Citi Shuts Subprime Lending Offices

Citigroup (C) unit CitiFinancial Services has closed nine Minnesota subprime lending offices at the end of June, according to a report in The Business Journal. The shuttered branches were located at Burnsville, Maple Grove, Alexandria, Austin, Blaine, North Branch, Virginia, Northfield and Marshall.

This comes as part of Citi’s efforts to restructure its business. Recently, Wells Fargo & Co. (WFC) also announced a restructuring of its consumer finance unit. Wells Fargo announced closing 13 stores in Minnesota alone, besides 625 other branches across the country, stop originating non-prime portfolio mortgage loans and lay off 3,800 positions as part of this restructuring.

Last Friday, Citi reported second quarter earnings of 9 cents per share, ahead of the Zacks Consensus Estimate of 5 cents. However, the results were below the prior quarter’s earnings of 14 cents and the year-ago quarter’s earnings of 51 cents.

Results reflect an improvement in credit quality and lower loan loss provisions. However, the market declines negatively impacted the revenues from its trading business in the quarter.

Though Citi has taken steps to bolster its capital position and has reduced its risk profile through several restructuring initiatives, we expect the company to still incur losses in the upcoming quarters from its exposure to residential mortgage portfolio, credit cards and structured residential mortgage securities.

Additionally, we expect the financial reform bill to partially restrict proprietary trading of commercial banks. Besides, dealing in derivatives – which are used to hedge risks or speculate the future value of assets – would also be limited.

These actions are expected to have a significant impact on the profitability of a number of commercial banks. Beside Citi, these banks include JPMorgan Chase & Company (JPM), Goldman Sachs (GS), Bank of America (BAC), Wells Fargo and Morgan Stanley (MS).

While Citi’s restructuring efforts are welcome, the protracted economic recovery and the elevated level of unemployment are expected to be a drag on its earnings in the upcoming quarters. Though Citicorp − its core business − remains attractive, the obscurity around the valuation of Citi Holdings will be a headwind in the near term.

Citi is currently rated as Zacks #3 Rank (Hold), implying no clear directional pressure on the stock over the next one to three months. The stock is also rated Neutral.

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