Citigroup reports dismal earnings

Citigroup's fourth-quarter profit and revenue missed analysts' forecasts.

NEW YORK (CNNMoney) -- Citigroup reported quarterly profit and revenue that fell short of forecasts, driven by ongoing weakness in trading and the unwinding of Citi Holdings, which includes Citi's mortgage servicing business.

"For 2012, the operating environment continues to be extraordinarily challenging, nowhere more so than banking," said CEO Vikram Pandit on the company's fourth quarter conference call Tuesday morning.

Citigroup (C, Fortune 500)'s fourth-quarter net income totaled $1.2 billion, or 38 cents a share, down 7.7% from a year ago. Revenue fell 6.5% from a year earlier, to $17.2 billion.

Both figures widely missed analysts' expectations, which called for a profit of 49 cents a share and revenue of $18.5 billion.

Despite disappointing earnings, Pandit pledged to return capital to investors in 2012. But the tenor of questions during the conference call made it clear that Citigroup still has a long and shaky road ahead in its quest to transform itself from a "financial supermarket" into a lean bank.

Citigroup's shares fell as much as 6% Tuesday while competitors Goldman Sachs, JPMorgan Chase, Bank of America, and Morgan Stanley were mostly unchanged. Citigroup's stock, which shed 44% in 2011, has rebounded a bit in 2012, gaining 16% from the start of the year.

After halting spending on marketing between 2008 and 2010 in areas like consumer banking and credit cards, Pandit said Citigroup spent a large chunk of its expenses to modernize branches and attract new banking clients.

Citigroup said it also spent $1 billion in 2011 to meet regulatory requirements and made substantial investments in "talent" while simultaneously spending on severance related to layoffs.

Another reason for Citigroup's steep fall-off in revenues came from the firm's continuing efforts to scale back its share of Citi Holdings, a hodgepodge of troubled business divisions. Revenues of Citi Holdings dropped 30% to $2.8 billion in the fourth quarter from a year earlier.

Even as Citigroup unwinds and sells its non-core Citi Holdings divisions, it still holds $269 billion of unwanted assets from that part of the business. It shed $90 billion in Citi Holdings assets in 2011.

Citigroup once deemed its retail credit card business as non-core, but said it now plans to keep the business. In the first quarter of 2012, Citigroup will move the division back into its core operations unit.

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Throughout the call, Pandit sounded alarm bells on Europe and blamed much of the company's profit troubles on issues in the markets related to the eurozone's sovereign debt crisis.

"We have been quite cautious, because Europe is being driven by politics as much as anything else," said Pandit.

But with less risk comes smaller profits, as Citigroup's fourth quarter earnings made clear. Still Pandit emphasized that Citigroup plans to make cautious bets.

Citigroup by the numbers: Revenues from Citigroup's trading and investment banking activities dropped roughly 29% in the fourth quarter of 2011 compared to the prior year's fourth quarter.

Within the investment banking unit, Citigroup said that its bond trading revenues fall 25% from the previous year as clients moved away from this market fearing repercussions from Europe's sovereign debt problems.

Meanwhile, operating expenses in the fourth quarter jumped 3.7% to $12.9 billion, which Citigroup attributed to the shrinking and sale of divisions, severance costs, and efficiency improvements.

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One bright spot came from emerging markets. Citigroup continues to increase its revenues in its Latin America and Asia consumer banking business. Losses on foreign exchange bets adversely affected revenues but excluding those losses, revenues in Latin America increased 5% in the fourth quarter from the prior year. In Asia, Citigroup logged a 1% revenue increase for the fourth quarter.

Despite a rocky fourth quarter, Citigroup reported a 6% gain in full year profit. Revenue, however, dropped to $78.4 billion in 2011, down 7% from a year earlier.

Citi's fourth quarter report comes days after rival JPMorgan Chase (JPM, Fortune 500) said it failed to hit analysts' forecasts. JPMorgan's numbers fell closer in line with expectations.

Morgan Stanley (MS, Fortune 500), Goldman Sachs (GS, Fortune 500) and Bank of America (BAC, Fortune 500) will report later this week.