Citigroup May Vend OneMain Financial - Analyst Blog

Citigroup Inc.'s C CEO Michael Corbat stated the possible sale of its consumer-lending business OneMain Financial at an investor conference on Thursday. Mr Corbat revealed that the company has initiated the process and is weighing its options comprising selling it to a private equity firm, divesting it through public listing or a combination of both by the end of 2014, or early 2015.

Why this Exit Plan?

OneMain Financial – part of the former CitiFinancial – is the biggest operating unit of Citi Holdings with around 1,200 branches and focuses primarily on subprime loans. As Citigroup was hit hard by the subprime mortgage crisis, the company has been taking several restructuring initiatives to make it as much problem-asset free as possible. Also the intention is to focus more on core operations.

Mr Corbat stated that the subprime business no longer is a strategic fit for the changed business track of Citigroup. He also mentioned that Citigroup previously explored the option to vend OneMain Financial, but did not get the right bid. As the unit currently garners decent earnings, the company might get an attractive price for it now.

Is It a Right Move?  

Amid troubled tides when Citigroup is encountering issues from various fronts including the ongoing investigations related to the Mexican fraud and the Federal Reserve's rejection of its 2014 capital plan, the proposed deal upon materialization will give the company some financial flexibility.

The company has already been shedding distressed assets from its Citi Holdings unit to boost earnings. Notably, Citi Holdings reported revenues of $1.5 billion in first-quarter 2014, rising 61.0% from the prior-year quarter. Excluding CVA/DVA, Citi Holdings' revenues increased 58.0% from the prior-year period to $1.4 billion, primarily driven by the absence of repurchase reserve builds for representation and warranty claims in the quarter.

Overall, Citi Holdings' first-quarter results were close to breakeven and management expects it to reach breakeven point by 2015.

Bottom Line

As we look forward to Citigroup resubmitting its capital plan to the Federal Reserve later this year, we believe the company is working on its internal inefficiencies and setbacks. Further, we believe these streamlining initiatives will bolster the company's capital position, reduce expenses and drive operational efficiencies.

Citigroup currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the finance sector include Capital City Bank Group Inc. CCBG, KCG Holdings, Inc. KCG and E*TRADE Financial Corp. ETFC. All these stocks carry a Zacks Rank #1 (Strong Buy).