Citigroup unveiled plans on Monday to repay 20 billion dollars in government aid and outlined a plan to emerge from a massive bailout, in a fresh sign that the banking sector is closer to standing on its own.
Citi, which was kept afloat by a series of state rescues during the financial crisis, said it would sell 20.5 billion dollars in new securities under the plan to replace the capital aid.
The proceeds will be used to buy back the preferred shares held by the US Treasury under the Troubled Asset Relief Program (TARP).
The plan also calls for the Treasury to sell five billion dollars of the common stock held in Citi and "to sell the remainder of its shares in an orderly fashion over the next six to 12 months," a Citigroup statement said.
The rescue of Citigroup was the most extensive for the US banks hit by the financial crisis last year.
The government injected a total of 45 billion dollars in the firm, once the world's biggest banking group. It converted a portion of that to common stock earlier this year in exchange for a stake of around 34 percent in Citi.
The agreement also calls for an end to additional state guarantees to Citi in a so-called loss-sharing agreement. "We are pleased to be able to repay the US government's trust preferred securities and to terminate the loss-sharing agreement," said Citigroup chief executive Vikram Pandit. "We owe the American taxpayers a debt of gratitude and recognize our obligation to support the economic recovery through lending and assistance to homeowners and other borrowers in need."
Citi had to get approval from the Treasury, which injected over 300 billion dollars into banks in an effort to stabilize the financial system and keep credit flowing.
"We are pleased that Citigroup is moving ahead with plans to pay the taxpayers back," the Treasury said in a statement. "Treasury has repeatedly stated that the United States never intended to be a long-term shareholder in private companies. As banks replace Treasury investments with private capital, confidence in the financial system increases, the government's unprecedented involvement in the private sector diminishes, and taxpayers are made whole."
The Treasury statement added: "While much work lies ahead to improve lending and spur job creation, today's announcement by Citigroup takes us another step in the right direction."
Citi said the repayment to the Treasury would result in a pretax loss of some eight billion dollars, but would save the firm 1.7 billion dollars a year in interest on the securities.
The end of the state guarantee will result a loss of 2.1 billion dollars, offset in part by annual savings of 500 million dollars.
"As I have stated many times over the past year, we planned to exit TARP only when we were convinced that it was prudent to do so," Pandit said. "By any measure of financial strength, Citi is among the strongest banks in the industry, and we are in a position to support the economic recovery."
Citi's announcement means that all the major US banks that received capital injections, with the exception of Wells Fargo, have repaid or are in the process of repaying the government.
Officials committed 250 billion dollars to bank recapitalization under the plan including 125 billion to the nine largest banking firms.
Bank of America said last week it had completed repayment of 45 billion dollars to the Treasury after raising new capital. Also last week, the US Treasury announcing it was extending the authority of the 700-billion-dollar financial bailout to October 2010 even though officials said the program would be wound down and cost less than expected.
Officials said the government expects to recover all but 42 billion dollars of the 364 billion in TARP funds disbursed in the fiscal year ended September 30, and projects "a positive return" from the investments in banks.