Following the announcement of its decision to sell off
mortgage servicing rights on Thursday,
) 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
. This step comes as an effort to scale down its non-core
operations and further strengthen its balance sheet.
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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
Walter Investment Management Corp.
Ocwen Financial Corp.
) 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
) and Goldman Sachs Group Inc, thereby enhancing their organic
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).