July 18 (Bloomberg) -- Citigroup Inc. reported a smaller- than-estimated loss by reducing mortgage-bond writedowns, eliminating jobs and borrowing money at lower rates.

Citigroup, the biggest U.S. bank by assets, rose in New York trading after the company said its second-quarter net loss was $2.5 billion, or 54 cents a share, because of $12 billion in writedowns and increased bad-loan reserves. Analysts estimated the New York-based bank's loss at $3.67 billion.

Led by Chief Executive Officer Vikram Pandit, Citigroup is the third major U.S. bank to beat analysts' predictions this week, after JPMorgan Chase & Co. and Wells Fargo & Co. Merrill Lynch & Co.'s results yesterday fell short of Wall Street's estimates. Pandit, who took over in December, reduced assets by about $67 billion during the quarter, making progress on the $400 billion he has targeted.

``Conditions have eased a little bit and at the same time they have been able to grow their top line,'' William Fitzpatrick, an equity analyst at Optique Capital Management in Milwaukee, which manages $1.4 billion, said in a Bloomberg Television interview. ``They haven't had a lot of clients run out the door. They have been able to maintain relationships. Now it's just a matter of being more profitable.''

Writedowns for subprime-related assets and debt linked to bond insurers totaled $7.2 billion. The bank's credit costs increased $4.5 billion from the second quarter of 2007, mainly because of bad consumer loans in North America and the company's credit-card business.

Writedown Estimate

Credit Suisse Group analyst Susan Roth Katzke predicted in a June 24 note that the company would have as much as $10 billion of writedowns.

Shares of the company rose to $19.29 in New York trading, from $17.97 at the close on the New York Stock Exchange yesterday.

Second-quarter revenue dropped 29 percent to $18.7 billion, compared with the average estimate of $17.3 billion among analysts surveyed by Bloomberg. Earnings in the same quarter last year were $6.23 billion, or $1.24 a share.

The U.S. consumer unit, which includes retail banking and loans to individuals and small businesses, had revenue of $7.89 billion, virtually unchanged from a year earlier. The global cards business rose 3 percent to $5.47 billion.

Tier 1 Ratio

Citigroup's Tier 1 capital ratio, a measure regulators use to monitor a bank's ability to withstand loan losses, rose to 8.7 percent at the end of the quarter from 7.7 percent in the first quarter and 7.1 percent at the end of 2007. The minimum for a ``well-capitalized'' rating from U.S. regulators is 6 percent. Citigroup sets its own target at 7.5 percent, partly to assure its AA- rating from Standard & Poor's.

Seven interest-rate cuts by the Federal Reserve in the past year have reduced the bank's borrowing costs and allowed it to trim the rates it pays depositors.

Revenue at Citigroup's corporate and investment bank plunged 71 percent to $2.94 billion. The wealth management division, which includes the Smith Barney brokerage, gained 4 percent to $3.32 billion.

Pandit, 51, put former Morgan Stanley colleague John Havens in charge of trading and investment banking, moved U.S. consumer head Steve Freiberg to oversee a new credit-card division and recruited former Wells Fargo executive Terri Dial to oversee consumer banking in the U.S.

Asset Sales

He also is taking steps to free up capital by selling assets. Under former CEO Charles O. Prince, Citigroup's balance sheet swelled by $689 billion, an amount larger than the entire balance sheet of San Francisco-based Wells Fargo, the fifth- biggest U.S. bank by assets. Citigroup's total assets stood at $2.2 trillion at the end of last year.

Citigroup slumped 39 percent this year through yesterday, reaching the lowest point since the bank was created a decade ago from the merger of Citicorp and Travelers Group Inc. The decline led to the ouster of Prince as credit-market losses piled up and Citigroup's market value fell below those of Bank of America Corp. and JPMorgan. New York-based JPMorgan reported second- quarter earnings yesterday of $2 billion. Wells Fargo's profit was $1.75 billion.

``We will continue to have substantial additional marks on our subprime exposure this quarter,'' Citigroup Chief Financial Officer Gary Crittenden said on a conference call last month.

Citigroup also wrote down the value of so-called monoline insurance companies including Ambac Financial Group Inc. after they were stripped of their AAA credit ratings.

Raising Capital

``All of the over $300 billion in capital raises worldwide have plugged holes,'' Oppenheimer & Co. analyst Meredith Whitney said in a Bloomberg Television interview earlier this week. ``They haven't funded new equity growth. You plug these holes and you are still in the same situation where you started off.''

The bank slashed the quarterly dividend by 41 percent in January to 32 cents a share, the first drop since the early 1990s. Analysts including Whitney have said the bank may have to cut the dividend again to bolster capital as losses escalate.

``They did not cut the dividend and many analysts were concerned that they might,'' David Dietze, president of Point View Financial Services, said in a Bloomberg Radio interview. ``Sequentially they made some nice improvements in terms of cost cutting.''

Pandit said in May that Citigroup will shed ``legacy assets,'' including real estate holdings and collateralized debt obligations, such as bonds backed by pools of subprime mortgages.

Revenue Target

Citigroup also plans to cut $15 billion in costs in the next two to three years, while aiming for revenue growth of 9 percent, Pandit said.

The bank said in January it would eliminate about 4,000 jobs in the securities division, and said two months later that the number had increased by about 2,000. Citigroup said in April it would slash 7,000 jobs outside the investment banking group over the next year, and executives have said further reductions are likely.

Citigroup agreed to sell its German consumer banking unit to France's Credit Mutuel Group last week for 4.9 billion euros ($7.7 billion). Capital freed up by that sale will boost Citigroup's Tier 1 ratio by another 0.6 percentage points, the company said.

To contact the reporters on this story: Josh Fineman in New York at jfineman@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: July 18, 2008 08:19 EDT