Citigroup (NYSE:C) has done a great job of improving itself since the financial crisis. The company's overall asset quality and capitalization has improved, and this has resulted in nearly a 50% gain in tangible book value over the past four years.

However, there are still about $114 billion in legacy assets stashed away in the Citi Holdings division, which is one of the reasons the stock is so cheaply valued. The company's market cap is just $147 billion, so if a significant portion of these assets began to perform badly, it could put a serious dent in Citigroup's bottom line. The cheap valuation makes sense, for now, but what happens when Citi Holdings is gone?

What are Citi Holdings' assets, anyway?
Citi Holdings was created in 2009 for the sole purpose of giving Citigroup somewhere to put its toxic and unwanted assets. Most of what remains of the division's assets are mortgages, and we all know why pre-2009 mortgages might fit into the category of "toxic". There were also a few assets placed in the division simply because they were not part of the company's "core" businesses of banking, securities trading, and cash management.

Citigroup has made tremendous progress with its bad assets
The leftover "legacy assets" are held in the Citi Holdings division, and the good news is that these are being wound down at a pretty impressive rate. The company has made tremendous progress in this, and has reduced the asset size of Citi Holdings by more than 60% since 2011. At the current rate, the division should be gone within the next couple of years.

In fact, Citi Holdings "only" lost $284 million in the first quarter. Granted, this does sound like a lot, but not when compared with the $804 million loss during the first quarter of 2013! The division's assets are performing better than in previous years, with 28% fewer loan delinquencies. In fact, Citigroup has cut the division's loan-loss allowance to $6.1 billion from $9.4 billion last year.

What it could mean to Citigroup's earnings
Once Citi Holdings is out of the picture, it could mean a big boost to Citigroup's profitability. Citi Holdings loses money each quarter, and the division reported a net loss of $284 million during the first quarter, down from $422 million last quarter and $804 million a year ago. Although this is great improvement, a loss is still a loss.

Erasing the $284 million net loss would mean almost an extra $0.10 in quarterly earnings per share. Citigroup reported earnings of $1.23 per share for the first quarter, so if Citi Holdings' loss was eliminated, it would raise earnings by about 8% all by itself. That's not to mention the other ways the bank is improving, such as better capitalization, increased consumer lending, and more.

A "double" catalyst
Also remember that the rise in earnings is not the only positive catalyst here. Once Citi Holdings is gone, or at least wound down to a small fraction of its current size, the market will perceive Citigroup as a much less risky investment. As a result, not only would profits increase, but the company's valuation relative to its earnings would rise, as it would for any company that lowers its risk level.

Matthew Frankel has no position in any stocks mentioned. The Motley Fool owns shares of Citigroup. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.