By AnnaMaria Andriotis And Mike Spector
Another piece of banking is moving to the shadows.
Citigroup Inc., the nation's third-largest bank by assets,
confirmed Tuesday that it would sell its large U.S.
subprime-lending business, OneMain Financial, to Springleaf
Holdings Inc., a nontraditional lender majority-owned by
private-equity firm Fortress Investment Group LLC.
The $4.25 billion deal, reported by The Wall Street Journal on
Monday, is the latest example of a core banking business, in this
case lending to lower-income customers, moving from a financial
conglomerate to a smaller rival that aims to serve customers more
efficiently in part because it faces a lower regulatory burden.
The move is emblematic of postcrisis regulations forcing banks
out of their old mind-set of trying to serve as many customers as
possible under one roof. In this case, Citigroup decided that U.S.
subprime borrowers, once a lucrative group to deal with because of
the high interest rates they pay, aren't attractive enough to keep
in a world of tighter regulation.
Subprime loans are given to borrowers who have low credit
scores, which can result after borrowers fall behind on loan
payments, go through foreclosure, bankruptcy or for other reasons.
In recent years, big banks "have shied away from these borrowers,"
said Cris deRitis, director of consumer-credit economics at Moody's
Analytics, a unit of Moody's Corp. "That's exactly what we're
seeing today with this merger."
Across trading and lending operations, hedge funds and
private-equity firms have plowed into businesses after
once-dominant banks retrenched. In the lending business, some
private-equity firms have invested in lenders looking to make
inroads against banks.
One big impact of the move is that consumers may see fewer
protections as smaller, less regulated companies take over bigger
portions of the business. Fewer regulators have oversight over
nonbank personal loan lenders. However, the Consumer Financial
Protection Bureau can bring enforcement actions against them if it
finds they are engaging in unfair, deceptive or abusive practices,
like deceiving consumers about the interest rates on their loans.
It can also supervise them if it determines they may pose a risk to
consumers.
The latest deal underscores large banks' reluctance to return to
the subprime market after the financial crisis. Before the
downturn, subprime lending served as a greater revenue source for
lenders that could charge higher interest rates and fees in
exchange for lending to risky borrowers. Regulations that kicked in
during the downturn crimped that revenue. A credit-card law in
2009, for example, limited charges that banks could impose.
At a panel discussion last year, Citigroup CEO Michael Corbat
said that shadow banking would "serve a very important role to
society," filling a void to meet demands that banks no longer
can.
Tuesday, in a statement, he said: "While this business didn't
fit our strategy, it serves customers who deserve and need
credit."
The transaction will turn Springleaf into the country's largest
subprime lender by number of branches. Shares of the Evansville,
Ind., lender climbed $12.19, or 32%, to $50.23, in 4 p.m. trading.
Citigroup's shares rose 24 cents, or 0.5%, to $53.73.
The deal means Citigroup will be able to sell the asset quickly
rather than go through the sometimes-risky process of selling
shares in an initial public offering.
Goldman Sachs Group Inc. noted in a research report Tuesday that
U.S. banks could lose $11 billion in annual profit, or about 7% of
last year's net income, to nontraditional, more focused lending
companies.
The biggest piece of that, $4.9 billion according to the Goldman
report, comes from the type of consumer lending that Springleaf and
OneMain specialize in: loans to individuals for a variety of items
from consolidating high-rate debt to paying for home improvements,
medical bills or vacations.
The combined lender, to be named OneMain, will have nearly 2,000
branches. It also will have about 2.5 million customers. The deal,
subject to regulatory approval, is expected to close in the third
quarter and result in 200 branch closures.
Since the financial crisis, big banks have looked to exit
businesses that don't generate a high enough return, in part
because of tougher capital rules that reflect regulators' views
that certain activities are too risky. Lending to lower-income
consumers fell into that bucket for Citigroup, which has also
jettisoned other businesses, including the Smith Barney brokerage
unit and life insurer Primerica.
The deals have also been encouraged by investors, who have
expressed a preference for financial companies with more focused
management, and regulators, who have pushed for simpler banking
businesses.
"This has been the four-year overnight sensation of ending up
with this" company, said Wesley Edens, Springleaf's chairman and
co-founder of Fortress. Mr. Edens said he held his first meeting
with Citigroup to discuss acquiring OneMain in early 2011.
Springleaf's $4.25 billion purchase price is roughly double what
Citigroup had sought for the business several years ago when it
neared a deal with other investors. That deal fell through.
Mr. Edens said more opportunities may come for investors looking
to buy assets from banks. "The water is still running, but at less
of a rate," he said, referring to bank divestitures.
Christina Rexrode contributed to this article.
Write to AnnaMaria Andriotis at AAndriotis@marketwatch.com and
Mike Spector at mike.spector@wsj.com
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