Citi's Getting Smaller, But That's a Good Thing

Updated from 2:58 p.m. EST

Citigroup's (C) reported discussions to sell a portion of its Smith Barney brokerage to Morgan Stanley (MS) is likely to strengthen the bank's traditional banking operations and give it a much-needed cash boost.

Even as rivals like JPMorgan Chase (JPM), Bank of America (BAC) and Wells Fargo (WFC) get larger through opportunistic acquisitions amid the credit crisis, Citi's potential downsizing will not make it a "second-tier player" in terms of retail and commercial banking, says Cassandra Toroian, the president and chief investment officer of Bell Rock Capital.

"Citi is a great brand and I would argue that they should have never gotten involved in all these other businesses to begin with," Toroian writes in an email to TheStreet.com. "They should have stuck to being a bank -- that is their brand strength." She does not own shares of Citi.

The size of the company's balance sheet will "dictate the loans they can compete for with JPMorgan Chase and Bank of America -- and that shouldn't change so much," she says. "Remember, we're talking about them reducing business lines and using the capital at the bank. That doesn't equate to them shrinking the bank and have a smaller loan limit."

Morgan Stanley is likely to pay Citi between $2 billion and $3 billion in cash for a 51% stake in Smith Barney, according to the Associated Press, citing sources close to the talks. In total, after accounting for the "revaluation" of Smith Barney, Citi would get a pre-tax gain of roughly $10 billion, or $5 billion to $6 billion after taxes, AP said.