Citigroup Inc's first-quarter profit fell 32 percent as bond trading revenue plunged and operating expenses jumped.

The results were better than analysts expected, but Citigroup shares were just 0.9 percent higher in late morning trading at $4.46.

It was the fifth consecutive quarterly profit for Citigroup, which teetered on the brink of failure during the financial crisis. But the third-largest U.S. bank generated profit in large part because it dipped into funds previously set aside to cover bad loans, releasing $3.37 billion of reserves in the quarter.

Revenue fell 22 percent to $19.7 billion, and operating expenses rose 7 percent, in part because of higher compensation and legal costs.

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.

Citigroup said it earned $3.0 billion, or 10 cents per share, down from $4.4 billion, or 15 cents per share, a year earlier.

Analysts on average had expected 9 cents per share, according to Thomson Reuters I/B/E/S.

The bank's higher expenses came from several areas, including spending more on compensation and benefits compared with the same quarter last year, and rising legal expenses.

On a conference call with reporters, Chief Financial Officer John Gerspach declined to say why legal expenses had changed.

But he said the bank will incur about $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.

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.

Citigroup was one of 14 U.S. housing lenders that have agreed to overhaul their mortgage operations and compensate borrowers who were wrongly foreclosed upon, as part of a settlement with three bank regulators.

Gerspach also said the bank would hire up 500 people as part of the settlement.


The higher compensation expenses may be linked to the bank's interest in investing in business opportunities, which Gerspach told reporters is a priority to be balanced with being disciplined on expenses.

Citigroup showed investors in January that it can once again turn an annual profit, three years after taking $45 billion in U.S. bailouts during the crisis.

By the end of 2010, the government had shed its common shares in Citigroup, and the bank reported its first annual profit since 2007.

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

Like larger rivals JPMorgan Chase & Co and Bank of America Corp, Citigroup is struggling to grow its revenue in a difficult trading environment, and with weak demand from creditworthy borrowers for new loans.

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.

In Citigroup's securities and banking business, fixed income trading revenue fell 29 percent to $3.8 billion.

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