Source: The Associated Press

Citigroup Inc. provided more evidence Monday that America’s big banks may have turned a corner. The bank reported a surprise first-quarter profit as trading revenue offset losses from failed loans.

Citigroup said it earned US$4.4 billion after payment of preferred dividends, compared with a loss of $696 million a year earlier. That was the bank’s biggest quarterly profit since the second quarter of 2007.

The company cited strong trading of bonds, stocks and other securities for its big profit. Citigroup, one of the hardest hit banks during the credit crisis and recession, said losses from bad loans fell for the third consecutive quarter. It also set aside less money for loan losses.

“Loan losses coming down with growth of top-line revenue speaks to the overall recovery,” said Oliver Pursche, executive vice-president at Gary Goldberg Financial Services. Pursche a co-portfolio manager of the GMG Defensive Beta Fund, which holds shares in Citigroup, but is not currently buying shares.

Citigroup earned 15 cents per share on revenue of $25.4 billion. That easily beat analysts expectations of a slight loss, according to Thomson Reuters.

Citigroup’s strong showing follows similarly impressive results last week by Bank of America Corp. and JPMorgan Chase & Co. That has boosted hopes that the worst of the credit crisis has passed and banks may be entering a period of sustained profitability.

Yet CEO Vikram Pandit sought to dampen short-term expectations for Citigroup, saying the bank remained cautious “given the uncertain economic recovery and high unemployment in the U.S.”

“Realistically, we do not expect our performance to follow an invariable trendline upward,” he said. “Longer-term, however, the prospects for Citigroup are clear and bright.”

Pandit sounded a little less upbeat about the economy than his counterparts at JPMorgan Chase and Bank of America. But Citigroup’s recovery from the devastation of the financial markets has been more difficult.

Analysts were more positive than the CEO about the outlook for the bank.

Michael Williams, director of research at Gradient Analytics, said Citigroup’s balance sheet is “very healthy.” The bank’s reserves for future losses are stronger than other banks like JPMorgan Chase and Bank of America, which provides it better protection moving forward, Williams said.

“They’re the brightest of all the big banks these days,” because of their strong balance sheet, Williams said.

Citi’s jumped 17 cents, or 3.7%, to $4.72 in afternoon trading. Shares briefly reached $5 last week for the first time in six months.

Other financial stocks were mixed as investors continued to digest news that the government charged Goldman Sachs Group Inc. with civil fraud for mortgage-related transactions.

Citigroup said its total reserves to cover losses from bad loans fell 22%, or $2.4 billion, from the fourth quarter to its lowest level in two years. The company said its credit losses fell 15% to $8.4 billion from almost $10 billion in the fourth quarter. Citigroup reported improvement across nearly all its loan portfolios.

John Gerspach, Citigroup’s chief financial officer, said the bank’s loan losses appear to have peaked in the second quarter last year and have been declining since.

“Perhaps the worst is behind us,” he said of the loan losses during a conference call with reporters.

“I think what this quarter demonstrates is that we have turned a corner and are executing our strategy,” he added.

Citi Holdings, the division Citigroup created during the credit crisis to hold non-core assets and businesses it planned to sell, showed significant improvement from previous quarters. The division lost $887 million during the first quarter, compared to a $2.58 billion loss during the last three months of 2009, and a loss of $5.47 billion a year earlier.

On a conference call with investors, Pandit said Citi Holdings’ “results reflected improving credit, asset reductions and lower risk.”

Citi Holdings set aside $5.8 billion for loan losses, down 27% from a year earlier. That drop was tied to a decline in losses on North American real estate lending. Private-label credit card losses fell slightly during the quarter.

Overall profit at the bank was driven by the $8 billion Citi made in its securities and banking operations, which includes its trading business. That was up $4.7 billion from the fourth quarter.

Those operations are a part of Citicorp, the division that holds Citi’s primary businesses.

Bonds accounted for a big chunk of the trading gain. Like other companies’ investment banking operations, Citigroup’s benefited from very low interest rates that allowed it to borrow cheaply to buy higher-yielding investments.