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March 5 (Reuters) - Moody's Investors Service has decided against raising its credit ratings on debt of Banamex, the Mexican subsidiary of Citigroup Inc, because of the bank's disclosure last week of losses on some $400 million on fraudulent loans to an oilfield services company.
Positive credit trends at Banamex that on Feb. 12 prompted Moody's to put the bank on review for an upgrade have "been offset by the more recent negative effects" of Banamex's charge to 2013 earnings for the alleged fraud, the ratings services said in an announcement on Wednesday.
Moody's said it has confirmed its current ratings on Banamex and finished the review.
Citigroup said on Friday that it discovered $400 million in fraudulent loans at Banamex and said employees may have been in on the crime. (ID:nL1N0LX187] The loans were made to services company Oceanografia on the basis of money it was supposedly owed by state-owned oil company Pemex.
The charge for the bad loans reduced Citigroup's 2013 net income by less than 2 percent. For Banamex, Moody's said, the charge reduced net income by 19 percent and hurt its financial strength.
"In addition, the charge revealed a breakdown of controls and auditing functions, as well as weaknesses in risk management and measurement as it relates to one of the bank's largest credit exposures," Moody's said.
"Moody's believes that such weaknesses increase the risk of additional charges to earnings that could affect the bank's ability to maintain sound capitalization, and limit its ability to expand business volumes," the statement said.
The service said it had previously considered upgrading Banamex in anticipation of the bank's ability to make money from its diversified franchise and ample deposits in an improving Mexican economy.
Fitch Ratings on Monday said the Oceanografia losses have had no material financial impact on Banamex. The service did not change its ratings. It said it will monitor Banamex for its risk management and internal controls.