By David Henry and Tanya Agrawal
(Reuters) - Citigroup Inc (NYS:C) 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. But echoing JPMorgan Chase & Co's (NYS:JPM) 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 double-digit percentage declines in revenue.
But Citigroup's results did beat analysts' average expectations, and shares rose 4.2 percent to $47.61 (28.47 pounds), putting them on track to log their biggest one-day percentage gain since January 2013.
The stock gains came after the bank's shares lost some 9 percent since late March, when Citigroup failed to win Federal Reserve approval to pay a higher dividend and buy back more shares.
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. Corbat said he expects to be held accountable for the rejection when the board of directors determines his pay.
The bank has given investors other bad news recently.
In February Citigroup said it was investigating $400 million of fraudulent loans it discovered it had made to a company in Mexico. The bank has terminated one employee in the fraud, and expects to dismiss others, Corbat told analysts on Monday.
Citigroup has found a second set of fraudulent loans, also linked to a supplier of Mexican oil company Pemex, (PEMX.UL) but the loans were less than $30 million, and it expects to fully recoup the funds, Gerspach said. He 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.
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 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 (NYS:JPM), 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 (NYS:BAC) will report quarterly results on Wednesday, while Goldman Sachs Group Inc (NYS:GS) and Morgan Stanley (NYS:MS) 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.
Citigroup has cut another 200 to 300 jobs, or about 2 percent of its global markets workforce due to market conditions, a source said.
Expenses for job cuts and other costs linked to repositioning 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.
(Reporting by David Henry in New York and Tanya Agrawal in Bangalore; Editing by Ted Kerr, Sofina Mirza-Reid and Meredith Mazzilli)