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Citigroup's 'Bad Bank' Gets Smaller, Badder

Citigroup earnings are being dictated by the ever-lightening Sisyphean rock called CitiHoldings — a 2008 spinoff of "non-core" assets — which Citi pushed off its balance sheet during the financial crisis, but continues to weigh on the bank's earnings performance.

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As part of its earnings announcement Monday, Citigroup said that it planned to retain its retail partner cards business after it reported significant strength including a $2.2 billion pre-tax through the first three quarters.

Citigroup CFO John Gerspach told reporters in a conference call that the decision to move the retail partner cards business back into the Citicorp portfolio from CitiHoldings had been a strategic one.

Citi has spent the last couple of years reworking the business, with the average credit scores underlying the portfolio now more than 700.

"It is a markedly different portfolio than what it was in 2008 and 2009," Gerspach said.

Secondly, as banks have pulled back credit lines since the crisis, consumers, wishing to avoid big purchases on their regular credit cards, are using private-label cards more often.

The assets include approximately $45 billion in credit loans made using Citi's balance sheet from partner retailers like Home Depot, Sears and ExxonMobil.

The other $32 billion of credit card assets from what was once CitiFinancial, now called OneMain, will remain with CitiHoldings.

CitiHoldings was invented in the fourth quarter of 2008 as a business of $850 billion in assets kept separate from its ongoing $2 trillion-plus-sized bank to help it build capital, become simpler and find a more predictable growth track.

Since its creation, CitiHoldings has been cut by more than half its size. In its most recent quarter, Citi reported that while the size of CitiHoldings as a percentage of total assets has fallen to 15 percent, it's not just been from sales — the remaining Citigroup has been able to rebuild its businesses back to pre-crisis levels.

Losses at CitiHoldings in the most recent quarter were the lowest on record, since Chief Executive Vikram Pandit spawned the idea as one of the ways for the bank to survive the financial crisis. With shrinking of CitiHoldings so far impressive, the question is whether last quarter's slowdown is indicative of the future for years to come at Citigroup, where CitiHoldings remains a sizeable part of its balance sheet. Management has cautioned investors to expect the latter.

On the media conference call, Gerspach said that the pace of asset sales will continue on an "Okay" pace. Roughly 40 percent of the $289 billion assets remaining under the Citi Holdings portfolio are comprised of U.S. mortgages, which is likely going to be the most difficult asset to sell, Gerspach said.

"No one is rushing out with a big check for the U.S. residential mortgage business," he said. "We are thankful that our residential mortgage portfolio relative to peers is smaller."

He also added that it was unlikely that Citi will consider transferring the mortgages business back to Citicorp in the same manner it has done with retail partner cards. Those mortgages had been issued under a different kind of underwriting criteria and to a different customer base, he said.

In 2009, just after the split between Citi and CitiHoldings took effect, asset sales began at a frenetic pace. That January, Citi ceded its ownership of brokerage Smith Barney to Morgan Stanley, in a joint venture that formed the world's largest brokerage and netted Citi almost $3 billion in much needed cash.

Months later, Citi sold its Japanese brokerage Nikko Cordial to Sumitomo Mitsui Financial Group, the third largest bank in Japan for nearly $8 billion, and it got another $2 billion in excess cash. Citi kept one Asian brokerage unit, Nikko Asset Management, which it later sold to Sumitomo for roughly $1.25 billion — ending an ambitious foray into Asia that was initiated by former CEO Chuck Prince.

In 2010, the sales kept on humming at CitiHoldings; during the year Citi reduced its assets by over $140 billion — a reduction of 28 percent. Among the most publicized sales was a selling of shares in its insurance unit Primerica to private equity fund Warburg Pincus, which later were sold in an IPO. That sale, a further push away from Citi's "financial supermarket" business model where anything money could be done under the roof of Citigroup, reduced CitiHoldings by roughly $5 billion in size and raised over $230 million.

Last year, the company also started selling some of its bundles of securities tied to real estate and credit card debt the bank had issued. In September 2010, Citi sold its stake in Student Loan Corp to Discover Financial for $600 million and another $3.5 billion in commercial real estate debt to JPMorgan Chase.

Later that fall, CitiHoldings sold $1.6 billion in credit card debt issued by retailers using Citi's balance sheet to General Electric . It was part of a push to sell off a $50 billion portfolio of loans made by retail partners that had higher delinquency rates than its own CitiCard consumer loans.

And that's where the plot's thickened for CitiHoldings — slowing asset sales. This year the company has actually reacquired assets like EMI, which it will sell this fall, and its struggled to divest CitiFinancial, renamed OneMain financial, its former consumer finance business with more than a thousand bank branches nationally.

Earlier in the year, Citi had been in negotiations with Centerbridge Capital Partners and Leucadia National to sell the unit according to reports from Reuters. The unit, with assets of roughly $13 billion and a value of $2 billion hasn't yet been sold because of disputes over its price, the funding of remaining assets and its credit rating.

Citi has said it will continue to review its holdings portfolio to see if it fits with Citicorp's strategy. Gerspach said during a media conference call Monday that the bank may have some more businesses that could be moved to Citicorp, but none of the magnitude of Partner Cards. He ruled out the possibility of transferring OneMain Financial to Citicorp, saying that it would be a "hard stretch" to get the former's customer base to fit in with the customer segment at Citicorp.

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