OneMain Financial, the subprime consumer lending arm of Citigroup with over 1,100 branches, filed on Wednesday with the SEC to raise up to $50 million in an initial public offering, although the deal size is likely just a placeholder. We estimate the initial public offering could raise $1 billion or more. OneMain is reportedly pursuing a dual track process and could be acquired by Springeaf Holdings (LEAF), which IPO'd in October 2013.
Business
OneMain operates 1,141 branches, serving 1.3 million customer accounts (average FICO score of 630) across 43 states. The company also operates Citi Assurance Services (16% of total revenue), which writes and reinsures credit life, disability, involuntary unemployment and collateral protection insurance. As of June 30, 2014, it held $8.1 billion of loans, which it divides into groups with a FICO score of less than 620 (42% of loan balance), between 620 and 660 (27%) and 660 or higher (30%).
The company raised its equity to assets ratio by nearly 6 percentage points to 33.8% compared to the prior year period. Its return on equity rose 9 bps to 19.1% and return on assets rose 90 bps to 6.0% during the six months ended June 30, 2014. Total average assets at quarter-end fell by almost 2% to $9.7 billion as the company distributed its home equity loans and residential first mortgages ($463 million; 72% with a FICO score of 660 or less) to its parent.
Parent and underwriter Citi
Citi owns a 100% pre-IPO stake in the company. OneMain plans to use IPO proceeds to pay down a dividend note that it intends to issue to Citi prior to the offering. Citi will earn all of the net proceeds from the sale of shares on the underwriter's (Citi) exercise of the over-allotment.
Recent financials
Combined net interest and noninterest revenue fell 2% to $1.1 billion during the six months ended June 30, 2014 as the company offloaded its real estate loans, partially offset by higher net interest revenue due to higher personal loan volumes yields. OneMain's operating income rose 14% to $447 million. The non-prime lender dropped its provision for credit losses, benefits and claims by 16% due to its exit of real estate lending and the run-off of closed blocks of its insurance business and fewer disability claims. In addition, its compensation and benefits expenses fell slightly due to lower headcount while other operating expenses dropped significantly, which the company attributes to lower indirectly allocated costs from Citi. OneMain's net income was $287 million, a 16% increase over the 1H13 (35.8% tax rate, down from 36.7%).
Other major financial spinoffs to IPO in 2014
OneMain Financial represents the latest divestiture of non-core assets from a major financial institution through an IPO in 2014. London-based insurer Old Mutual plans to price the IPO of its US asset management arm (OMAM) after markets close on October 8, 2014. Great Western Bancorp (GWB), scheduled to raise $375 million next week, is being carved out of National Australia Bank. Other $1+ billion IPO spinoffs include Citizen's Financial (CFG), the US banking arm of RBS (raised $3 billion, +5% since September IPO); Synchrony Financial (SYF), GE's consumer lending arm ($2.9 billion, +8% since July); and Santander Consumer USA (SC), the Spanish bank's subprime auto lending arm ($1.8 billion, -25% since January).
The Baltimore, MD-based company, which was founded in 1912 and booked $2.3 billion in net interest and noninterest income for the 12 months ended June 30, 2014, plans to list on the NYSE. Citi is the sole bookrunner on the deal. No pricing terms were disclosed, and the company has not selected a ticker.
