Citi Strengthens Its Balance Sheet for Future Payouts
Citigroup (NYS: C) is looking to shore up its capital base further by selling off non-core assets, as the bank failed to clear the recent round of Federal Reserve stress tests -- which meant the Fed wouldn't allow it to carry out plans to increase its dividend payments or buy back shares.
Citi is busy reducing its stake in a number of businesses around the globe. Last week, the company sold its 2.7% share in Shanghai Pudong Development Bank for $668 million. That follows Citi's sale last month of a 9.9% share in India's largest mortgage lender, Housing Development Finance Corporation, raising $1.9 billion.
Citigroup is also looking to cut its investment in Turkish lender Akbank, reducing its ownership stake from 20% to less than 10%. However, that sale that is subject to regulatory approval, which will come at a cost, as Citi's expected to take on a one-time charge of $700 million in its first quarter.
And that's still not all. Nomura Holdings analyst Glenn Schorr said Citigroup is looking to sell the remainder of its stake in retail brokerage unit Morgan Stanley Smith Barney, its joint venture with Morgan Stanley (NYS: MS) . (Citi was already slated to sell more than 14% of its holding in the brokerage to Morgan Stanley.) Credit Suisse analyst Howard Chen valued the unit at $15 billion in January, whereas JMP Securities analyst David Trone, in a note in February, valued it at $24 billion.
Citigroup isn't the only bank looking to shed assets, though: Fellow banking behemoth Bank of America (NYS: BAC) is doing much the same. Although B of A passed this round of stress tests, it has for now chosen to toughen up its capital position further to meet international standards and cope with mortgage losses rather than apply to pay out higher dividends. Recently, the bank sold off its Irish credit card business to an Apollo Capital Management fund. The sale, according to the Charlotte Business Journal, is a part of CEO Brian Moynihan's strategy to do away with non-core assets and strengthen its balance sheet.
No dividends? So what?
Although Citi's unable to pay out higher dividends, it will eventually look to raise its payout. Currently, Citi pays out a symbolic dividend of $0.04 that translates into a yield of just 0.1%. Through the sale of these non-core assets, the bank is looking to bolster its balance sheet so it can increase its dividends and payout in the future -- and that's something investors can look forward to. This is the right call for the long run. Do you agree? Let me know in the comments box.
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At the time this article was published Fool contributor Shubh Datta doesn't own any shares in the companies mentioned above.The Motley Fool own shares of Bank of America and Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.