UPDATE 1-Citigroup's Mexico unit to keep reinvesting

(Adds background on loan growth)

By Noel Randewich

MEXICO CITY Feb 16 (Reuters) - Banamex, the Mexican unit of Citigroup Inc, said on Monday it will reinvest all of its profits this year to keep its balance sheet healthy and continue growing.

Banamex Chief Executive Enrique Zorrilla reiterated that Citigroup has no plan to sell the No. 2 Mexican bank. Media reports and analysts have speculated Banamex could be sold to raise cash to help its troubled U.S. parent.

Banamex saw net profit fall 28 percent in 2008 to 13 billion pesos ($941 million), largely because of increased provisions for bad loans, Zorrilla told reporters.

In the past three years, Citigroup (C.N) has reinvested all of its profits from Banamex in the financial group, a policy expected to continue this year, Zorrilla said.

"In no way do we plan to weaken the franchise," he said.

Banks in Mexico have weathered the world financial crisis relatively well because they have not dabbled in risky businesses like subprime lending. But consumer credit defaults in Mexico have been ticking higher as the economy slumps.

In the United States, Citigroup has been weakened by more than $80 billion in writedowns and credit losses. The U.S. government has injected $45 billion of capital into Citigroup since October through the Troubled Asset Relief Program (TARP).

A Banamex spokesman handed out statements from three Banamex insiders denying reports they were trying to raise financing to buy the bank.

Citigroup's acquisition of Banamex for $12.5 billion in 2001 was the largest ever in Mexico at the time and was part of a wave of foreign purchases after an economic crisis devastated the banking sector in the mid-1990s.

Since buying Banamex, Citigroup has taken 11 percent of total profits out of the bank as dividends, Zorrilla said.

Banamex added 1.5 million clients last year, bringing the total to about 18 million, executives said.

Lending to consumers and businesses in Mexico expanded at explosive rates of around 50 percent a year in 2005 and 2006 as banks tended to a market starved of financial services.

But in recent months, banks have become more cautious about handing out new credit cards and consumer loans.

Banamex increased its capital adequacy ratio by more than a percentage point to 17.65 percent in December, according to Mexico's bank regulator. (Editing by Matthew Lewis) ($1 = 13.815 pesos at end December)