NEW YORK (CNNMoney.com) - Despite a challenging interest rate environment, Citigroup is confident the company's consumer business, which put pressure on the banking giant's fourth-quarter earnings, will overcome its struggles, the company's CEO said Friday.

Citigroup's, the world's largest bank, reported operating earnings for the fourth quarter fell to $4.97 billion, or 98 cents a share, from $5.19 billion a year earlier, missing analysts' average forecast by 2 cents a share, according to earnings tracker Thomson First Call.

The news sent Citigroup (down $1.73 to $46.21, Research) stock down over 3.5 percent as investors worried about the outlook for earnings growth in 2006.

Citigroup underwent an overhaul last year under the guidance of Chief Executive Charles Prince in an effort to distance itself from past company misdeeds.

In addition to selling off non-core businesses, replacing former top executives, and instituting a rigid ethics model, the company changed its disclosure policies and provided little guidance for the year -- a disappointment for investors struggling to digest Friday's earnings new, said Jeff Harte, research analyst at Sandler O'Neill.

While dodging specifics, Prince said during a conference call that "we feel good about 2006" but admitted that Citigroup's consumer banking business -- once its strong suit -- will struggle in the near-term with rising short-term rates but unusually low long-term rates.

Banks and securities firms borrow money at short rates and lend at long-term rates, so the current environment squeezes profits.

But Prince said that "won't last forever and when that changes, it will have a significant positive effect on the company."

Citigroup's total U.S. consumer banking group's profits tumbled 33 percent to $1.41 billion from the fourth quarter of 2004 due to a 60 percent drop from U.S. credit card operations. The weakness was driven in part by the spike in bankruptcies in the quarter as well as the tough rate environment.

The company recorded a $252 million of losses as consumers rushed to file for bankruptcy ahead of the tougher Oct. 17 bankruptcy law change.

Competitor JPMorgan Chase, which reported earnings Wednesday, said losses related to bankruptcies were an estimated $650 million before taxes as about 500,000 Americans sought bankruptcy protection in the week before the change.

In addition to the rate environment, banks like Citigroup will face challenges in 2006 as higher minimum payments on credit cards result in more consumers defaulting on debts.

Banks decided to raise the minimums last year in a bid to prevent consumers from falling too far into debt. But that could result in higher chargeoffs for banks in the short term.

Speaking to members of the press after the call, Citigroup's chief financial officer Sallie Krawcheck said higher minimum payments will be an additional headwind for the industry this year. She added that while the company may see higher chargeoffs "in the hundreds of millions of dollars," Citigroup has reserves in place to address the issue to avoid any damage to its bottom line.

And Prince said he expects more from Citigroup's international consumer business, which could tip the scales for the company.

Citigroup's international consumer business posted earnings growth of 2 percent to $1.09 billion. He said the company is focused on international growth and expects that business to help in 2006. Citigroup plans to open more than 900 branches in the U.S. and abroad this year.

Citigroup was also bullish on the prospects for its volatile capital markets business. In the fourth quarter, the company's corporate and investment banking profit climbed 21 percent to $2.05 billion, bolstered by strong M&A activity and a solid performance from its equity underwriting.

But fixed income trading was a laggard, disappointing Wall Street.

Analysts had anticipated a decline in trading profits for big banks after an unusually strong third quarter. But Citigroup's 25 percent drop in bond trading revenue was a steeper drop than the 16 percent decline Piper Jaffray's senior research analyst Andrew Collins had estimated.

In a research note, Collins said the company's fourth-quarter numbers were negative due to the poor trading results and weakness in its credit card operations.

Krawcheck said the weakness in trading was the result of some pressure in its commodities business. But Prince said that the company sees positive momentum for its overall trading business in 2006.

"We have had the best fixed-income business on the Street and we're committed to having that," he said. "We're investing in that area and through the course of 2006, the performance should reflect that standard."

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