Citi said it plans to list the business, called Banamex, in 2025 and resume a "modest level of share buybacks" this quarter.
The bank is considering a dual stock listing, possibly in Mexico City and New York, for the unit, two sources familiar with the matter said.
New York-based Citi had been in talks to sell Banamex to Mexican billionaire German Larrea's conglomerate Grupo Mexico (GMEXICOB.MX), with sources saying in recent months the sides were close to a deal.
But tensions between the conglomerate and Mexican President Andres Manuel Lopez Obrador, which had been rising, flared up after the latter moved on Friday to expropriate part of one of the company's rail lines.
The spat between Grupo Mexico and Citi as well as other government demands on Banamex - including that it remained in Mexican hands and that any new owner not be allowed to cut costs through layoffs - led the two sides to abandon the deal, according to two sources familiar with the matter.
A spokesperson for the president did not respond to requests for comment.
Lopez Obrador has previously said there "was no problem" with Grupo Mexico buying the business. After Citi's announcement, he said the Mexican state could participate in a deal, adding the government could have up to $3 billion at its disposal.
Citi shares sank more than 3% on Wednesday and are down about 1.7% this year. Shares in Grupo Mexico, some of whose investors had been mystified about the synergies a mining group could obtain buying a bank, were up more than 8%.
Citi first bought Banamex in 2001 for $12.5 billion. The lender announced in January 2022 that it would exit Mexico, ending its 20-year retail presence in the country.
The sale was part of a broader overhaul at the U.S. No.3 bank, which has struggled for years to gain scale and profitability from a myriad of businesses worldwide. Chief Executive Jane Fraser decided to exit consumer businesses in 14 markets, while focusing on multinational companies and wealthy clients to boost profitability.
Fraser, who had met Lopez Obrador in February, said in a statement on Wednesday that the bank had decided an IPO would be the best path to "advancing our goal to simplify our firm."
It remains unclear what investor appetite would be for such a deal, however, especially given the Mexican government's opposition to layoffs that could be needed to make the unit more competitive.
"The good news is that Mexico's stock market may have another listed bank, although Citi's ability to pull off an IPO of its Mexican consumer banking operations at a decent price remains to be seen," said Damian Fraser, CEO of communication agency Miranda Partners, who previously ran UBS's operations in Mexico and is not related to the Citi CEO. "The bad news is that in the end no one wanted to buy Banamex."
