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Citigroup Inc.’s (C - Analyst Report) effort to sell its OneMain consumer-lending unit has hit a roadblock. The company was in talks with a number of private equity buyers but a sale agreement could not be reached, according to a Wall Street Journal report.

The turmoil in the credit markets in the midst of the European sovereign debt crisis as well as increasing qualms regarding a global economic slowdown has been cited for the failure to reach an agreement.

Citi was in talks with a bidding group for the sale of OneMain. The company was negotiating with the private-equity investment firm Centerbridge Capital Partners LLC and Leucadia National Corp. (LUK">LUK).

OneMain makes mortgage and other loans to high-risk borrowers. In order to finance the business, such loans need to be packaged and sold to investors by the prospective buyers.  However, in a stressed economic environment the market for such securitizations has dried up.

Such issues are said to be the reason for the failure for reaching an agreement. We believe that this failure to reach an agreement will adversely impact the stock’s price in the short term.

Earlier in 2011, Citi completed the rebranding of its entire U.S. full service network of 1,300 stores from CitiFinancial. The rebranding plan was announced in December 2010.

Citi was in a bad shape during the financial crisis and had to take resort to government bailout to stay afloat. The company has been executing a number of strategic reengineering efforts. It has designated CitiCorp as its core operating unit and Citi Holdings as its non-core unit. Citi intends to dispose of its non-core operations and OneMain happens to be a part of this unit.

Citigroup’s long-term strategy to shrink non-core assets and increase its fee-based business mix would also improve its valuation over time. The divestiture of Citi Holdings, its legacy problem assets portfolio, is also on track. This run-off will ultimately reduce the company’s risk profile and free up capital to be invested in its core businesses.

However, we believe that though this strategy to shrink non-core assets would improve the valuation over time, the shrinking of the Citi Holdings portfolio would result in revenue challenges, partially restricting the upside potential of the stock. Regulatory issues and sluggish economic recovery also remain concerns. Yet, its core business, Citicorp, remains attractive. International business is gaining momentum and should support its earnings.

Besides Citigroup, the other Wall Street biggie Bank of America Corp. (BAC">BAC) is also trying to remove a large number of non-core assets to strengthen its capital position and balance sheet.

Shares of Citi currently retain the Zacks #4 Rank, which translates into a short-term Sell rating.

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