Citigroup Inc posted a $4.43 billion first-quarter profit, its best result in more than two years, as the global economic recovery lifted the values of its worst assets and allowed the bank to set aside less money to cover credit losses.

Citigroup seems to be recovering after having long been seen as one of the weakest of the major U.S. banks. But in a statement on Monday, Chief Executive Vikram Pandit cautioned that its road to recovery could remain rocky.

Realistically, we do not expect our performance to follow an invariable trend-line upward, he said, but added that the bank's long-term prospects were bright. Citigroup shares were up 3.1 percent to $4.70 in early afternoon trading.

On a conference call with reporters, Chief Financial Officer John Gerspach said a key variable for the bank's future profitability is the performance of corporate and investment banking, which can fluctuate over time. Values in the bank's Citi Holdings unit, which houses businesses and assets that the bank is looking to shed, are also an important factor, he said.

The third-largest U.S. bank posted first-quarter net income to shareholders of 15 cents a share, compared with a shareholder loss of 18 cents a share, or $966 million, in the first quarter of 2009. Analysts on average expected the bank to break even, according to Thomson Reuters I/B/E/S.

One of the biggest drivers of the improved performance was a profit of $865 million in the bank's special asset pool, where it houses assets like subprime mortgage securities that it is shedding. In the same quarter last year, Citigroup lost nearly $4 billion in that unit. Analysts said that kind of improvement could be difficult to duplicate in the future.

Citigroup racked up $8.4 billion of credit losses in the quarter. Adjusting for accounting changes, such losses totaled $9.8 billion last year.

But not every business improved in the quarter. Citicorp securities and banking, essentially the bank's corporate and investment banking unit, generated $8 billion of revenue, down 34 percent. The biggest declines regionally were in Europe and Asia, which is seen by Citigroup as an important growth area.

Net revenue was $25.42 billion. Adjusting for an accounting change, revenue declined somewhat from $26.97 billion a year ago.

Citigroup raised $20 billion of equity in December 2009 to buy back debt it sold to the U.S. government. That equity-raise was painful -- the common shares sold at $3.15 each, far below their price before the sale was announced, and below the $3.25 price at which the government bought in.

The government, which had planned to sell up to $5 billion of shares, was forced instead to agree not to sell shares for 90 days.

TOUGH SLEDDING

But since then, the outlook for Citigroup has improved. In January, it said its loan losses were showing signs of stabilizing.

It has been a rough ride for Pandit, who took the reins in December 2007 as the bank was taking big writedowns linked to subprime mortgages. Citigroup has suffered more than $100 billion of credit losses and writedowns since the financial crisis began.

Pandit is working to heal the bank by shrinking its balance sheet and focusing on its main businesses, including consumer banking and commercial and investment banking.

Citigroup has shed more than $500 billion of assets since the 2007 third quarter and is working on winding down or selling more than $500 billion of additional assets.

And Pandit, who has reshuffled the ranks of his executives several times over the past two years, continues to do so, according to a Monday memo obtained by Reuters. Edward Ned Kelly, a former chief financial officer and a current vice chairman of mergers and acquisitions at the bank, will add the title of chairman of global banking to his current responsibilities.

The shadow of the financial crisis continues to yield new concerns for Citigroup investors. Shares plunged on Friday, on the news that the government had charged Goldman Sachs Group Inc with fraud over a 2007 mortgage collateralized debt obligation deal it set up for a hedge fund manager.

Citigroup also sold CDOs at the time, but Gerspach told the conference call that Citigroup was not involved in the Goldman regulatory matter. Citigroup is involved in an industry-wide inquiry into subprime matters, as it has previously disclosed, he said.

The U.S. Treasury is now eligible to sell its 7.7 billion Citigroup shares, and announced last month that it plans to do so over time this year. With the shares having closed at $4.56 on Friday, the government can easily sell at a profit.

By some measures, the shares look cheap. They are trading at about 0.9 times their book value, while some of the bank's peers trade above their book value.

Some analysts believe the bank can earn more than 60 cents a share when it stops reeling from credit losses, a measure known as normalized earnings. Citigroup shares are trading at about 7.6 times those normalized earnings, while rivals like JPMorgan Chase & Co are trading at about 10 times estimated normalized earnings.

Through Friday's close, Citigroup shares had risen 38 percent this year, compared with a 28 percent rise in the KBW Banks Index. As the credit outlook has improved, the shares of the banks seen as riskiest have rallied more than their peers because these lenders have more to gain from a stabilizing economy.

ACCOUNTING CHANGE

Citigroup's results, like those of other banks, were influenced by accounting rules that moved loans bundled into bonds back onto bank balance sheets.

Those rules, known as FAS 166 and FAS 167, boosted Citigroup's assets and liabilities and decreased its equity. The rules also boosted Citigroup's revenue compared with prior periods, because previously credit losses from loans that had been bundled into bonds, or securitized, hit revenue rather than counting as an expense.

(Reporting by Dan Wilchins, additional reporting by Maria Aspan; Editing by John Wallace and Tim Dobbyn)

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