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Citigroup Will Find 'Bad Bank' a Harder Sell

Citigroup bad bank article updated with management commentary and share price.

NEW YORK ( TheStreet) - Citigroup (C - Get Report) continued to wind down its "bad bank" during the second quarter, but the pace of sales is moderating as the bank fights to get a fair price for its local consumer lending businesses.

Citi Holdings- the bank's non-core operations that include brokerage and asset management, local consumer lending and special asset pools- has been a drag on earnings. Investors are counting on the bank to wind down the unit to a point when it can no longer hurt earnings.

Shrinking the Citi Holdings portfolio is also a crucial in order for the bank to achieve regulatory capital standards and ultimately generate returns to shareholders through higher dividends.

The bank has over the last three years managed to sell several of the non-core operations. The $308 billion Holdings portfolio at the end of the second quarter is half a trillion dollars lower than its 2008 peak.

During the second quarter, the portfolio shrank 34% from the year-ago period . The reduction was driven by the local consumer lending business, where revenues declined 30% to $2.9 billion, on the back of declining loan balances.

Citigroup sold $12.7 billion in securities that were transferred to trading in the previous quarter at positive marks, helping to boost special asset pool revenues by 77%. Brokerage and asset management revenues were $47 million, a decrease of 67% compared to the prior year period, due to a lower equity contribution from the Morgan Stanley Smith Barney joint venture.

Citi previously announced that it closed on the sale of its UK credit card business. It also announced the sale of $1.7 billion of limited partnership interests in private equity buyout funds and a portfolio of direct stakes in companies to AXA Private Equity.

As a result of asset disposals and lower loan balances, revenue from the unit dropped 18% to $4 billion.

The bad bank, however, reported a narrower second quarter loss of $218 million, $1 billion less than the year-ago-quarter, as continued improvement in credit costs offset declining revenues.

In the quarters ahead, however, analysts expect the pace of decline in assets to moderate, with the portfolio now saddled with assets that are tougher to sell.

"What we have modeled for in the next three years is a 5% decline per quarter in assets, "said Anthony Polini, analyst at Raymond James. "That is less than half of what it has been so far."

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