Citi delivers $2.7 billion profit

NEW YORK (CNNMoney.com) -- Citigroup posted second-quarter earnings of $2.7 billion Friday, marking its second consecutive profit and beating Wall Street expectations, thanks to improving credit trends.

But the stock fell along with other banks as worries about the broader economy and financial reform continued to plague the markets.

Earnings for the banking giant came in at 9 cents per share. Analysts polled by Thomson Reuters expected the company to earn 5 cents for the quarter.

Citigroup (C, Fortune 500) shares slipped 4% Friday, however. Despite beating estimates, profits were 37% lower than the second quarter of 2009.

Revenue from the bank was weaker than expected, falling 33% to $22.1 billion. That was driven by a 26% decline in revenues from its securities and banking unit, which was widely expected as a result of increased market volatility.

During a conference call with analysts. Citigroup CEO Vikram Pandit said he isn't too concerned about the sweeping Wall Street reform, which is expected to be signed into law by President Obama next week.

"I've been an advocate since the start of regulatory reform and am quite pleased we're moving forward," he said. "The ultimate impact won't be clear until we know all of the details, but we have been managing the business and selling assets in line with the principles of reform."

He added that the bill, which calls for most derivatives to be bought and sold on clearinghouses and exchanges, won't have a major impact on much of its derivatives business.

Beyond the Wall Street side of Citigroup's operations, the bank's consumer businesses delivered strong performances during the quarter. Credit losses decreased by $422 million, or 5%, to $8 billion as fewer loans failed.

In a statement, Pandit noted that "credit improved for the fourth consecutive quarter" and that the bank was also helped by international growth in Latin America and Asia.

"In terms of credit quality, everything is moving in the right direction," said Amanda Larsen, analyst at Raymond James, highlighting that reserves for credit losses fell to the lowest level since the third quarter of 2007 and delinquencies on Citi-branded cards also edged lower.

"The market has been freaking out about the health of the consumer as of late, and bank earnings are giving us solace that it's not as bad as the market is making it out to be," Larsen added.

The bank also continued to pare back its Citi Holdings division, which was created to house the firm's so-called "troubled assets" and businesses it is looking to get rid of. Citi Holdings reduced its assets by $38 billion during the quarter, and those assets now represents less than quarter of Citigroup's total.

Larsen said that at this pace, the bank is on track to shed a majority of its Citi Holdings over the next three years.

The latest results from New York City-based bank are further evidence that the bank is bouncing back after being one of the hardest hit institutions during the financial crisis. Last quarter, Citigroup reported $4.4 billion in earnings.

The Treasury Department, which took a sizeable stake in the bank as part of the government's bailout of Citigroup, is continuing to trim its stake. Earlier this month, the government said it sold 1.1 billion shares of the bank and plans to unwind the remainder of its 5.1 billion shares by the end of the year.

Based on the average price of $4.03 that Treasury has been able to sell shares at, U.S. tax payers could make a profit of $2.03 billion from the controversial bailout.

Citigroup's report also matches results from rivals JPMorgan Chase (JPM, Fortune 500), which raked in $4.8 billion last quarter, and Bank of America (BAC, Fortune 500), which earned $3.1 billion. Both banks beat forecasts and said that results were helped by improvement in consumer lending businesses.

But the report comes a day after the bank disclosed in an SEC filing how it made an accounting blunder that concealed billions of dollars in debt from investors by incorrectly identifying short-term trades as sales instead of borrowings.

"The impact of these transactions was never large enough to have a material impact on Citigroup's financial statements or our published regulatory capital ratios, including our leverage ratios," Citigroup spokesman Jon Diat said.

The bank initially acknowledged the error in a filing in May.