made to different companies in China. As Dealbook notes:

Large banks and trading firms are frantically trying to determine whether they have fallen victim to a suspected commodities fraud emanating from the giant Qingdao Port in northeast China.

Citigroup and several other large Western banks are concerned that their loans may lack the appropriate collateral, big stockpiles of copper and aluminum at the port. The banks have inspectors on the ground who are trying to assess whether enough of the metals are there.

This follows news from earlier in the year when Citigroup had to revise its 2013 net income down by $360 million as a result of client-fraud from its corporate lending operations in Mexico.


Banamex building in Mexico City.

Michael Corbat, the CEO of Citigroup, flew into Mexico and personally fired 11 of its employees in there, including its heads of corporate banking, trade finance, as well as treasury and trade solutions, and its head institutional risk office in the country. A few weeks later, we would learn the Mexican authorities had issued arrest warrants for 10 of the former executives.

Not so isolated?
When the fraud in Mexico was announced, Corbat said as soon as the bank became aware of the troubles it began a "rapid review" of the similar agreements to that which Citigroup had with Oceanografia S.A. ("OSA"), which resulted in the fraud.

Following the review, which spanned not only its operations in Mexico but all of Citigroup, Corbat went on to say, "[A]t this point, we believe this is an isolated incident."

Troublingly, the reports from today seem to indicate although it is unrelated to what happened in Mexico, it may not be only fraud affecting Citigroup.

Citi By S

Source: Flickr / S_E_Santana

What to make of it all
At the end of the most recent quarter, Citigroup had $550 billion, or nearly 60% of deposits, parked outside of North America. The bank noted its consumer banking operations had roughly 3,600 branches across 35 countries, and its institutional client business is the "largest proprietary global network with physical presence in [roughly] 100 countries." 

Some have argued this diversity among the locations of its businesses is a good thing, as it can help mitigate risk and expand its capabilities as economies across the globe expand. Yet I'd take the opposite perspective.

If banks in the U.S. fell into the troubles surrounding mortgage loans made in their own backyards because of questionable monitoring, how can we expect management to effectively monitor credit and client trends across entire countries and continents?

Banks are rife with risk if they are not carefully monitored -- the most recent financial crisis is a clear picture of that -- and spanning so many different countries seems to only heighten possible risks.

That isn't to say Citigroup is destined to fail, or worldwide operations is a bad thing, but it's important to see one bad apple can cause exponentially more harm to a bank than most other companies.

Citigroup is often lauded because it trades at a steep discount relative to the other banks. And while its worldwide reach may result in greater return, if recent events are any indication, investors must see it too faces greater risk.

These stocks beat the big banks...
In other news, Citigroup saw it's capital plan rejected this year and investors are still hoping it will one day pay a solid dividend. But there's still hope for those who want to pocket big dividends. After all, over time, dividends can make you significantly richer. And guess what? The big banks are laggards when it comes to paying dividends. So instead of waiting for a cash windfall that may never come, check out these stocks that are paying big dividends to their investors RIGHT NOW. Click here for the exclusive free report.

Patrick Morris has no position in any stocks mentioned. The Motley Fool owns shares of Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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