Citigroup last night sold a majority stake in Smith Barney, its wealth management business, to Morgan Stanley but will still consider dumping loss-making assets under a huge reorganisation of the troubled financial group.

The bank will receive a $2.7 billion (£1.86 billion) cash payment from Morgan Stanley in return for a 51 per cent share in the $14.9 billion joint venture.

The struggling bank’s books will be bolstered also by a $5.8 billion after-tax gain and a share of $1.1 billion in cost savings created by the deal. Vikram Pandit, Citigroup’s chief executive, said that the capital raised in the sale would be used in other businesses.

However, Mr Pandit, who is under pressure to turn round 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 in selected markets around the world.

The bank is also expected to cut back its capital-intensive proprietary trading business. It has spent four quarters in the red, having lost more than $20 billion on forays into sub-prime lending and risky credit-related assets.

Citigroup is expected to reveal up to $10 billion of losses on January 22 when it releases its figures for the fourth quarter of 2008. Further sales are expected, with the consumer finance businesses most likely to go. Mr Pandit is also considering hiving off unsaleable assets into a “bad bank”.

Less than two months ago Mr Pandit said he had no plans to break up the financial group and singled out the Smith Barney business as the one he wanted to keep. But growing concern among lawmakers and regulators over Citigroup’s continued financial instability, despite a huge bailout with taxpayers’ money, is thought to have forced him to consider more radical measures to stem the bank’s outflow of cash. Mike Corbat, chief executive of Citigroup’s wealth management business, denied last night that Citigroup had been under pressure from the Government and regulators to do a deal with Morgan Stanley.

Under the terms of the deal, Morgan Stanley will immediately take a 51 per cent stake in the new venture and will start to raise its share within three years, with Citigroup likely to exit after five. The new business will have more than 20,000 financial advisers, 6.8 million customers and $1,700 billion in client assets, making it the world’s biggest wealth manager.

James Gorman, Morgan Stanley’s co-president, who will run the business, said that it was too early to know how many people would lose their jobs when the wealth management businesses merged. Citigroup has already announced that it would cut 52,000 staff around the world. “Obviously there are synergies because there is duplication in what we do but this is a growth story,” Mr Gorman said.

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