Citigroup Inc's first-quarter profit fell 32 percent as shrinking loans and poor trading results pressured revenue while expenses surged.

The results highlighted how the third-largest U.S. bank, which teetered on the brink of collapse in the financial crisis, has stabilized but is still struggling to generate real growth.

The results were better than expected, which supported Citigroup's stock on a day when the U.S. equity market was falling. But like other big banks, the company's profit came mainly from dipping into money previously set aside to cover bad loans.

We're not seeing a lot of revenues being thrown off by main businesses ... They haven't been able to turn recovery into growth, said Len Blum, a managing partner of investment firm Westwood Capital, who personally owns bank stocks.

All three of the biggest U.S. banks -- Bank of America, JPMorgan Chase and Citigroup -- have posted shrinking loan books for the first quarter, raising questions about the strength of U.S. economic growth.

The biggest boon for banks right now is that credit losses are dropping. Citigroup's credit losses fell 25 percent in the quarter and steadily declined all last year, allowing it to dip into reserves previously set aside to cover losses.

Citigroup is among the most international of the major U.S. banks, and that helped some businesses in its Citicorp unit, where the bank houses the operations it plans to continue operating over the long term.

Citicorp's Latin American consumer banking, investment banking and transaction-processing services all posted higher income from continuing operations, for example, even as North American investment banking and transaction-processing operations posted profit declines.

BEATING ESTIMATES

Overall, Citigroup earned $3.0 billion, or 10 cents per share, in the first quarter, beating analysts' average forecast of 9 cents a share, according to Thomson Reuters I/B/E/S. A year earlier it earned $4.4 billion, or 15 cents per share.

Revenue dropped 22 percent to $19.73 billion. In its securities and banking business, fixed income trading revenue fell 29 percent to $3.8 billion.

Operating expenses rose 7 percent to $12.33 billion. Citigroup said this was in part due to higher legal expenses, but on a conference call with reporters, Chief Financial Officer John Gerspach declined to say why those costs had risen.

Gerspach said the bank will incur $25 million to $30 million in annual costs, as well as one-time charges of $45 million to $50 million over the next few quarters, related to a foreclosure-related settlement with bank regulators.

Last week, 14 banks including Citigroup agreed to overhaul their mortgage operations and compensate borrowers who were wrongly foreclosed upon, as part of a settlement with bank regulators.

The foreclosure mess that began in the fourth quarter of 2010, with borrowers accusing major banks of repossessing homes without having the right paperwork in place, will increase costs at several large U.S. banks.

Gerspach said Citigroup would hire up 500 people as part of the settlement. JPMorgan Chase & Co last week said it might have to hire up to 3,000 people to comply with the settlement.

RECOVERY TO GROWTH

Citigroup's higher compensation expenses in the quarter may be linked to efforts to build up its investment bank and other businesses. Gerspach told reporters such investments are a priority that must be balanced with discipline on expenses.

On a conference call with investors, Chief Executive Vikram Pandit said the bank is building its investment banking franchise.

In 2010, the bank posted its first annual profit since 2007, showing that Pandit had turned the bank around after it received $45 billion of government funds over the course of three rescues.

By the end of 2010, the government had shed its common shares in Citigroup.

Now, Pandit has to prove that Citigroup can move past recovery to growth, despite broad challenges facing the banking industry's attempts to boost profits.

The bank did add assets to its balance sheet in the first quarter, bringing its total assets to $1.33 trillion, a 3.6 percent increase from the fourth quarter of 2010.

But loans fell 1.8 percent from the fourth quarter, with gains in assets coming from areas like trading account assets.

The bank's shares were up 4 cents to $4.46 in afternoon trading.

(Reporting by Maria Aspan; additional reporting by Joe Rauch in Charlotte; Editing by Tim Dobbyn and John Wallace)

Vikram pandit Citigroup Bank of america Jpmorgan chase