By Tatiana Bautzer and Guillermo Parra-Bernal
SAO PAULO (Reuters) - Citigroup Inc (N:C) has put its stake in a Brazilian credit card processing joint venture with Elavon Inc up for sale, two sources with direct knowledge of the plan said, after a disagreement over additional funds for the loss-making unit.
Relations between Elavon and Citigroup, partners for five years, have soured after Brazil's central bank said the joint venture needed more cash and the U.S. bank declined to come up with any additional funds, said the sources, who declined to be named because the talks were confidential.
The joint venture, known as Elavon do Brasil, has failed to gain traction in a burgeoning payment processing market dominated by Cielo SA (SA:CIEL3) and Rede, a unit of Itaú Unibanco Holding SA (SA:ITUB4). While Cielo, Rede and peer GetNet Serviços own a combined 98 percent of the market, Elavon has managed to capture a share of only 1 percent.
One source said the Citi-Elavon venture needs about 200 million reais (£35.5 million) in new capital. But with Brazil mired in recession, Citigroup does not want to deploy more money in the country and is unwilling to reallocate capital from its other operations there, the source said.
Over the past three years, Citigroup has tempered its ambitions in Brazil. Helio Magalhães, who became Citigroup's Brazil chief executive officer in 2012, reversed his predecessor's strategy of seeking to take market share from larger rivals, in order to focus on wealthy customers and corporate banking.
The value of Citigroup's 49.9 percent stake has yet to be determined, one source said. The joint venture had negative equity of 195 million reais as of June, according to Citigroup's Brazil financial statements, meaning the bank could lose money if it tried to sell the stake.
In a statement to Reuters, Citigroup said the joint venture remained "an investment aligned with our strategy of offering a complete product platform to our corporate clients."
An Atlanta, Georgia-based spokeswoman for Elavon declined to comment. Elavon hired Greenhill & Co Inc (N:GHL) as an adviser, the sources added. Citigroup's investment bank is also working on it.
Citigroup's stake has been offered to Itaú, Banco Bradesco (SA:BBDC4), state-controlled lenders Caixa Econômica (CEF.UL) and Banco do Brasil SA (SA:BBAS3) as well as Banco Santander (MC:SAN) Brasil SA (SA:SANB11), one source said. Elavon already has a partnership with Caixa, with the latter distributing Elavon's card machines nationwide.
The banks declined to comment. Citigroup shares were down 0.2 percent at $54.65 in New York on Monday morning.
'DIFFICULT TO COMPETE'
Citigroup's lack of scale in Brazil is not new. Local lenders have gobbled up market share over the past three years and now control 90 percent of assets. Among the top six lenders, Banco Santander Brasil is the only foreign-owned one among them.
Last year, Citigroup's Brazilian assets grew by 8.7 percent, compared with 14 percent growth for Banco Bradesco SA (SA:BBDC4) and 24 percent for Caixa Econômica Federal, according to central bank data.
Despite a push for high-end customers, including opening two flagship branches in São Paulo and Rio de Janeiro, Citigroup's Brazilian retail banking unit has been losing money in recent years, according to two other sources, who are former executives who spoke on condition of anonymity.
Citigroup declined to comment on the performance of the retail bank.
Magalhães, Citigroup's Brazil CEO, has said the exit of HSBC Holdings Plc (L:HSBA) earlier this year from Brazil could help the bank win more wealthy clients but competition is escalating. Bradesco paid $5.2 billion for the HSBC unit this year, targeting that segment.
"It's becoming difficult for global banks to compete with local banks in the retail banking segment because their franchise costs, such as global software and processing costs, have to be assumed by their subsidiaries, as well as the lag they have in terms of scale," said Alvaro Tayar, lead partner at PwC for financial services.
Income from corporate and transaction banking have helped offset losses in the retail bank, mainly since Citigroup is Brazil's No. 1 custodian of foreign investments. Its large currency trading platform, coupled with increased transaction banking activity, propped up profit in Brazil during the first half, according to its financial statements.
Efforts to grow in investment banking, however, have yielded mixed results.
Citigroup poached dealmakers Andre Kok and David Panico from Itaú BBA and Bank of America (N:BAC) Merrill Lynch, respectively, but the two men departed within two years as the bank lost ground on advisory rankings.
In the first nine months of this year, Citigroup ranked sixth and 14th in inputted fees from M&A advisory and debt underwriting. In 2011, it ranked fourth and seventh, respectively.