Citi Plans to Release Reserves

Citigroup Inc. ( C - Analyst Report ) is contemplating to release reserves created against bad mortgages of its Citi Holdings division. As per Citigroup CEO, this particular move is most likely to boost the overall profitability and achieve break-even point for the division.

Citi Holdings consists of businesses that are considered non-core and are required to be divested. The division was created in the aftermath of the 2008 financial crisis as part of the company’s restructuring initiatives. While Citi Holdings is a mixed bag, its main purpose is to wind down some non-core businesses and reduce total assets.

Citi Holdings consists of several business entities including remaining interests in local consumer lending such as OneMain Financial, divestitures such as Smith Barney, and a special asset pool along with perilous mortgages.

Mortgage securities have remained a cause of concern ever since the last financial meltdown. These risky securities have resulted in huge losses for Citigroup. The company had set aside a substantial provision to cover the losses. The company is now deliberating the use of these provisions to offset losses in Citi Holdings. In 2012, losses for the unit totaled $3.7 billion.

The reserve releases are likely to take place in the current year, given unsettled macro economic environment. However, management is unsure of achieving the break-even point in 2013. Further, the CEO finds dealing with claims from mortgage finance providers namely Federal National Mortgage Association ( FNMA ) and The Federal Home Loan Mortgage Corporation ( FMCC ) , to be another way to achieve the break-even level for Citi holdings.

Fannie Mae and Freddie Mac approached Citigroup and a number of other banks to repurchase loans they sold to the two mortgage finance companies during the housing boom, thereby putting an end to mortgage related problems.

Recently, Bank of America Corporation ( BAC - Analyst Report ) announced a settlement with Fannie Mae worth about $10.3 billion. The settlement includes the resolution of all outstanding and potential repurchases along with other claims relating to all major residential mortgage loans originated and sold directly to Fannie Mae by BofA from Jan 1, 2000 through Dec 31, 2008.

We view the use of provisions to cover losses as a tactical measure to revive profitability. Currently, Citigroup carries a Zacks Rank#3 (Hold).