Citi to sell bulk of its student loans unit

Citigroup will incur a $500m after-tax loss this quarter as part of a deal to sell the bulk of its student loan business to Sallie Mae and Discover Financial Services.

Discover will take over the ongoing business of Student Loan Corporation, which was listed in 1992 but remained 80 per cent owned by Citi, and will also purchase $4bn of private student loans.

Sallie Mae will acquire $28bn of federally funded student loans prior to the Discover sale, while Citi itself will retain about $8.7bn in assets on its books.

In all, SLC shareholders will receive $30 a share, or about $600m. SLC shares on Thursday closed at $21.15.

The complex deal highlights Citi’s challenges as it tries to shed $400bn-plus in unwanted assets and businesses accumulated in the past decade.

The US government, which holds a stake in Citi of about 17 per cent, regulators and some shareholders have been putting pressure on Citi to accelerate the pace of disposals and get back to its core businesses of international wholesale and retail banking.

Citi has countered that a fire-sale of the assets housed in Citi Holdings, its collection of non-core businesses, would increase the chances of incurring losses and end up short-changing taxpayers and other investors.

The $500m charge, which will dent Citi’s profits in the third quarter, was mainly the result of accounting writedowns, according to people familiar with the deal. The transaction is, however, expected to add slightly to Citi’s capital.

Wall Street analysts expected Citi to record net income of $2.2bn in the three months to September, according to Thomson Reuters.

Citi will provide financing for Sallie Mae’s portion of the deal, those people added, the price for which is about $1.2bn.

While Sallie Mae paid a premium to the book value of the loans it purchased, Discover on Friday said its deal had been struck at a discount of 8.5 per cent.

Citi will pay only slightly under book value for the assets it will keep.

Citi Holdings’ assets have declined from more than $820bn at the start of 2008, when Citi decided to create the entity, to $465bn at the end of the second quarter.

Vikram Pandit, chief executive, on Friday said Citi Holdings would account for less than 20 per cent of the overall group by the end of the year.

Moelis & Company advised the independent directors of SLC. Barclays Capital advised Discover.

The US government said it was ending its programme which encouraged private lenders to make government-guaranteed student loans.

SLC has previously said it would sell $4.7bn in loans to the US department of education.