(Adds comment from bank association, detail on AG investigation)
By Tomás Sarmiento
MEXICO CITY, Oct 3 (Reuters) - The head of Citigroup Inc's Mexican unit Banamex has resigned, the bank said on Friday, after problems this year that included a major loan scandal that generated hundreds of millions of dollars in losses.
Ernesto Torres Cantu, a veteran of more than 25 years at the Mexican bank who previously headed its retail unit, will replace Javier Arrigunaga, said Banamex, Mexico's No. 2 bank by assets.
"Given the difficulties our institution has faced during the past year, Javier Arrigunaga reached the decision that new leadership was needed for the group," Manuel Medina Mora, the chairman of Banamex's board, said in a statement.
The bank said Torres will be supported by Rodrigo Zorrilla, who was appointed deputy chief executive of Banamex.
Arrigunaga, who had led Mexico's Bank Association (ABM) since April 2013, also stepped down from that role, the association said, praising him for his work in helping the government pass a financial reform last year.
The financial reform was designed to encourage banks to boost lending in Latin America's No. 2 economy.
Banamex management has been under pressure since Citigroup said in February it uncovered $400 million in bogus loans made to Mexican oil services company Oceanografia, whose assets the government seized.
The bank later uncovered other bad loans linked to Oceanografia and another oil services company, bringing the total losses to $565 million.
Banamex also suffered losses on loans to Mexican homebuilders, and fired a pair of rogue traders at the unit.
Citigroup this year has fired about a dozen staff members who either were directly involved or failed to stop the bad loans to Oceanografia. People familiar with the matter said that one of the fired employees was accused of spiriting away documents early in the bank's internal probe.
In May, Citigroup CEO Michael Corbat said in a memo that he expected more employees to be disciplined.
Earlier this year, Citigroup's board of directors said it may cut Medina Mora's 2014 pay and claw back some prior compensation because of the loan fraud at Banamex.
It separately cut his 2013 pay to $9.5 million from $11 million in 2012 after regulators sanctioned Banamex USA for lax anti-money laundering controls.
In a report that Reuters has reviewed, Mexico's banking regulator said its own investigation found that Banamex failed to follow internal protocols.
That failure was the main problem, and not material changes to the procedures, according to the 77-page report by the Comision Nacional Bancaria y de Valores (CNBV).
Mexico's attorney general, Jesus Murillo, said in June he was seeking to arrest three Banamex employees in connection with the bank's fraud claims, but not one of those arrests has been made.
Appearing before Congress at the end of September, Murillo was questioned about the lack of arrests in the case and said the investigation was continuing. (Additional reporting by Elinor Comlay, writing by Dave Graham; editing by David Gregorio and Matthew Lewis)