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As part of its ongoing capital planning efforts, Citigroup Inc. (C - Analyst Report) has offloaded its entire stake in Housing Development Finance Corporation Ltd. (HDFC) through the National Stock Exchange.

The company sold 145.3 million shares in HDFC, representing 9.85% of the total stake. Proceeds from the stake sale are projected to be $1.9 billion, which would result in a pre-tax gain to Citigroup of $1.1 billion, and an after-tax gain of approximately $722 million.

In 2011, Citi had slashed its stake in HDFC by 1.5% to 9.85%. This move comes as the company prepares itself to comply with Basel III capital rules before these are implemented.

HDFC is a premier housing finance company of India that was set up in 1977. Its asset base was $ 27.6 billion as of December 31, 2011. It is also the promoter of HDFC Bank Limited (HDB - Analyst Report), one of the largest banks in India.

The stake sale by Citi is an outcome of the capital planning initiative that the company is implementing to satisfy regulatory norms. Regulatory officials around the globe are trying to exercise more flexibility in taking care of the world’s biggest banks with a new set of capital standards, known as Basel III. Banks would be required to set aside additional capital for their investments in financial institutions. This is to dissuade banks from retaining large stake in other financial institutions.

Citi had acquired a less than 10% stake in HDFC in 2006 from its life insurance ally, Standard. Later, Citi further added to its stake in the Indian housing financer. One of the largest foreign banks in India, Citi has 42 full-service branches in 30 cities and a market share of greater than 20% in credit card spends.

Adoption of stricter capital norms is aimed at discouraging banks from indulging in risky activities and fostering a strong capital shield so as to avoid another recession. It is also to break the illusion that government would come to rescue big banks from collapsing in the event of a financial crisis, a sentiment that developed across the market following regulatory initiatives to reinstate stability in the financial market post crisis.

We believe that ultimately such efforts would strengthen the overall capital position of the banks, and lead to in fewer bank failures and lesser involvement of taxpayers’ money in bailing them out.

Citi currently retains its Zacks #3 Rank, which translates into a short-term Hold rating.

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