MUMBAI — Citigroup Inc. signaled Thursday that it plans to sell its almost 10% stake in Housing Development Finance Corp., a major Indian lender, in a move that could raise $2.1 billion for the New York banking giant.
The development comes at a time when Indian stock markets are buoyant, after a dreadful 2011, and as Citigroup faces a potential write-down on its minority stake in the Morgan Stanley Smith Barney brokerage venture.
The HDFC sale, planned for Friday, marks a culmination of Citigroup's seven-year investment in India's largest mortgage lender by assets.
The initial 2005 purchase grabbed headlines in both countries: In the U.S. for being a major move into India by an American bank; and in India as a milestone for the apparently immense potential of the local market.
But the going hasn't been very good, and Citi hasn't been able to get the strategic benefits it expected, said analysts.
Indian rules — such as a restriction on banks owning more than 10% of another local lender — and hazy regulations on how foreign banks can operate have made doing business difficult.
The unpredictability of regulators and the risks foreign firms face in making big bets on Indian growth have been at the forefront of investor concerns.
A recent example is a Feb. 2 Supreme Court ruling ordering the cancellation of 122 telecom licenses because of alleged corruption in the handing out of bandwidth.
This more than four years after the licenses were given out, and after companies, with their foreign partners, invested billions of dollars to grow their operations.
In addition to this, a tax case between Vodafone Group PLC and Indian authorities — eventually won by the U.K. telecom company after a four-year legal battle — was closely watched by global investors looking to do business in Asia's third-largest economy.
Citigroup raised its stake to 9.3% stake in HDFC from HDFC's life insurance partner Standard Life in 2006. It later increased its holding to 11.4% and has maintained continuously that its investment is part of its core holding.
As at Dec. 31, Citigroup Strategic Holdings Mauritius held 8.78% while Citigroup Holding Mauritius owned 1.07% of HDFC.
Citigroup "held the stake for several years, and didn't do anything strategic with it, so it probably felt the capital could be put to better use elsewhere," said a person familiar with the development.
The "elsewhere" could be the potential multi billion-dollar write-down Citigroup is facing as it begins to unwind its minority investment in the Morgan Stanley Smith Barney brokerage.
Analysts estimate the venture's value to have dropped since its launch in 2009, as a rocky stock market, weak economy and slow integration of the two companies acted as a drag on the company's ability to gather new assets from clients.
The lower valuation could leave Citigroup facing an after-tax earnings hit of as much as $1.8 billion, analysts said.
A Citigroup executive declined to comment on the possible HDFC stake sale, or if it is linked to the Morgan Stanley Smith Barney write-down.
The U.S. bank is looking to sell 145.3 million shares, or the 9.85% stake it still holds in HDFC, through block deals Friday, according to a term sheet seen by Dow Jones Newswires.
Citigroup, which is running the sale process itself, is seeking a price of INR630.00-INR703.55 a share, the term sheet showed.
The stock closed down 0.2% at INR700.35 Thursday in a Bombay Stock Exchange market down 0.4%.
The term sheet said that the sale is part of Citi's capital planning process, but it still won't do sentiment about Indian investments any good.
Deepak Parekh, chairman at HDFC, confirmed Citi's stake sale plans, adding that the U.S. lender may be selling to conform to the stringent Basel III requirements.
Last June, Citi pared its stake in HDFC to 9.9% from 11.38%, earning a pre-tax profit of about $160 million, in a move to help avoid the burden of additional capital requirements as prescribed in the Basel III regulations.
Basel III is a new global regulatory standard on bank capital adequacy that asks lenders to keep higher capital buffers to absorb potential financial stress. Banks with investments in financial institutions also need to set aside additional capital as a prudential requirement.
This is the second time in less than a month that a significant minority shareholder has pared its stake in HDFC.
On Feb. 1, the Carlyle Group sold about a quarter of its stake in the mortgage lender for $273.4 million.
Citi's stake plan also coincides with a rally in local markets in 2012. India has led the global equity market rally with stock markets rising 30% in 33 days in dollar terms, and 20% in rupee terms.
Apart from the Carlyle deal, some other foreign investors have been selling their interests in Indian finance sector companies as well.
Kotak Mahindra Bank Ltd. shares also saw a block sale on Feb. 1, raising about $175 million for the seller, reportedly a European private equity firm.
Then, on Feb. 8, a unit of Singapore state investment company Temasek Holdings Pte. Ltd. sold nearly 40% of its holding in ICICI Bank Ltd. (532174.BY) through several bulk deals for INR14.72 billion ($299.6 million).
Analysts say the recent stake sales aren't a reflection of Indian lenders' fundamentals, which will get only better as interest rates are believed to have peaked and the central bank may start softening its monetary stance in April.
Separately, Citi's stake sale could also cause choppiness in the currency markets Friday, said a dealer with a foreign bank.
The HDFC-Citi outflow of about $2 billion would weigh on the Indian rupee. But any inflows from foreign institutions to purchase Citigroup's stake could neutralize part of the impact, the dealer said.
The Indian rupee has gained more than 10% from its all-time level of 54.2925 to a dollar reached on Dec. 15 on a wave of inflows into local stocks and debt.
Citi still offers services in India ranging from banking to investment banking to credit cards, among a host of other financial services.
