Division of Accounting Results Hints At Future Citi Holdings Spin-Off

Last Updated Jul 12, 2009 3:04 PM EDT


Citigroup is going one step further in solidifying what looks to be the firm's most significant strategy shift in more than ten years, announcing two sets of financial results for the banking behemoth's second quarter this year.

Second quarter earnings will be divided between Citicorp, comprising 56 percent of the firm's assets, and Citi Holdings, which is focused on areas such as consumer finance, retail broking and maintaining the bank's toxic assets.

Friday, Citi also provided historical data for the two divisions which showed markedly different past performance for the businesses. Last year, while Citicorp earned $6.14 billion on revenue of $60.56 billion, Citi Holdings lost $35.64 billion, on negative revenue of $6.7 billion, mostly due to massive writedowns.

The newly separated earnings results, to be released Friday, lend further credence to the idea that chief executive Vikram Pandit is aiming to split Citi up and focus the bank on more traditional investment banking activities. That idea was posited here at BNET Finance on Thursday.

Citi Holdings chief executive Michael Corbat still insists that there may be some life in the problematic assets.

"Sure, we are working through our troubled assets, but we've also got the ability to generate new assets where it makes sense," Corbat told the Wall Street Journal earlier this week.

In particular, Corbat expects that Citi's consumer finance division CitiFinancial will survive intact and continue to grow, while divisions more closely tied to the subprime meltdown such as CitiMortgage will need to be modified in order to remain competitive.

As the Wall Street rumor-mill has it, one of the increasingly likely ways in which Citi Holdings might be able to make those kinds of modifications is by raising its own capital on the open market in an initial public offering or being sold to a more appropriate buyer sometime in 2010.

That solution would serve the prevention of further diluting the equity stakes of existing investors, who have had a rocky time with the bank's massive reliance on billions in government support and a lagging valuation.

Relative to its peers, Citigroup shares have had a pretty disastrous first-half 2009. Shares of Morgan Stanley, JPMorgan and Goldman Sachs -- all of which paid back their TARP loans in June -- are in positive territory year-to-date, while Bank of America and Wells Fargo are down 15 percent and 22 percent, respectively. By comparison, Citigroup has shed more than 60 percent of its value in the same period.

"The problem is that analysts can't get their arms around what's going on in the company," Paul Mendelsohn, chief investment strategist of Virginia-based Windham Financial told BNET Finance Thursday. "You know that the government is not going to let them go under, but that doesn't mean shareholders won't get wiped out."

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  • Daniel Harrison

    Daniel M. Harrison is a business journalist who has written for publications such as The Wall Street Journal, Dow Jones Newswires, and Forbes.com.

    In 2007, Harrison initiated Asian market coverage for TheStreet.com, reporting from New York and Hong Kong. He also served for a while as Opening Bell Editor at the financial blog Dealbreaker.com. Harrison is the publisher, editor and writer of The Global Perspective, and you can follow him on Twitter at Twitter.com/bizjourno.