July 11 (Bloomberg) -- Citigroup Inc., the largest U.S. bank, agreed to sell its German consumer unit to France's Credit Mutuel Group for 4.9 billion euros ($7.7 billion) to shore up capital.

The Paris-based customer-owned bank will pay the amount in cash, plus the equivalent of Citibank Privatkunden AG's 2008 earnings, New York-based Citigroup said in a Business Wire statement today. Credit Mutuel, France's second-largest bank by branches, gains the market leader for consumer loans in Germany with 340 branches and about 3.2 million clients.

Citigroup, reeling from losses on subprime-infected assets, is selling the unit as Chief Executive Officer Vikram Pandit disposes of $400 billion of assets. Credit Mutuel beat out Deutsche Bank AG, Germany's biggest bank. The sale of Citibank may be the first in a wave of takeovers in Germany because Deutsche Postbank AG, the country's biggest consumer bank by clients, and Allianz SE's Dresdner Bank are also up for sale.

``Citibank gives the French lender a great foothold in the German retail market,'' said Konrad Becker, a Munich-based analyst at Merck Finck & Co. ``Now Deutsche Bank will have to concentrate on getting Postbank.''

Deutsche Bank CEO Josef Ackermann needs to expand more stable businesses such as consumer banking and asset management to offset a decline in investment banking. The Frankfurt-based bank is bidding for Postbank to gain its 14.5 million customers and 850 branches.

Deutsche Bank Expansion

Deutsche Bank last week agreed to buy commercial-lending units in the Netherlands for 709 million euros from Fortis. It also bought German lenders Norisbank and Berliner Bank for 1.1 billion euros in 2006.

``The sale of Citibank eliminates one more option and makes Postbank that more attractive,'' said Robert Minde, an analyst at BHF-Bank AG in Frankfurt. ``Postbank would fit Ackermann's strategy of bolstering the stable businesses.''

Postbank rose 2.3 percent to 50.59 euros in Frankfurt trading, valuing the lender at 8.3 billion euros. Deutsche Bank declined 3.7 percent to 52.27 euros.

Takeovers will shake up financial services in a market still dominated by state-owned lenders where ``tooth-and-claw'' competition has sapped profitability, Citigroup analysts said in a February report. Germany's five biggest private banks together hold 12 percent of the nation's 1 trillion-euro consumer lending market, Bundesbank data show.

Commerzbank, Dresdner Talks

Commerzbank AG, Germany's second-largest bank by assets that had also looked at Citibank, is in talks with Munich-based Allianz about a combination with Dresdner, two people with knowledge of the matter said on June 13. A takeover of Dresdner would double its branch network in Germany.

Deutsche Post AG, Europe's biggest postal service, said on June 25 it is holding ``exploratory'' talks about a sale of its majority stake in Postbank.

The sale of Citibank will result in an after-tax gain of about $4 billion and increase Citigroup's tier 1 capital ratio, a measure of capital strength, by about 60 basis points as of March 31, the company said. Citibank had net income last year of 365 million euros, a 16 percent decrease from 2006. Return on equity, a measure of profitability, was 50 percent.

``This is another strategic step in our effort to reorganize Citi, strengthen our balance sheet, and put us squarely on the path to future growth driven by our core businesses,'' Pandit said in the statement.

Expensive Purchase

Credit Mutuel paid more than five times Citibank's net asset value. A group led by Royal Bank of Scotland Group Plc paid about three times ABN Amro Holding NV's book value last year, higher than the multiple of 2.35 that JPMorgan Chase & Co. paid in its acquisition of Bank One Corp. in 2004.

``The high price shows that there are still strategic players willing to pay a premium for banks,'' said Carsten Werle, a Frankfurt-based analyst at Sal. Oppenheim. He had forecast Citibank would fetch no more than 4.5 billion euros.

Pandit is selling assets after booking $43 billion of credit losses and writedowns since the subprime mortgage market collapsed last year. The credit-market contraction has saddled banks and brokerages worldwide with $408 billion of writedowns and increased the value of retail lenders because they offer cheaper access to funding and more stable revenue, analysts say.

The sale adds to the $44 billion Citigroup has raised by selling common, preferred and convertible shares to investors since November. Citigroup is the biggest U.S bank by assets ahead of Bank of America Corp. and JPMorgan Chase & Co.

Lower Net Income

Credit Mutuel's 2007 net income declined 7.3 percent to 2.7 billion euros because of about 300 million euros of provisions tied to the U.S. subprime mortgage market collapse, according to figures from the company's Web site. Credit Mutuel employs about 59,450 people in France.

In Germany, Credit Mutuel currently has a stake in CardProcess, a provider of electronic payment services for cooperative banks, according to the company's 2006 annual report. The bank currently has more than 5,000 branches under its Credit Mutuel and CIC brands, second to Credit Agricole SA in France.

About 10 domestic and foreign banks submitted initial bids for Citibank by June 4, people told Bloomberg News. Citigroup then narrowed the list of bidders for its German consumer lending unit to include Deutsche Bank and Credit Mutuel.

Citigroup advised itself on the transaction and Lehman Brothers Holdings Inc. worked with Credit Mutuel.

Credit Mutuel's long and short-term counterparty credit rating was placed on credit watch with negative implications by Standard & Poor's today. The acquisition could weigh on the group's strong capitalization, the rating company said.

To contact the reporters on this story: Aaron Kirchfeld in Frankfurt at akirchfeld@bloomberg.net; Jacqueline Simmons in Paris at jackiem@bloomberg.net

Last Updated: July 11, 2008 11:55 EDT