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NEW YORK (Reuters) - Citigroup Inc posted a $4.43 billion first-quarter profit, its best result in nearly three years, as the economic recovery reduced the bank's credit losses and increased prices on even its worst assets.
The results signal the bank is recovering and appear to vindicate Chief Executive Vikram Pandit, who a year ago was under pressure by some regulators to leave. But in a statement on Monday, Pandit cautioned that its road to recovery could remain rocky.
"Realistically, we do not expect our performance to follow an invariable trend-line upward," he said, adding that the bank's long-term prospects are still "bright." Citigroup shares rose 7 percent to $4.88.
Chief Financial Officer John Gerspach told reporters on a call that key variables for the bank's future profitability include its corporate lending and investment banking unit, and the performance of assets the bank is looking to shed.
The third-largest U.S. bank posted first-quarter net income to shareholders of 15 cents a share, compared with a shareholder loss of 18 cents a share, or $966 million, for the first quarter of 2009. Analysts on average had expected the bank to break even, according to Thomson Reuters I/B/E/S.
"When you finally cut costs, when you sell off assets, and when you have an inflation of asset values -- even your most distressed values -- this is what happens," said Bill Smith, Chief Executive at Smith Asset Management, regarding the earnings.
"This is a decent number," said Smith, a longtime Pandit critic.
The results were the best the bank has turned in since the second quarter of 2007, when the subprime crisis was just starting to bubble over into a broader credit crunch. In 2008 and 2009, the bank posted net losses totaling nearly $30 billion. Those net losses triggered more government rescues for Citigroup than for any other major U.S. bank.
Citi's first-quarter results improved so much from the prior year's quarter in large part because of earnings of $865 million from the bank's special asset pool, where it houses toxic assets like subprime mortgage securities that it is shedding.
In the same quarter last year, Citigroup lost nearly $4 billion in that unit. Analysts said that kind of improvement could be difficult to duplicate in the future.
Citigroup racked up $8.4 billion of credit losses in the quarter. Adjusting for accounting changes, those losses totaled $9.8 billion last year, with the improvement in special asset pool performance reflecting the recovering global economy. The bank set aside less money to cover bad corporate loans as the outlook for its loan book improved, and even reduced the reserves it had previously set aside.
Not all of Citi's businesses improved in the quarter. Revenue from securities and banking, the bank's corporate and investment banking unit, fell 34 percent to $8 billion. The biggest declines regionally were in Europe and also in Asia, which is seen by Citigroup as an important growth area.
Consumer banking income dropped 94 percent in North America, to $22 million. Consumer credit quality improved much more dramatically outside the United States, Gerspach said.
Revenue fell nearly 6 percent to $25.42 billion from the same quarter a year ago, adjusting the year ago figures to be on the same basis as 2010's first quarter.
Citigroup raised $20 billion of equity in December 2009 to buy back debt it had sold to the U.S. government. That equity-raise was painful -- the common shares sold at $3.15 each, below the $3.25 price at which the government bought the bank's shares.
The December capital raise was the latest episode in a difficult drama for Pandit at Citigroup. He took Citigroup's reins in December 2007 as the bank was making big writedowns linked to subprime mortgages.
Pandit is working to heal the bank by shrinking its balance sheet and focusing on its main businesses, including consumer banking and commercial and investment banking.
Citigroup has shed more than $500 billion of assets since the 2007 third quarter and is working on winding down or selling more than $500 billion of additional assets.
An accounting change lifted the bank's assets by about 8 percent from the fourth quarter of 2009, to $2 trillion, but the bank is still winding down assets in its Citi Holdings unit, which includes the special asset pool.
Pandit told German newspaper Frankfurter Allgemeine Zeitung: "I believe the crisis is over. But that does not mean we do not have to worry any longer."
Pandit has reshuffled the ranks of his executives several times over the past two years in an effort to turn Citigroup around. He continues to do so, according to a Monday memo obtained by Reuters, having named former Chief Financial Officer Edward "Ned" Kelly, as chairman of global banking. Kelly will remain a vice chairman of mergers and acquisitions at the bank.
Some investors are calling for Citigroup to further reshuffle its board, as well. The bank holds its annual meeting on Tuesday in New York. Calpers, the biggest U.S. public pension fund, said late on Monday that it will refrain from voting for Andrew Liveris and Judith Rodin for the bank's board.
Liveris is chairman and CEO of Dow Chemical and Rodin is president of the Rockefeller Foundation. Regulators last year pushed Citigroup to change directors, which resulted in board turnover.
Calpers said both Rodin and Liveris were on the bank's audit and risk committee prior to the financial crisis, when the bank failed to ensure proper risk management practices were in place. Also, it objects to Liveris being a CEO and serving on what the fund views as "an excessive number" of public company boards.
The financial crisis has hurt nearly all the major banks in one way or another. On Friday, the Securities and Exchange Commission charged Goldman Sachs Group Inc with fraud over the marketing of a subprime mortgage investment. Goldman had long been seen as one of the better performing banks during the downturn.
Citigroup's Gerspach, speaking on a conference call with investors, said: "Citi is not involved in the matter the SEC announced on Friday." The bank is being investigated by the SEC and others as part of an industry wide probe into subprime and other issues, and Citi is cooperating. Gerspach declined to comment further on the matter.
By some measures, Citigroup's shares look cheap. They are trading at about 0.9 times their book value, while some of the bank's peers trade above their book value.
Through Friday's close, Citigroup shares had risen 38 percent this year, compared with a 28 percent rise in the KBW Banks Index.
Citigroup's results, like those of other banks, were influenced by accounting rules that moved loans bundled into bonds back onto bank balance sheets.
Those rules, known as FAS 166 and FAS 167, boosted Citigroup's assets and liabilities and decreased its equity. The rules also boosted Citigroup's revenue compared with prior periods, because previously credit losses from loans that had been bundled into bonds, or securitized, hit revenue rather than counting as an expense.
Reporting by Dan Wilchins; additional reporting by Maria Aspan and Karen Brettell in New York and Peter Dinkloh in Frankfurt; Editing by John Wallace; Gerald E. McCormick and Carol Bishopric