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 of losses over the past 15 months. Citigroup earned $2.2 billion in the July-September period in 2007.

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

Citigroup shares rose 27 cents, or 25.7 percent, to $1.32 in early trading, after falling below $1 for the first time last week. The cost of insuring its debt against default fell from Monday's record high, indicating investors see less risk.

Other bank stocks also rose, including a gain of 18.7 percent for Bank of America Corp, the largest U.S. bank by assets. The KBW Bank Index rose 7.2 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, on Tuesday said U.S. officials were examining fresh steps for Citigroup if its problems mounted. But it said talks were preliminary and 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.

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

Some key Republicans in the U.S. Congress have said the United States should consider letting some large troubled banks fail rather that commit more money to prop them up. Among these are Richard Shelby, the top Republican on the Senate banking committee, who on Sunday called Citigroup a problem child.

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.

Williams said investors would significantly reward Citigroup if first-quarter results, expected in mid-April, reflected Pandit's upbeat tone.

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, and Dena Aubin and Ellis Mnyandu in New York; Editing by Hans Peters, Jon Loades-Carter and John Wallace)

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