By David Henry and Tanya Agrawal
(Reuters) - Citigroup Inc posted better-than-expected quarterly income as losses on troubled assets narrowed, but revenue declined in many of its major businesses and operating expenses remained stubbornly high.
The biggest boon to Citigroup's first-quarter results came from Citi Holdings, the unit that houses the assets it's looking to shed. Losses at that unit narrowed by about $500 million, excluding an accounting adjustment, as credit losses fell 44 percent.
But echoing JPMorgan Chase & Co's results on Friday, Citigroup was hurt overall by a decline in revenue from bond trading and home mortgage lending. Citigroup's Chief Financial Officer John Gerspach said he would not be surprised if bond trading revenue fell 5 to 10 percent for the industry this year.
As with JPMorgan, many of Citigroup's other major businesses posted weaker revenue, too. Investment banking revenue fell 10 percent, treasury services and processing fell 1 percent, and retail banking revenue fell 11 percent.
The revenue decline came after the bank has hit investors with a good deal of disappointing news in recent months. Citigroup failed to win Federal Reserve approval to pay a higher dividend and return $6.4 billion of capital to shareholders through stock buybacks.
Citigroup Chief Executive Michael Corbat has been struggling to improve the bank's relationship with regulators, and the Fed's rejection was a stinging blow.
More bad news from the bank came in February, when Citigroup said it was investigating $400 million of fraudulent loans it discovered it had made to a company in Mexico.
On Monday, CFO Gerspach said the bank had found a second set of fraudulent loans, also linked to a supplier of Mexican oil company Pemex, but that the loans were less than $30 million, and it expects to fully recoup the funds. Gerspach declined to identify the company.
First-quarter adjusted net income rose to $4.15 billion, or $1.30 per share, from $4.00 billion, or $1.29 per share a year earlier, the third-largest U.S. bank said on Monday.
Total net income under Generally Accepted Accounting Principles rose to $3.94 billion, or $1.23 per share, from $3.81 billion, or $1.23 per share.
Analysts on average had expected adjusted earnings of $1.14 per share, according to Thomson Reuters I/B/E/S.
Citigroup shares rose 4.1 percent to $47.57, clawing back some of the loss since the Federal Reserve rejected its capital plans on March 26.
The adjusted loss at Citi Holdings, which holds the bank's portfolio of troubled assets left over from the financial crisis, eased to $292 million from $798 million a year earlier.
For all of Citigroup, adjusted revenue dropped 2 percent to $20.12 billion.
Operating expenses fell at a slower rate, slipping 1 percent to $12.15 billion.
STILL WAITING MORE WORD FROM FED
The Fed's capital plan rejection wrecked what was left of Citigroup's chances of meeting a key profitability target that Corbat announced a year ago - a 2015 profit equal to at least 10 percent of a measure of the bank's common equity.
That ratio - known as return on tangible common equity - is a measure of how effectively the bank uses shareholders' money to generate income.
"We are committed to bringing our capital planning process to the highest possible standards, befitting an institution of our global reach. I will dedicate whatever resources and make whatever changes necessary to achieve this critical goal," Corbat said in a statement.
Gerspach told reporters that the bank still has not received a formal letter from the Fed detailing its issues with the bank's capital plan. He said, however, that Citigroup has no reason to believe the Fed objects to its global business model. Instead, regulators seem to have taken issue with the way Citigroup identifies and quantifies risks in stress scenarios when it is planning for its capital needs, Gerspach said.
Citigroup's two previous quarterly reports missed market estimates, adding to the pressure on the bank's executives to deliver on Monday.
JPMorgan Chase & Co, the biggest U.S. bank by assets, reported lower than-expected earnings on Friday, largely due to a 21 percent decline in bond trading revenue.
Bank of America Corp will report quarterly results on Wednesday, while Goldman Sachs Group Inc and Morgan Stanley will report on Thursday.
In fixed-income trading for Citigroup, adjusted revenue fell 18 percent to $3.85 billion from a year earlier as clients took to the sidelines to await more clarity from the Fed on interest rates. For its adjusted results, Citigroup strips out tax changes and the impact of changes in value of its debt and in the creditworthiness of its derivatives.
Investors are trying to gauge how much of the decline in fixed income business is temporary, and how much is permanent because of new, tighter rules being imposed by regulators to protect the financial system.
Expenses for job cuts and other costs the company says it incurred to reposition its businesses rose to $211 million from $148 million a year earlier.
Legal costs rose to $945 million from $710 million.
Ahead of Monday's report, analysts had said Citigroup would likely have to spend more on legal and compliance matters because of the rejection of the capital plan and multiple problems at its Mexican subsidiary, Banamex.
Citigroup revealed its difficulties with Pemex supplier Oceanografia on February 28, and on March 3 the bank said it also faced a criminal investigation into possible violations of anti-money laundering laws at California-based Banamex USA.
Citigroup has long considered its big operations in emerging markets as it greatest advantage over other large U.S. banks, and Banamex is its biggest operation outside the U.S.
The Wall Street Journal, citing a person familiar with the matter, reported on Monday that Citigroup had cut another 200 to 300 jobs, or about 2 percent of its global markets workforce, citing market conditions.
(Reporting by David Henry in New York and Tanya Agrawal in Bangalore; Editing by Ted Kerr and Sofina Mirza-Reid)