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Subprime payoff

3 March 2015 By Antony Currie

Trust Citigroup to benefit from offloading its most profitable business. The U.S. mega-bank has at last sold OneMain, to rival Springleaf, for $4.25 billion. The subprime consumer finance unit has generated returns that far exceed anything else at Citi. And yet the deal provides all manner of relief for the erratic lender run by Michael Corbat.

Losing OneMain deprives Citi of much-needed earnings. The unit’s return on assets, at 6.7 percent, is some seven times better than its owner’s 0.9 percent, a sign of both OneMain’s lower costs and the higher interest rates it charges customers. The business could earn $574 million this year, Bernstein analysts reckon. It’s a mere fraction of what Citi will produce, but the bank needs all it can get.

Corbat can offset much of the hit. First, the sale will provide a decent one-off boost to income. Along with retiring the higher-cost funding for OneMain, Citi reckons the pre-tax gain will amount to about $1 billion. The sale price also should give the bank an opportunity to tap into its $50 billion or so of deferred tax assets accumulated from losses during and after the crisis, and which can be used as long as U.S.-based businesses turn a profit.

The third overt financial benefit will be capital freed up from shedding OneMain’s nearly $10 billion of assets. Assume Citi holds 10 percent against the sum, and that’s almost $1 billion. Corbat can either reinvest the funds or try to persuade the Federal Reserve to allow him to return some or all of it to shareholders.

Getting OneMain into good enough shape to sell took substantial effort. Securing a deal required at least four years. That means being rid of it at last removes a serious management distraction. And in one final perk, Citi investment bankers will get a bit of league table credit for advising on the sale. Now all Corbat has to do is find a way to produce healthy returns from the rest of his sprawling empire.


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