Citicorp's plan to sell the public a small stake in its profitable student-loan business may be the first step in an effort to unload the entire unit, analysts say.

Otherwise, they add, the company's announcement that it will sell 18% to 20% of the $3.1 billion-asset business would make little sense.

"The whole thing seems sort of odd," said Lawrence Cohn, an analyst at PaineWebber Inc. "I don't really understand why you'd go through all that you have to go through in a public offering to sell this small a piece of the company."

A Citicorp spokeswoman would not comment on the strategy.

But analysts said selling an initial small piece of the business, which now resides in its Citibank (New York State) subsidiary, would serve two purposes. A partial public offering that established a market value for the shares could facilitate sale of the rest of the unit.

Quick Gain

It also would allow the company to book a quick, if modest gain by yearend -- whereas selling a big stake would take longer to execute.

Citicorp has already established precedence for a two-step sale. In 1991, it sold a partial stake in AMBAC Indemnity Corp., a municipal-bond insurance unit, to the public at $20 per share.

It spun off the rest of the insurer at $31.75 per share early this year.

"It wouldn't surprise me if that's what they're trying to do here," said Stephen Berman, an analyst at County NatWest USA.

Sallie Mae Angle

Some analysts also suggest that the student loan offering could be a ploy to get a better price for its student loan portfolio from the Student Loan Marketing Association. Sallie Mae, as it is known, said in August that it was negotiating to buy the loans and related servicing operations.

If a high market price is set for one-fifth of the company, presumably Sallie Mae would be interested in purchasing the remaining 80% at a better price.

"Our discussions with Citicorp are still underway and nothing has been concluded one way or the other," a Sallie Mae spokesman said. "We don't know what if any bearing their announcement [of an initial public offering] might have."

The plan to spin off up to 20% of the student loan unit is expected to raise $75 million but would have a "minimal" effect on the bank's capital-raising efforts, some analysts said.

Mr. Berman estimated that it would add one basis point to the bank company's Tier 1 capital, which stood at 4.25% at the end of the third quarter.

The offering prospectus for the unit, which originates, holds, and services guaranteed student loans, indicates that more shares may indeed by sold.

But such sales cannot occur within 180 days of the first offering unless the underwriters approve, according to the prospectus.

Smith Barney, Harris Upham & Co. and First Boston Corp. are leading the deal.

A complete sale of the unit could carry broad implications for the student loan market, since Citicorp is one of its largest players. The company holds $3.2 billion of guaranteed student loans -- second only to Sallie Mae -- and it is the largest originator of such credits.

Regulation Called Burdensome

Everyone will be watching Citicorp very closely," said Joe Belew, president of the Consumer Bankers Association. "People will want to see what Citicorp decides to do and why."

A number of lenders, he said, have become discouraged by the increasingly dense regulations of the guaranteed loan system. Citicorp warns in its prospectus that "every significant aspect" of the business is subject to "extensive regulation."

The prospectus also mentioned indications by President-elect Bill Clinton of "a strong interest in implementing a variety of changes in the student loan program."

The prospectus states, "If such changes were to include a widely implemented direct lending program, the role of lending institutions . . . could be materially limited."

Despite Citi's leadership role in student lending, the business has minor influence on its profits. Citibank earned $35.2 million in the first nine months of the year from the division, up from $18.4 million in the comparative 1991 period.

Though the unit has earned a 1.53% return on assets this year, Mr. Cohn calls the earnings "peanuts" in the context of the $219 billion-asset bank's total profit-and-loss line. Mr. Cohn estimates that the company's ailing profits will rebound to around $1 billion in 1993.

Criminal Investigation

The prospectus also noted that the loan unit is the subject of a criminal investigation by the U.S. Attorney for the Western District of New York with regard to the falsification of certain documents by an employee.

The documents purported to show that some delinquent borrowers had been located or had acknowledged liability for their loans. To be reimbursed under the guaranteed loan program of the Department of Education, lenders must demonstrate diligence in attempting to trace delinquent borrowers.

Citibank said it has repaid about $500,000 to loan guarantee agencies to settle the dispute. The continuing investigation is not expected to have an adverse effect on the student loan unit, the prospectus said.

"It was Citicorp's internal audit that caught the problem," said Frank R. DeSantis Jr., an analyst at Donaldson Lufkin & Jenrette. "The way I understand it, it's not a systemic problem. It's minor."

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