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Citi Shake-Up Could Signal Asset Sales

The banking giant's reorganization would make sales or spinoffs easier, but probably not until the banking environment improves.

Citigroup's

(C) - Get Citigroup Inc. Report

decision to separate its consumer credit card and retail banking arms could be a first sign that the beleaguered banking titan is preparing to undertake a long-called-for paring of its business.

The New York-based bank, soiled by securities writedowns and forced to take billions in provisions for mortgage loan losses, formally announced Monday

a new corporate organizational structure

in which its business lines will be combined and reported by geographic location. The company is also splitting its consumer banking and credit card divisions into two separate units.

Proponents of the changes say that they will enable CEO Vikram Pandit to get a better grip on improving performance at some of the more troubled areas of the firm, notably its credit card and retail banking businesses, after years of underperformance. And while Citi declined to comment on speculation, it's possible that Pandit could also be paving the way for an eventual sale or spinoff of one or more individual businesses, as the changes break Citi into more manageable pieces.

News You Need: Citigroup, JPMorgan Chase

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Some critics of Citi have been calling for a breakup of the financial giant, particularly in the wake of the subprime mortgage meltdown and ongoing credit crunch. Ex-CEO Sandy Weill built the financial supermarket a decade ago, but Citi shares have really taken a beating since last summer, when a global credit crunch forced billions in writedowns from it and from major Wall Street firms such as

Merrill Lynch

(MER)

and

UBS

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.

The writedowns at Citi led to the ouster of Weill's handpicked successor as CEO, Charles Prince, in November and Pandit's ascension in December. And when Pandit first spoke to analysts as CEO,

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he suggested

organizational changes and said the potential sale of assets were a possibility.

"I will undertake an objective and dispassionate review of all the businesses individually and in aggregate," Pandit said on the December call.

On Monday, Pandit hailed the changes the bank was making as a way to make "a simpler, leaner and more efficient organization that works collaboratively across the businesses and throughout the world." The changes include realigning businesses along geographic lines in Asia, the Middle East, Europe and Latin America, while consolidating U.S. and international credit cards under one roof and U.S. consumer banking under another. All of the divisions would report directly to Pandit.

"With this new structure, we reinforce our focus on clients by moving the decision-making process as close to clients as possible and assigning some of our strongest talent to lead the regional areas and global product groups," Pandit said.

Tim Ghriskey, chief investment officer at Solaris Asset Management, acknowledged that the realignment announced Tuesday does "position

Citi theoretically for an easier sale" of certain businesses.

Still Ghriskey, whose firm does not own shares of Citi, and others agree that while a sale or spinoff could be coming in the future, Citi's first order of business is to improve those units that are not pulling their own weight. Additionally, the generally poor banking environment makes looking for a buyer even more difficult.

Pandit is essentially "trying to tear the place apart and get people to function," says Anton Schutz, president of Mendon Capital Advisors and the fund manager to Burnham Financial Services, which owns shares of Citi. "A lot of assets he had were underperforming for a long period of time

such as the credit card business. ... You don't want to sell something at a point of weakness."

"The reality is this company had a number of businesses that performed relatively poorly over some period of time," Schutz says. "I do believe there is a pretty valuable franchise underneath the securities portfolio and operating issues.

Both problems may sort of come together at the same time."

While the credit card business is better served from a global perspective so that it can achieve scale and compete against large competitors such as

JPMorgan Chase

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and

Bank of America

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, the rest of the consumer businesses, retail banking and mortgages, should be decentralized so that they can respond to regional needs, observers say.

"I don't think he is thinking breakup," says Jeff Harte, an analyst at Sandler O'Neill & Partners. "

Pandit is trying to run the business better."

Harte notes that critics who are in the camp of breaking up the businesses often don't take into account the fact that some of these businesses are often cash generators like Citi's wealth management arm, Smith Barney, and the credit card business.

"There are advantages to being all together from a capital perspective," Harte says. And capital is certainly something that many banks, including Citi, are looking for these days. He rates the company at hold.

But Harte wonders how much more patience investors will have for the banking titan to prove to that it is still a good investment opportunity. It's possible that Citi as is, could be "too large a ship to be steered," he says.

Solaris' Ghriskey says the chain of command Pandit is proposing "simply makes more sense to us."

"This is a better line of reporting to control risk and control the business, but in the near term this doesn't address any issues that are currently plaguing the bank or the system," he adds. "But a lot of this -- there is not much Citi can really do in this current environment other than wait for the credit issues to simply play out."

Deutsche Bank analyst Mike Mayo estimates that Citi is looking at $18 billion in writedowns during the first quarter, according to a note on Monday. He has a sell rating on the company.

"Citi's business reviews are ongoing but today's announcement seems to rule out a radical restructuring or sale of the major product or geographic areas," he writes. "Yet we still expect about 15%

to 20% of Citi's balance sheet to get reduced via downsizing, discontinued

operations, asset sales and/or sales of smaller businesses."

Citi shares closed up 2.8% to $21.42 on Monday.