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Citigroup to Vend MSRs, Shares Dip

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Following the announcement of its decision to sell off mortgage servicing rights on Thursday, Citigroup Inc.’s (C - Free Report) share price tumbled 0.18% to $50.06 per share. After reporting dismal third-quarter earnings in mid October, Citigroup decided to proceed with the sell off of mortgage-servicing rights (MSRs) on $63 billion of loans, according to Bloomberg. This step comes as an effort to scale down its non-core operations and further strengthen its balance sheet.

Additionally, given the new capital regulations, servicing of loans has become a costly affair for the banks. Therefore, Citigroup’s move is based on reduction in the mortgage business for adapting new Basel III rules, thereby reducing risks.

Notably, Citigroup’s risk-weighted assets under the regulations declined to $1.16 trillion from $1.19 trillion at the end of March and the bank recorded servicing rights on just about $301 billion in the second quarter of 2013 from the mortgage business.

At the same time, specialized mortgage-servicing companies, such as Walter Investment Management Corp. , Ocwen Financial Corp. (OCN - Free Report) and Nationstar Mortgage Holdings Inc., are capitalizing on such sales and building their business. Over the last couple of years, these companies have been purchasing MSRs from major banks including Wells Fargo & Co., Morgan Stanley, Bank of America Corporation (BAC - Free Report) and Goldman Sachs Group Inc, thereby enhancing their organic growth prospects.

We believe that Citigroup’s plan to vend off MSRs will be a positive for the company and enable it to focus on core and profitable operations. In the current market scenario, many banks are finding it difficult to cope with the volatile conditions, in which the scope for revenue growth is limited. Hence, these banks are resorting to extreme cost-cutting measures comprising layoffs and closures of business units worldwide. Currently, Citigroup carries a Zacks Rank #3 (Hold).

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