Citigroup Inc posted a $1.3 billion quarterly profit on Tuesday, as losses on bad loans fell, but the bank missed estimates on its earnings as it struggled with a slump in investment banking revenue.

Shares of Citigroup fell about 3.3 percent to $4.96 in premarket trading.

The third-largest U.S. bank released about $2.3 billion in reserves for bad loans, mainly due to an improvement in the store credit cards business it has put up for sale.

But a slump in Citigroup's securities and trading unit hurt revenues, which fell 6 percent on a managed basis from the third quarter to $18.4 billion. The bank's fixed-income revenue alone dropped almost 60 percent from the third quarter.

My guess is, Citi wishes they had more loan loss reserves that they could have released to get earnings. Eventually, you need real revenue growth if you're going to get profit growth, you can't just keep releasing reserves, said Matt McCormick, portfolio manager and banking analyst at Bahl & Gaynor.

Citigroup, which took $45 billion in U.S. bailout funds during the financial crisis, reported a net profit of 4 cents per share for the fourth quarter. That compared with a year-earlier loss of $7.6 billion, or 33 cents per share.

Analysts on average expected Citigroup to post a profit of 8 cents per share for the fourth quarter of 2010, according to Thomson Reuters I/B/E/S.

It was the fourth consecutive quarterly profit for Citigroup, and its first since the U.S. government finished selling off its stake in the company last month.

Shares of Citigroup closed at $5.13 on Friday -- their highest close since August 2009.

(Reporting by Maria Aspan; Editing by Muralikumar Anantharaman, Dave Zimmerman)