Citigroup has sold a majority stake in its wealth management business to Morgan Stanley but continued to consider dumping loss-making assets as part of a major reorganisation of the troubled financial group.

Citigroup will receive a $2.7 billion cash payment from Morgan Stanley in return for a 51 per cent share in the $14.9 billion joint venture, called Smith Barney.

The struggling bank's books will be bolstered further by a $5.8 billion after-tax gain and a share in $1.1 billion worth of cost savings created by the deal.

Vikram Pandit, Citigroup's chief executive, said that the capital raised in the sale would be deployed to other core businesses.

But Mr Pandit, who is under pressure to turn around Citigroup after accepting $45 billion in emergency cash from the US Government, is expected to further pare down the bank, putting its focus on banking for large corporate clients and retail banking for customers in selected markets around the world.

The bank is also expected to cut back its capital-intensive proprietary trading business.

Citigroup has spent four straight quarters in the red, having lost more than $20 billion on ill-fated forays into sub-prime lending and risky credit-related assets.

The bank is expected to reveal as much as $10 billion of losses on January 22 when it releases its figures for the fourth quarter of 2008.

Further asset sales are expected, with Citigroup’s consumer finance businesses most likely to go. Mr Pandit is also considering the possibility of hiving off unsaleable assets into a so-called bad bank.

Less than two months ago Mr Pandit insisted that he had no plans to break up the financial group, and even singled out the Smith Barney wealth management business as one he wanted to keep.

But growing concern amongst lawmakers and regulators at Citigroup’s continued financial instability, despite a huge bailout with taxpayers’ cash, is thought to have forced the chief executive to consider more radical measures to stem the flow of cash from the bank.

Under the terms of yesterday’s deal, Morgan Stanley will immediately take a 51 per cent stake in the new venture and will start to increase its share within three years, with Citigroup likely to exit after five years.

The new business will have more than 20,000 financial advisers, 6.8 million customers and $1,700 billion in client assets, immediately eclipsing Bank of America, which recently bought Merrill Lynch and its army of advisers, as the world’s biggest wealth manager.

The deal, which includes Quilter, Citigroup’s UK business, and Smith Barney Australia, boosts Morgan Stanley’s efforts to diversify its operations after changing from an investment bank to a deposit-taking facility last year.

James Gorman, Morgan Stanley’s co-president, will run the business. Charles Johnston, the president of Citigroup’s wealth management business in the US and Canada, will be the president of the joint venture. Senior managers and members of a new board will be taken from both banks.

Rise and fall?

1812 City Bank of New York founded

1998 Citigroup formed after the $140bn merger of Citicorp and Travelers Group to create the world’s largest financial services organisation

350,000 employees

200m customer accounts in more than100 countries

$45bn Government bailout last year 75,000 job cuts made in midst of credit crunch

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