Coverage: Citigroup sells subprime unit

Citigroup agreed to sell its subprime lending unit for $1 billion, exiting the market that brought it so much pain during the financial crisis.

Dakin Campbell and Matthew Monks had these details for Bloomberg:

Citigroup Inc. agreed to sell its 103-year-old subprime lender OneMain Financial to Springleaf Holdings Inc. for $4.25 billion in cash, taking another step away from the business model championed by Sandy Weill.

Springleaf, majority owned by Fortress Investment Group LLC, plans to complete the acquisition in the third quarter, the Evansville, Indiana-based company said Tuesday in a statement. Citigroup said the sale will add about $1 billion to pretax earnings, and Springleaf expects the deal to boost 2015 net income, excluding one-time charges tied to the purchase.

Citigroup is jettisoning a consumer lender founded in 1912 as Commercial Credit that Weill used as a building block to create the world’s largest financial supermarket. Chief Executive Officer Michael Corbat has continued to dismantle it, picking up where predecessor Vikram Pandit left off. The firm has sold more than 60 businesses and $700 billion of assets, including insurance and retail-brokerage units that Weill once deemed essential.

Antony Currie wrote for Reuters Breakingviews that while the sale will be a blow to earnings, the company will be able to make much of its money back:

Losing OneMain deprives Citigroup 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, analysts at Bernstein figure. That is a mere fraction of what Citigroup will produce, but the bank needs all it can get.

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

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

Forbes staffer Antoine Gara wrote that the quick deal seemed to be beneficial to both sides:

Springleaf is buying OneMain at a relatively modest 7.5 times forward earnings multiple, giving the lender an easy path towards earnings growth as it takes on the subprime lender’s near $14 billion book of consumer finance receivables and grows its bank footprint to nearly 2,000 branches nationwide. On Tuesday, Springleaf said it expects the acquisition to be accretive to its 2015 earnings and forecast that profits would rise by $470 million by 2017.

“Buying a franchise at 7.5 times earnings is quite a coup, so well done,” Sterne Agee analyst Henry Coffee said to Springleaf on an investor call. As of the third quarter, Springleaf held $3.6 billion in branch consumer net finance receivables.

Citigroup’s quick divestiture of OneMain – the deal is expected to close in the third quarter – also has major benefits. Currently, investors are waiting to see whether  or not the lender passes its Federal Reserve administered stress test later in March, and also has its capital plan approved by regulators. In recent years, risky assets such as loans to low-rated borrowers and illiquid portfolios have caused lenders like Citigroup to surprise investors by coming up short of expectation.

With OneMain off of its books, Citigroup will also be able to retire expensive financing that it currently uses to support Citi Holdings, freeing up additional capital as it goes through stress testing. Tuesday’s sale, in addition to the freeing of capital, is expected by Citigroup to boost its earnings before income taxes by approximately $1 billion. Bernstein analyst John E. McDonald estimates the deal will free up to $1.5 billion of capital that can be returned to shareholders later this year.

The Wall Street Journal story by Annamaria Andriotis and Mike Spector pointed out the shift in the business may not be ideal for consumers:

Across trading and lending operations, hedge funds and private-equity firms have plowed into businesses after once-dominant banks retrenched. In the lending business, some private-equity firms have invested in lenders looking to make inroads against banks.

One big impact of the move is that consumers may see fewer protections as smaller, less regulated companies take over bigger portions of the business. Fewer regulators have oversight over nonbank personal loan lenders. However, the Consumer Financial Protection Bureau can bring enforcement actions against them if it finds they are engaging in unfair, deceptive or abusive practices, like deceiving consumers about the interest rates on their loans. It can also supervise them if it determines they may pose a risk to consumers.

The latest deal underscores large banks’ reluctance to return to the subprime market after the financial crisis. Before the downturn, subprime lending served as a greater revenue source for lenders that could charge higher interest rates and fees in exchange for lending to risky borrowers. Regulations that kicked in during the downturn crimped that revenue. A credit-card law in 2009, for example, limited charges that banks could impose.

While a bank divestiture of a troubled business may not be the biggest news, it is a symbol of a larger shift. Many banks are looking to build their consumer businesses, but they’re not looking to serve all people. They’re leaving that to private companies and pricing that might not be as regulated.