(Adds Breakingviews link)
By David Henry and Tanya Agrawal
July 14 (Reuters) - Citigroup Inc said on Monday that quarterly earnings fell 96 percent, hurt largely by a $7 billion mortgage settlement, but also by declining income in most of its main businesses including stock trading and retail banking.
There were bright spots in the results, including better- than-expected stock and bond trading results, which helped the bank post adjusted earnings that beat the average analyst estimate. Citigroup shares rose 3.7 percent to $48.74.
While the trading results topped expectations, revenue from stock and bond trading declined. And profit for Citigroup's main businesses, known as Citicorp, fell 23 percent in the second quarter, as revenue slid 8 percent and expenses rose 4 percent.
The results underscored how much work Chief Executive Officer Michael Corbat still has to do to fix the third largest U.S. bank, which has been struggling to contain its costs for more than a decade.
Net income to common shareholders totaled $80 million, or 3 cents a share, compared with $4.09 billion, or $1.34 a share, in the same quarter last year.
Excluding the bank's $7 billion settlement with the U.S. government as well as accounting adjustments to trading results that reflected the changing market value of the bank's debt, Citi posted earnings of $1.24 per share. That compared with the average analyst estimate of $1.05 a share, according to Thomson Reuters I/B/E/S.
The bank's settlement with the U.S. government over shoddy mortgages resulted in a $3.8 billion charge, before taxes.
SIGNS OF WEAKNESS
But there were signs of weakness in the bank's continuing operations, including a 46 percent decline in retail banking income to $362 million from the same quarter last year, hurt by falling fee income.
Merger advisory revenue fell 10 percent to $193 million. Overall institutional client group revenue, including investment banking, sales and trading, and processing, dropped 7 percent, excluding accounting adjustments.
Among the bright spots in its earnings report, revenue from stock and bond trading fell less than the company expected. The drop was 15 percent, excluding an accounting adjustment, while Chief Financial Officer John Gerspach had forecast a decline of roughly 20 percent to 25 percent in May.
In a call with reporters, Gerspach attributed better-than-expected trading performance to eased tensions in Russia and Ukraine during the latter part of the quarter.
Citi's fixed-income results were the first to be reported by a major U.S. investment bank for the second quarter and may point to how competitors fared. Wells Fargo & Co posted results on Friday, but its bond trading business is much smaller, and it does not disclose results from the segment.
Fixed income trading has slumped industrywide as trading volumes fell and interest rates and bond yields remained relatively steady globally. New rules imposed by regulators to protect the banking system after the financial crisis have also cut into profits in the business.
Citi Holdings, which houses assets the bank is looking to shed, posted a $3.48 billion net loss, compared with a $582 million loss in the same quarter last year, mainly due to the settlement.
Excluding the settlement, the unit posted income of $244 million, as revenue rose and operating costs fell. Assets in the unit were $111 billion at the end of the second quarter, compared with $114 billion in the first quarter of 2014. (Reporting by David Henry and Tanya Agrawal; Editing by Ted Kerr, Dan Wilchins and Jeffrey Benkoe)