“And refusing to rush into a fire sale of OneMain worked. The $4.25 billion cash price tag to which Springleaf Holdings has agreed is much larger than the $2 billion Citi was reportedly asking for the business in 2011, even though the unit’s assets have shrunk considerably…

…The deal will allow Citi to pay down debt that finances OneMain’s assets with enough left over to raise pretax earnings by approximately $1 billion, according to the bank. This should put Citi within reach of its financial target for 2015 of a return on assets of 0.90% to 1.10%….. OneMain Financial is part of Citi Holdings, the division created in 2009 to house assets and businesses the bank planned to sell or wind down in the wake of its near-death, financial-crisis experience. Citi has long insisted on taking a patient approach to selling parts of Holdings, defying critics who would have preferred that the bank “fold ’em” rather than “hold ’em.””, John Carney, “Citi’s Holdings Strategy Wins a Hand: Patience Pays Off in Sale of OneMain Financial”, The Wall Street Journal, March 4, 2015

“This is exactly the point I have made in Statements #640 today and #637 yesterday and elsewhere on this blog. The FDIC, as a conservator, needs to wake-up and do the same with the institutions and assets they acquire; especially at times when market prices are irrational. (In a New York Times article in early 2009, FDIC Chair Bair was quoted as saying that “asset prices are irrational”, and yet she allowed the FDIC to go ahead and fire-sell IndyMac Bank into the teeth of the crisis and that irrationality.) Despite these experiences, the FDIC’s conservatorship policy remains to this day to just “fold ‘em” (sell as fast as possible), creating enormous and mostly unnecessary losses for the FDIC insurance fund.”, Mike Perry, former Chairman and CEO, IndyMac Bank

Heard on the Street

Citi’s Holdings Strategy Wins a Hand

Patience Pays Off in Sale of OneMain Financial

By John Carney

Citigroup ’s sale of OneMain Financial shows that patience can pay.

OneMain Financial is part of Citi Holdings, the division created in 2009 to house assets and businesses the bank planned to sell or wind down in the wake of its near-death, financial-crisis experience. Citi has long insisted on taking a patient approach to selling parts of Holdings, defying critics who would have preferred that the bank “fold ’em” rather than “hold ’em.”

And refusing to rush into a fire sale of OneMain worked. The $4.25 billion cash price tag to which Springleaf Holdings has agreed is much larger than the $2 billion Citi was reportedly asking for the business in 2011, even though the unit’s assets have shrunk considerably. The deal will allow Citi to pay down debt that finances OneMain’s assets with enough left over to raise pretax earnings by approximately $1 billion, according to the bank.

This should put Citi within reach of its financial target for 2015 of a return on assets of 0.90% to 1.10%. While this will certainly be challenging—last year, Citi’s return on assets fell to 0.61%—the additional income on a shrinking asset base makes achieving the low end of the target range a realistic possibility.

Although Citi hasn’t disclosed how much the sale will reduce risk-weighted assets, Holdings’ assets can serve as a rough indicator. These make up just 5% of Citi’s total assets but account for 14% of its risk weighted assets.

If that proportion carries over to OneMain’s assets, Citi could be shedding as much as $17.5 billion in risk-weighted assets. This might actually understate the reduction because the consumer loans made by OneMain typically carry high risk weights that require outsize capital support.

So the move likely strengthens Citi’s capital position, improving its ability to eventually return capital to shareholders. As well, the sale somewhat streamlines and simplifies the bank, which is likely to please regulators who have veto power over its capital-planning process.

As of the end of last year, Citi had $98 billion in assets in Holdings, having sold more than $700 billion over the past five years. It is likely that the pace of sales will be significantly slower in the future. OneMain was the last large business unit left. What remains are primarily troubled mortgage assets that remain difficult to sell without incurring large losses.

Perhaps most important, the sale demonstrates the successful execution by Citi’s management of its announced strategy. That is an important step in winning back the trust of investors after last year’s stress-test failure and other unexpected stumbles.

Posted on March 4, 2015, in Postings. Bookmark the permalink. Leave a comment.

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