Updated for latest share price, links to video, related story.



) -- While



(C) - Get Citigroup Inc. Report

progress in winding down Citi Holdings -- its so-called bad bank -- has been substantial, a recent decision to shuffle some assets around hints that the company may not be as married to its original strategy as it initially let on.

In the Jan. 16, 2009 press release announcing its plans to radically reorganize into its current good bank/bad bank structure, CEO Vikram Pandit said the restructuring would simplify its strategic focus and "preserve what makes Citi unique -- its global, universal banking footprint."

The company would continue to serve institutional clients with various services while reorganizing into four regional consumer banks divided between North America, Asia, Latin America and the Europe, Middle East and Africa region. In the process, it would shed its brokerage and retail asset management operations, untangle its local consumer finance business, and become a smaller, less-unwieldly entity.

>>>>VIDEO: Citi is Dead Money

But this ongoing effort to slim down seems slightly at odds with Citigroup's plans to move in excess of $60 billion in assets, more than half related to mortgages, back into its good bank entity during the current quarter. The news didn't get much fanfare when it was announced along with the company's fourth-quarter results in late January, but the amount does represent more than 10% of the $547 billion worth of assets in the Citi Holdings portfolio.

Citigroup's rationale for the move is that it's determined the assets are now "strategically important" to its core banking operations. The shift is also related to its fourth-quarter exit of the loss-sharing agreement it entered with the U.S. government during the financial crisis. The company ended the loss-sharing deal, which when struck in November 2008 originally provided a backstop for roughly $306 billion in assets, in conjunction with its repayment of $20 billion in TARP funds in late December.

Of the assets being brought back to the "good" side of the balance sheet, more than half -- about $34 billion -- are U.S. consumer mortgages, the main source of its problems during the crisis. Another $3 billion worth of other consumer lending assets are also included. The next biggest chunk consists of $19 billion in commercial and corporate loans and securities related to what it describes as "core Citicorp clients," that up until now were housed in its special assets pool. And finally, $5 billion would be added to Citicorp as a result of taking off the market its Mexican insurance and asset management businesses, which are significant contributors to Banamex, its substantial Mexican retail banking operations.

The decision shows Citigroup is at least open to shifting its strategy as the financial crisis abates and the economy recovers, and that may be disconcerting for anyone whose logic for buying the stock is founded on a belief that a streamlined Citigroup is really the goal.

At the same time, if the assets do qualify as "good," maybe it's in the company's best interest to hang onto them. After all, criticism has followed some of its divestitures, such as that of highly profitable energy trading unit Phibro.

"While it does concern us that management is changing part of its initial strategy laid out to reduce the size and scope of Citigroup, we are encouraged to see that management sees sufficient value in some Citi Holding assets to retain them," wrote Sandler O'Neill & Partners analyst Jeff Harte in a recent note to clients. Harte has a buy rating on the stock.

There's also a school of thought that the moves are more window dressing than anything else.

"The argument that they make to investors is look at Citicorp -- making improvements, increasing net interest income, lending more money -- and Citi Holdings is shrinking," says Richard Bove, an analyst at Rochdale Securities, said in an interview last week. "It's a beautiful cosmetic move because it helps bolster their arguments about where they are taking this company. But it doesn't mean anything."

Citigroup insists the transfer is merely repositioning of assets that should have never been considered "bad assets" in the first place. CEO Pandit has said that many of the businesses lumped into the Citi Holdings portfolio were in fact good businesses that just didn't fit the company's core strategy.

The Mexican businesses "probably should have quite frankly been kept in Citicorp from the beginning," CFO John Gerspach said during the quarterly conference call last month, noting he came to that conclusion following discussions with Manuel Medina-Mora , Citigroup's former head of Banamex who now is responsible for all consumer operations in the Americas.

As for the ring-fenced assets guaranteed by the government, Citigroup decided at that time that any asset included in the agreement needed to be in the special asset pool under Citi Holdings, Gerspach explained.

