Oct. 15 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank, said mortgage delinquencies and consumer lending will deteriorate for the rest of the year after earnings fell 57 percent in the third quarter.

Citigroup had its biggest drop in more than a month in New York trading after Chief Financial Officer Gary Crittenden on a conference call said borrower defaults are ``accelerating.''

Chief Executive Officer Charles Prince, who has overseen a 17 percent drop in the company's stock this year, said momentum ``continues very strong'' in most of the company's businesses. Since Prince became CEO in 2003, Citigroup shares are virtually unchanged, compared with a 29 percent jump at Bank of America Corp., the second-largest U.S. bank by assets.

``They certainly had a lot of troubles and to some extent have been tripping over themselves the last couple of years,'' Jeffery Harte, an analyst at Sandler O'Neill & Partners LP in Chicago, said in an interview. Prince is ``doing the right things strategically. It's become more of an execution problem lately.''

The New York-based company said in a statement that net income declined to $2.38 billion, or 47 cents a share, from $5.51 billion, or $1.10, a year earlier. Citigroup said two weeks ago that earnings would fall 60 percent.

Citigroup dropped $1.63, or 3.4 percent, to $46.24 in composite trading on the New York Stock Exchange at 4:17 p.m.

Wall Street Writedowns

The results included about $6.5 billion of costs for fixed- income trading and underwriting losses and consumer loans gone bad. Like Wall Street rivals Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch & Co., Citigroup had to write down the value of mortgages, asset-backed securities and corporate loans held on trading books or in its underwriting business.

Earnings included a $729 million pretax gain on the sale of shares of Redecard SA, MasterCard Inc.'s transaction processor in Brazil. Revenue climbed 5.8 percent to $22.7 billion.

Return on equity, a gauge of how effectively the company reinvests earnings, dropped to 7.4 percent from 18.9 percent a year earlier, making it the second-lowest among Wall Street firms that have reported earnings, after Bear Stearns Cos.' 5.3 percent. Goldman Sachs Group Inc.'s 31.6 percent was the highest.

Citigroup is the first of the nation's biggest banks to report earnings for the quarter. New York-based JPMorgan Chase & Co. releases its results on Oct. 17, and Bank of America, based in Charlotte, North Carolina, is scheduled for Oct. 18.

Analyst Expectations

Citigroup's profit exceeded analysts' estimates of 44 cents a share, according to a Bloomberg survey.

``Their revenues actually weren't as bad as we were expecting,'' Harte said. ``The trading and some of the banking businesses held up better than we thought.''

Revenue in Citigroup's trading and investment-banking division was $4.6 billion, compared with Harte's estimate of $3.75 billion. Revenue from wealth management, including the company's Smith Barney retail brokerage, was $3.51 billion. Harte had predicted $3.25 billion.

Bank of America is expected to report a return on equity of 15 percent for the third quarter, Fox-Pitt Kelton Cochran Caronia Waller analysts estimated. Wachovia Corp., the nation's fourth-largest bank, will report an ROE of 13 percent when it releases earnings on Oct. 19, according to the analysts.

Citigroup's profit drop included costs of $1.35 billion for leveraged-buyout loans and $1.56 billion for subprime mortgage assets. It also suffered a $636 million fixed-income trading loss and reported $2.98 billion of costs to guard against rising defaults for consumer loans. The losses and writedowns announced today were $600 million bigger than the company estimated two weeks ago.

Maheras, Barker

On Oct. 11, Citigroup replaced Thomas Maheras, 44, who ran trading, and Randy Barker, 48, a senior fixed-income executive. The company promoted Vikram Pandit, 50, to run trading, investment banking and alternative investments.

The board is ``comfortable'' with the management changes, Prince said on the call, declining to comment on whether his own job was in jeopardy.

Past-due home loans doubled in the U.S. The slide in the mortgage business is frustrating Prince's effort to increase revenue faster than expenses.

Surging defaults ``raise fear that credit quality may continue to be challenging,'' said Tom Kersting, an analyst at Edward Jones & Co. in Des Peres, Missouri. The delinquencies are ``worse than they talked about even a couple of weeks ago.''

Late Payments

The percentage of U.S. real-estate loans where borrowers were more than 90 days behind on payments climbed to 1.8 percent, from 1.4 percent in the second quarter and 1 percent a year earlier, Citigroup said.

Investors were further disheartened after Crittenden said capital ratios -- a measure of the bank's ability to handle a business decline -- have fallen below the company's target, according to Kersting. The bank now has to divert spare capital away from share buybacks, Crittenden said.

Prince, 57, said when the losses were announced that they were an ``aberration'' and that profit would ``return to a normal earnings environment'' in the fourth quarter. Citigroup is part of a group of banks that agreed to set up a fund of about $80 billion to revive the market for asset-backed commercial paper, or loans that mature in 270 days or less.

The stock's slide has fueled criticism from investors such as Second Curve Capital LLC's Thomas Brown. Prince came under fire last year from Saudi billionaire Prince Alwaleed bin Talal, Citigroup's largest individual shareholder, for failing to control costs.

Alwaleed's Support

Prince placated Alwaleed by pledging earlier this year to cut annual expenses by $4.6 billion, or 10 percent, by 2009. The CEO announced plans in April to eliminate 17,000 jobs. Alwaleed said this month that he supports Prince.

Crittenden, the CFO, said on the conference call that the company is ``ahead of our commitment'' on headcount reductions and expense savings.

Since taking over in October 2003, Prince has defended the company's breadth as helping to assure stable earnings. The bank says it has about 200 million customer accounts in more than 100 countries.

``Prince has been dealt a tough hand,'' said Michael Chren, a portfolio manager at Allegiant Asset Management Co., which oversees about 1 million Citigroup shares. ``He's doing the best job he can, and I think at this point you have to give him the benefit of the doubt.''

To contact the reporter on this story: Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: October 15, 2007 17:18 EDT