Oct. 1 (Bloomberg) -- Citigroup Inc., the biggest U.S. bank, said third-quarter profit fell 60 percent after $5.9 billion of credit and trading losses on loans and mortgage- backed securities.

Earnings may drop to the lowest since the second quarter of 2004 because Citigroup will write down loans for leveraged buyouts by $1.4 billion before taxes, the New York-based company said in a statement today. It lost $1.3 billion on subprime assets and about $600 million in fixed-income trading, while higher loan-loss reserves contributed to $2.6 billion in credit costs in the consumer-banking business.

Citigroup shares rose 2.3 percent after Chief Executive Officer Charles Prince said earnings will return to ``normal'' in the fourth quarter. The company's third-quarter losses were bigger than any others disclosed by the world's top banks and securities firms. UBS AG, Europe's largest bank, said today that it had a loss for the period after writing down about $3.4 billion of fixed-income securities.

``It's critical to put Citibank's financial strength into perspective,'' said David Katz, who helps oversee $1.6 billion including Citigroup shares as chief investment officer at Matrix Asset Advisors in New York. ``They did say they were expecting to return to normal operating profitability in the fourth quarter.'' Katz also said the share price compared with earnings was low.

Earnings Expectations

The 60 percent net income drop announced in today's preliminary report would cut Citigroup's profit to about $2.2 billion. The bank, which will release a complete earnings report on Oct. 15, was expected to earn $5.6 billion, or $1.08 a share for the quarter, based on the average estimate of analysts surveyed by Bloomberg.

``Our expected third-quarter results are a clear disappointment,'' Prince said in the statement. ``We expect to return to a normal earnings environment in the fourth quarter.''

Citigroup rose $1.05 to $47.72 at 4:17 p.m. in composite trading on the New York Stock Exchange. The stock has lost 14 percent this year.

``This does not indicate a change in the long-term prospects for the bank,'' Standard & Poor's said in a statement. ``We expect the fourth-quarter earnings to be considerably stronger.''

Deutsche Bank AG analyst Mike Mayo wrote today in a report that the writedowns may ``lead to changes in management.''

Prince has faced criticism from shareholders including Smith Asset Management President William Smith for refusing to break up a company they say is too large and unwieldy. Citigroup's stock price doesn't reflect the combined value of its parts, Mayo wrote.

``Citi's problems have spanned several businesses,'' Mayo wrote. ``We are questioning management at all levels and also think that Citi needs to consider restructuring its business mix to improve performance and capital efficiency.''

Saudi billionaire Prince Alwaleed bin Talal, the company's largest individual shareholder, said today in an interview with the Wall Street Journal that he supports the current CEO.

``No financial institution is immune from the financial turmoil in global markets,'' Alwaleed said.

Impact on Third-Quarter

Morgan Stanley, Bear Stearns Cos. and Lehman Brothers Holdings Inc., three of the five largest U.S. brokerages, reported declining profits last month after reducing the value of their loan commitments and mortgage-bond holdings.

Bank of America Corp., based in Charlotte, North Carolina, and New York-based JPMorgan Chase & Co., Citigroup's two biggest U.S. rivals, also report third-quarter profit this month. So does Merrill Lynch & Co., the third-biggest U.S. securities firm.

Bank of America Chief Financial Officer Joe Price said Sept. 17 that ``unprecedented dislocations'' in credit markets will have a ``meaningful impact'' on third-quarter results. The bank, which will report its earnings Oct. 18, isn't providing further information, spokesman Scott Silvestri said today.

JPMorgan spokesman Joseph Evangelisti declined to comment.

Biting the Bullet

Banks are taking losses on leveraged buyout loans to prevent deals from falling apart and to avoid getting stuck holding as much as $320 billion in debt. Credit Suisse Group, the lead arranger of financing for First Data Corp.'s LBO, last month agreed to lower the amount of loans that banks initially will sell to $5 billion from $14 billion, and cut the price to 96 cents on the dollar. The discount alone could cost about $200 million.

Citigroup, JPMorgan and at least nine other lenders in the takeovers of Alliance Boots Plc and Allison Transmission Inc. also agreed to sell debt at discounts. Banks' inability to sell the LBO debt has curtailed their willingness to forge other lending agreements. They're offering the discounts to help entice investors and make room for new loans.

To contact the reporters on this story: Yalman Onaran in New York at yonaran@bloomberg.net; Bradley Keoun in New York at bkeoun@bloomberg.net.

Last Updated: October 1, 2007 22:02 EDT