Citigroup tries to stop the bleeding

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Citigroup stock has nearly tripled in value since March when word leaked that the company was profitable during the first two months of the year.

NEW YORK (CNNMoney.com) -- The latest crop of quarterly numbers from the banking industry has proven promising so far. But with every harvest, there's always bound to be a few rotten apples in the bunch.

This quarter, it's likely to once again be Citigroup.

Analysts predict that the embattled bank will be one of only a few major financial institutions to record a net loss this quarter. Citigroup is scheduled to deliver its first-quarter results before Friday's opening bell.

According to current consensus estimates from Thomson Reuters, Wall Street is forecasting a loss of $1.39 billion, or 34 cents a share.

If Citigroup does post a loss, it would be the sixth consecutive quarter of red ink. The New York City-based bank has lost more than $28 billion since the credit markets began to unravel in late 2007.

But shares of Citigroup (C, Fortune 500), which briefly traded below $1 a share in early March, have soared in recent weeks along with the rest of the banking sector. The stock was trading at about $3.80 as of Wednesday afternoon.

Part of the rise can be attributed to relatively impressive results across the rest of the industry. Goldman Sachs (GS, Fortune 500) blew past Wall Street estimates when it reported a profit of $1.8 billion earlier this week. Last week, Wells Fargo said it anticipated a profit of $3 billion this quarter, much more than expected.

Citigroup has also signaled to Wall Street that its own fortunes may be improving. Last month, Citigroup CEO Vikram Pandit wrote in an internal memo to the company's staff that the bank was profitable during the first two months of 2009.

A modest improvement in capital markets activity, a surge in mortgage refinancings and a massive gap between the rates at which banks borrow money and make loans should be a huge boon for banks like Citigroup and rivals such as JPMorgan Chase (JPM, Fortune 500) and Bank of America (BAC, Fortune 500).

So why are expectations on Wall Street for the bank to report a loss? For one thing, analysts remain concerned about Citigroup's ongoing exposure to home equity, credit cards and other consumer-related loans, which continue to deteriorate as the recession drags on and more people find themselves out of work.

"[Loan] losses will be up across the board given the mixture of a slowing economy, rising unemployment and real estate continuing to devalue," said Barclays Capital analyst Jason Goldberg.

Citigroup's decision to bulk up its reserves for future loan losses to the tune of $6 billion proved devastating last quarter. The company recorded an overall net loss of $8.3 billion.

But some worry that Citigroup may not be as aggressive enough this time around. By scaling back on the money set aside for bad loans, Citi's results would appear a bit rosier, but it could leave the company ill-prepared to cope with future loan losses.

David Trone of Fox-Pitt Kelton Cochran Caronia warned clients last week that he expected provisions this quarter to shrink to about $4 billion, while charge-offs, or loans a company doesn't believe are collectable, will climb to $7 billion.

Any upbeat numbers issued by Citigroup would help to sustain growing investor speculation that the worst may be over for the bank.

Market experts said the bank's stock may also be getting a lift because the bank could soon give more details about issuing new shares as part of the government's planned conversion of part of its investment in Citigroup to common stock.

In late February, the government said it would convert up to $25 billion of preferred shares to common stock in an effort to improve the company's capital base.

So far, the government has injected approximately $45 billion into Citigroup, making it one of the biggest recipients of government assistance during the recession. Once the conversion of the preferred shares ais complete, the government could own as much as 36% of Citigroup's common stock.

Yet, there are concerns that Citigroup could need even more aid. The Treasury Department is expected to publish the results of its so-called "stress test" of the nation's 19 largest banks once those lenders have finished reporting their first-quarter results. Citigroup is one of the banks undergoing the stress tests.

Mike McKeon, senior partner and head of the financial services practice of consultancy Booz & Company, said he did not expect regulators to give specific details about Citigroup or any bank being tested for that matter. Instead, the government is likely to give some broad industry observations based on the results of the tests.

But David Hendler, an analyst with CreditSights, told clients in a report this week that Citigroup's string of crushing losses could end sooner than many anticipate, given that the bank now has other options for improving its financial health.

Banks' funding sources have improved significantly since the Federal Deposit Insurance Corp. established its debt guarantee program last year, which backstops losses a borrower may suffer if a bank can't pay back its debt.

In addition, the Treasury's soon-to-be-launched "toxic asset" plan will allow banks to sell soured loans and securities to private investors partnering with the government.

"The smorgasbord of government initiatives aimed at assisting the banking sector could help improve the company's liquidity and earnings," Hendler wrote.