The No. 3 U.S. bank by assets has now winnowed its portfolio of undesirable loans down to $116 billion from $649 billion in 2009, Citigroup said on Thursday. It has signed contracts to sell another $32 billion by year-end, taking the total to about $85 billion, or less than 5 percent of total assets.

"After that it is going to be a little more difficult to have significant reductions," Chief Financial Officer John Gerspach said in a conference call with reporters to discuss quarterly earnings.

What is left in Citi Holdings, the "bad bank" that the lender split off from its core operations as part of a post financial crisis restructuring, has little to appeal to buyers. It is mostly home mortgage loans, many of which were made to U.S. subprime borrowers during the housing bubble.

Some $23 billion of the loans are second mortgages and home equity lines of credit. Borrowers' required monthly payments are set to rise on about half of the loans between now and 2017, Gerspach said later on an analyst call. Defaults often spike around such resets.

The portfolio expected to remain at year-end will tie up roughly $10 billion of capital with little promise of profits. Gerspach said he thinks the portfolio will be "no worse than break even on an annual basis."

The portfolio's more profitable assets are already gone or slated for sale. Citi Holdings earned $306 million in the first half of this year, a significant portion of which was from subprime lender OneMain Financial, the sale of which is expect to close by October.

What remains should not be a major drag on Citigroup profits assuming there is no new housing bust, said Brian Kleinhanzl, an analyst at Keefe, Bruyette & Woods.

Still, the loans remain a toxic legacy of the company's past. At $85 billion, the portfolio would represent roughly 40 percent of Citigroup's common equity, which is the cushion the bank has against losses on assets.

Bank of America Corp,, which bought Countrywide Financial Corp and Merrill Lynch as they were failing during the financial crisis, has retained a portfolio of troubled loans valued at less than half Citi's.

Gerspach said he has hope borrowers will show in coming months that they can handle the payment resets and that more investors will then want Citigroup's remaining assets.

"Perhaps a market for home equity loans will open up, if not later this year then perhaps early or mid-next," Gerspach said.

(Reporting by David Henry in New York; Editing by Christian Plumb)

By David Henry