NEW YORK (MONEY) - The big banks have underperformed the broad market over the past two years. But they began a recovery about six months ago and still look like they have plenty of room to run.

Citigroup's strong first-quarter earnings report on Monday further supports that bullish outlook.

It's difficult to make an exact year-over-year comparison for Citigroup because of a variety of accounting adjustments, including special charges for stock options given to employees.

But analysts agree that the results were very good, on balance. In fact, Citigroup's first-quarter earnings beat consensus estimates by five to 10 cents a share.

For the quarter, total profit was up by 4 percent. But earnings per share from continuing operations were up a whopping 13 percent.

Citigroup's (Research) greatest strengths were international business, where earnings soared 47 percent on a 19 percent revenue increase, and brokerage and investment banking, where profits rose more than 20 percent.

Business was less robust for credit-card lending, because cautious consumers are being a bit more careful about using their plastic.

In addition, high short-term interest rates have been cutting into bank profit margins by raising the cost of funds.

Consumer caution and lean profit margins will probably persist as long as Federal Reserve chairman Ben Bernanke keeps raising short-term interest rates. He may raise rates a few more times over the coming months, but the series of rate increases begun in June 2004 looks to be nearing an end.

Research shows that almost all of the damage to big bank stocks occurs while short-term rates are actually rising and that share prices rally once rate increases finally end. Based on that pattern, bank stocks should enjoy above-average gains over the next 12 to 18 months.

In addition, Citigroup chairman Sandy Weill is retiring this week. Chuck Prince, a long-time Weill associate who succeeded him as CEO in October 2003, will now also serve as chairman. That should give Prince a free hand to pursue his corporate strategies.

Whereas Weill was a great dealmaker and built Citigroup into the largest financial conglomerate, Prince is focusing on streamlining the company and boosting profitability.

As part of that program, last year Prince sold Travelers Life & Annuity to MetLife and unloaded most of Citigroup's asset-management business in a deal with Legg Mason.

Prince is also promoting international expansion and added 238 new branches in 19 countries during the first quarter. In addition, the company bought back $2 billion of stock and has authorized the repurchase of another $10 billion.

Inflation, interest rates and other economic factors could always disrupt Citigroup's progress -- at least for a time. But there's every reason to believe that Prince's strategy will boost the share price over the long term.

With annual earnings growth of 10 percent a year and a 4 percent yield, Citigroup offers a total return a couple of percentage points better than what's projected for the S&P 500. And at $48.35, Citigroup is trading at less than 12 times this year's estimated earnings. That's a return at a price that's hard to beat.

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