Citigroup Inc.’s (C) Chief Executive Officer (CEO) Vikram Pandit indicated that the company will eventually divest its remaining stake in the Smith Barney joint venture with Morgan Stanley (MS). The CEO’s comments came at a conference sponsored by Barclays Capital.

Citigroup and Morgan Stanley entered into a deal in January 2008 to combine their brokerage and wealth management units, and the resulting joint venture was named Morgan Stanley Smith Barney. Morgan Stanley, which now holds a 51% stake in the venture, paid $2.7 billion to Citigroup as part of the deal. Morgan Stanley has the option to increase its stake after three years.

During the second quarter of 2009, Citigroup reported results separating them into Citicorp and Citi Holdings. The company is currently undergoing a major restructuring in its businesses and plans to hold down its assets and divest non-core businesses in Citi Holdings. However, there remains a lot of uncertainty about the valuation of these assets in the wake of increasing losses.

Besides the Morgan Stanley-Smith Barney joint venture, Citigroup has also managed to sell other businesses, like Nikko Cordial Securities and Nikko Asset Management in Japan and some overseas divisions. However, troubled assets like Primerica, CitiMortgage, CitiFinancial and a “special pool” of toxic assets backed by a loss-sharing agreement with the government still remain to be sold off.

Citigroup has already truncated its assets by approximately $500 billion over the past 18 months, and plans to divest more of them to improve its liquidity.

The U.S. government injected $45 billion in bailout funds into the bank, $25 billion of which was recently converted to a 34% ownership stake. Top-level management at the company is conceiving plans to downsize the government’s stake in the company through a multibillion-dollar stock offering. Under the plan, Citigroup would issue new shares to the public and the Treasury Department would sell at least a portion of its holdings in Citigroup.

Despite an attractive valuation and elevated capital levels of the company overall, we believe that the lack of clarity around the ultimate valuation of Citi Holdings will probably remain a drag on the shares in the near term.

Citigroup will release its third quarter 2009 earnings on October 15, 2009 with a conference call scheduled later in the day to discuss its results. Ahead of its results, we maintain our Neutral recommendation on the stock.
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