Citigroup Inc was profitable in the first two months of 2009 and is confident about its capital strength, Chief Executive Vikram Pandit said, easing concerns about the troubled bank's survival prospects.

I am most encouraged with the strength of our business so far in 2009, Pandit wrote in a memo to staff on Monday. We are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007.

Pandit's assessment suggests that Citigroup may surprise analysts, who on average expect the third-largest U.S. bank by assets to lose money at least through September, following $37.5 billion in losses over the past 15 months. Citigroup earned $2.2 billion in the July-September period in 2007, the last quarter it posted a profit.

It's better than being in the red, said Peter Cardillo, chief market economist at Avalon Partners in New York.

In afternoon trading, Citigroup shares were up 34 cents, or 32.4 percent, at $1.39. The cost of insuring its debt against default fell, indicating that investors see less risk.

The stock was bolstered after U.S. Rep. Barney Frank, head of the House Financial Services Committee, said U.S. regulators plan to soon restore the uptick rule, which prevents investors from selling stock short while the stock is falling.

Citigroup has blamed short-sellers, who bet that stocks will fall, for some of the drop in its own share price, which last week fell below $1 for the first time.

Other bank stocks also rose on Tuesday, including Bank of America Corp , the largest U.S. bank by assets, up 25 percent. The KBW Bank Index <.BKX> rose 12.7 percent.

Since October, New York-based Citigroup has received two federal bailouts, $45 billion of capital from the Treasury Department's Troubled Asset Relief Program, and a government agreement to cap losses on $300.8 billion of troubled assets.

Last month's bailout would make the government Citigroup's largest shareholder, with a potential 36 percent stake.

The Wall Street Journal, citing people familiar with the matter, said Tuesday that U.S. officials were examining new action if Citigroup's problems mounted. But it said talks were preliminary and that no imminent rescue was planned.

Citigroup also faces waning patience in Washington for expanded taxpayer support of the banking system.

STOPPED LISTENING

In the memo, Pandit said he was disappointed with broad-based misperceptions about the bank, and that its credit spreads reflect neither its condition nor the government's interest in supporting the financial system.

Pandit said revenue in January and February was $19 billion, excluding various writedowns, versus a quarterly average of $21 billion as adjusted in 2008.

He also said deposit flows were relatively stable. Expenses of $8.1 billion over the two months were below the bank's target.

Pandit said the government's assistance would make Citigroup the strongest capitalized large U.S. bank.

Some analysts were heartened. Knowing what we know today, Citigroup's capital levels look sufficient, Sandler O'Neill & Partners LP analyst Jeff Harte wrote.

Pandit said the bank was confident about its capital strength after undertaking stress tests, using assumptions that were more pessimistic than those of the Federal Reserve.

David Williams, head of European bank research at Fox-Pitt Kelton, said Citigroup should disclose more about its tests to help regain credibility with investors. A one dollar stock price tells you the market has stopped listening, he said.

Citigroup plans to report quarterly results on April 17.

On Tuesday, it cost $585,000 annually to protect $10 million of Citigroup debt against default for five years, down from $640,000 annually on Monday, Phoenix Partners Group said.

(Additional reporting by Douwe Miedima in London; Dena Aubin and Ellis Mnyandu in New York, and Rachelle Younglai in Washington, D.C.; Editing by John Wallace and Jeffrey Benkoe)

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