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In an effort to cut down its non-core assets, Citigroup Inc. (C - Analyst Report) has decided to sell its Diners Club UK and Republic of Ireland card, issuing businesses to Affiniture Cards Ltd., a private investor group. Citi reached an agreement in this context with Affiniture, which will acquire payment card accounts in these countries. The financial terms were undisclosed.

As a matter of fact, Citi was badly poised during the financial crisis and needed a government bailout in order to stay afloat. The company has been executing a number of strategic reengineering efforts since. It has designated CitiCorp as its core operating unit and Citi Holdings as its non-core unit.

Citi now intends to dispose of its non-core operations. Incidentally, the business that the company is selling is a part of that non-core unit.

In the past few years, Citi partly sold off this Diners Club franchisee business. In November 2009, the company announced selling of its Diners Club North America business to Bank of Montreal (BMO - Snapshot Report) which got exclusive rights to issue Diners cards in the U.S. and Canada. Moreover, in August 2010, Citi sold off the Switzerland and Germany franchises to a private investment group.

Our Take

The sale of this business is a strategic fit for Citi. In fact, we believe that the company’s long-term strategy to shrink non-core assets will ultimately reduce its risk profile and free up capital to be invested in its core businesses. It would also improve its valuation over time.

Notably, the divestiture of Citi Holdings, its legacy problem assets portfolio, is on track. At the end of the latest reported quarter, Citi Holdings assets represented approximately 10% of total Citigroup assets.

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 causes of concern. But its core business, Citicorp, remains attractive. International business is gaining momentum and should support its earnings.

Besides Citigroup, another Wall Street biggie, Bank of America Corp. (BAC - Analyst Report), is also making efforts to shed off a large number of non-core assets to strengthen its capital position and balance sheet. The bank which suffered severely during the financial crisis, is striving to regain its position.

Shares of Citi currently retain the Zacks #3 Rank, which translates into a short-term Hold rating.

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