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NEW YORK (CNN/Money) - The flat yield curve has hurt major banks, and Citigroup has suffered especially. But now, analysts see brighter prospects for the depressed stock.

Banks are basically in the business of borrowing money at short-term rates and lending it out at longer-term rates. And the spread on that transaction has been getting smaller, squeezing profit margins.

In the past 15 months, the Federal Reserve has raised short-term interest rates 10 times, for a total increase of 2.5 percentage points. Over the same period, yields on 10-year bonds actually declined by more than half a percentage point.

The thinner margins that resulted hit Citigroup's business particularly hard in the second quarter, and earnings came in five cents a share below expectations. But some analysts think there may be a marked improvement in results before year-end.

Apart from the lending climate, Citigroup has a lot of things going right. International expansion, for instance, has been proceeding quite successfully.

On Monday, Prudential upgraded the stock from neutral to overweight, largely because of greater activity for the mergers and acquisitions division and overall revenue growth that is outpacing expenses.

Perhaps even more important from a long-term point of view, Citigroup is streamlining its business mix. Chief executive Chuck Prince took over as CEO from Sandy Weill in October 2003. Weill is renowned for his deal-making, but Prince has said that he wants to focus on improving profitability.

To that end, in January the company agreed to sell its Travelers Life & Annuity division to MetLife. In June, Citigroup announced that it would swap almost all of its asset management businesses in exchange for Legg Mason's brokerage and investment banking operations and other consideration.

And this week, Citigroup agreed to sell the Legg Mason investment banking business to Stifel Financial in St. Louis. All three of these transactions have been well received.

Citigroup is so large and diverse that one of its chief risks is becoming hard to manage. Smart transactions that refocus the company on its most successful businesses should help lay the foundation for future profit growth.

At the moment, the stagnant stock market and the difficult interest-rate environment are keeping a lid on Citigroup stock. In fact, the share price is down 13 percent from its 2004 high.

But the company's fundamentals are solid -- and likely to improve. In the meantime, Citigroup is using some of its nearly $20 billion annual cash flow to repurchase stock. In April, the company announced that it was increasing its ongoing share repurchase plan by $15 billion.

It's impossible to know whether these moves will start paying off by October, when Citigroup reports third-quarter results, as some analysts anticipate. But the stock should be well positioned to profit when the banking environment finally does improve.

Over the next five years, Citigroup (Research) is projected to grow earnings at an 11 percent compound annual rate. In the meantime, investors have the chance to buy a stock that trades at an 11 P/E, has raised dividends for 20 years in a row and currently offers a fat 3.9 percent yield.

Sivy on Stocks resources:

Sivy 70: America's best stocks

Guide to Growth

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Michael Sivy is an editor-at-large for MONEY magazine. Click here to receive Sivy on Stocks via e-mail every Tuesday.