"And as we began to finalize the population of assets that were in the special asset pool, what we found was that in order to fill up the $300 billion we actually needed to move more high-quality assets into that pool than we otherwise would have," he said.

Citigroup is under intense scrutiny as it works through its turnaround strategy. The stock, which has traded under $10 since November 2008 and even briefly broke below $1 in early March 2009, is routinely one of the most heavily traded on the New York Stock Exchange, and although the company did manage to repay TARP, the federal government still owns a stake of a little less than 30% in the firm. Executive turnover has also been an issue with Terri Dial leaving her post as CEO of Consumer Banking for North America in January, and the board in a

state of flux

. The stock was rising a penny to $3.40 Friday afternoon.

The bad bank consists of three divisions -- brokerage and asset management (a majority of which has now been sold or wound down); local consumer finance, into which Citigroup had moved its entire mortgage portfolio; and the special asset pool containing other illiquid and soured assets.

TheStreet Recommends

The firm's progress in reducing the assets in Citi Holdings has been steady. Last quarter, it shaved off $70 billion to reach that $547 billion figure. Among the steps it took were the divestiture of the Nikko Cordial and Nikko Asset Management businesses, $15 billion in asset sales, the runoff of $24 billion in assets, and recognizing $6 billion of net credit losses, Gerspach said. Since the beginning of 2008, Citigroup has reduced the assets of the businesses now considered part of Citi Holdings by a total of $351 billion. This week there have been reports the company is

in talks to sell

its $4 billion hedge fund unit to SkyBridge Capital.

The addition of the more than $30 billion of U.S. consumer mortgages back into Citicorp is probably the most interesting aspect of the shift, given the fact that Pandit has identified mortgages -- particularly U.S. mortgages as well as credit card loans -- as the two main trouble areas for Citigroup at this point. The company wouldn't disclose further details about the mortgage assets.

And while credit troubles seem to be abating at Citigroup and other banks, including its big bank peers

JPMorgan Chase

(JPM) - Get JPMorgan Chase & Co. (JPM) Report


Wells Fargo

(WFC) - Get Wells Fargo & Company Report


Bank of America

(BAC) - Get Bank of America Corp Report

, CEO Pandit did say during the fourth-quarter conference call that U.S. mortgage exposure overall is the "key remaining issue" for the company.

"Of course, we have large credit card portfolios both in branded and the partner cards, but it's the U.S. mortgage portfolio that we are watching most carefully," Pandit said. Citigroup expects slightly higher credit costs in the first quarter, "and then obviously after that depending upon where the economy goes."

Citigroup isn't getting out of mortgages completely. The CitiMortage business is part of

Citi Holdings

, but the company is also writing new business, in keeping with its retail banking focus. What's being left behind, it's assumed, is handing out mortgages to less-qualified consumers.

"It's obvious that we are in the retail banking business and mortgages are a piece of that and we've got a growing book of mortgages now ... that are actually underwritten by the

tightened standards of our North America businesses" and are from existing customers, CFO Gerspach said on the January conference call.

"Over time that's a piece of the business that we're going to continue to run so these mortgages really belong back in Citicorp," he added.

Another contributing factor to asset shift is that now that Citigroup indeed has substantial capital -- as of Dec. 31, Citigroup's Tier 1 common ratio was 9.6% -- it likely needs to incrementally add more assets to earn a reasonable rate of return, according to Oppenheimer Chris Kotowski.

"To do that, you need assets that earn a good risk-adjusted return," Kotowski said in an email conversation regarding the asset transfers. "Given that backdrop it probably makes sense to add back assets that you have some knowledge of and business relationship to, rather than say just adding securities to the balance sheet."

"Overall, I viewed it as a modest positive, but not a huge deal," Kotowski says. "At the margin Citi's management is slightly more optimistic about the quality of the assets."

Citigroup's overall assets have declined from $2.19 trillion in 2007 to $1.94 trillion in 2008, and finally $1.86 trillion at the end of 2009, so the company is paring down. If it ends up the sleek "high-return and high-growth" business originally pitched to investors remains to be seen.


Written by Laurie Kulikowski in New York