After five quarters in the red, Citigroup Inc. is finally daring to say the word "profit."

In an internal memo Tuesday, the New York banking giant's chief executive, Vikram Pandit, told employees that, thanks to strong operating results, the embattled company is having its best quarter since 2007, the last time it had profit. While still a partial picture (Pandit excluded provisions and markdowns from his calculation), it was a rare bright spot for a company that has had an outsize effect on sentiment toward the industry.

Investors desperate for bullish news responded Tuesday by driving up the bank's stock price 38% and the KBW Bank Index 15.5%.

"Citi has been profitable for the first two months of 2009, and we are having our best quarter-to-date performance since the third quarter of 2007," Pandit wrote in a letter that was ultimately sent to reporters Tuesday morning and later filed in an 8-K with the Securities and Exchange Commission.

Citigroup earned $2.2 billion in the third quarter of 2007 and has since reported five straight quarterly losses — totaling $37.5 billion. The company's first-quarter earnings through February, excluding provisions and taxes, were $8.3 billion, or $33.3 billion at an annual rate, Pandit wrote.

"I am, like you, disappointed with our current stock price and the broad-based misperceptions about our company and its financial position," Pandit wrote in the memo. "I don't believe it reflects the strengths of Citi."

The memo reeled off a number of these perceived strengths: year-to-date expenses lower than targeted, bank deposits "relatively stable" and Citigroup's status as the best capitalized large bank thanks to assistance from the federal government.

Citigroup's stock has been under enormous pressure in recent weeks as the company revised its fourth-quarter results to show a bigger loss and announced its third government bailout in five months. Last week, Citigroup fell below $1 a share in New York trading for the first time ever. On Tuesday, its stock rose 40 cents, to $1.45 a share.

Arthur Hogan, the chief market analyst at Jefferies & Co., said Citigroup's 38% gain for the day is still modest, considering that it was trading at more than $50 just two years ago.

Still, he said, Pandit's memo was a kind of wake-up call to the market, reminding investors that Citigroup, despite its problems, retains a powerful core commercial banking business.

"At least for the day, we're focusing on the fact that, if they succeed in staying aloft, they will have earnings power," Hogan said. "And that is the one thing we sort of forget about in this foggy quagmire that is the financial space of 2008 and 2009."

Hogan said Citigroup's fortunes for the year may be turning, as it has already written down most of its bad assets. For instance, its earnings outlook in the first quarter became considerably brighter after it added a goodwill impairment charge of $9.6 billion to its revised fourth-quarter results last month.

"These guys may well earn money. That's the first time that's been spoken of in a bit," he said.

A Citigroup spokesman did not return a call for comment.

Jeffery Harte, an analyst at Sandler O'Neill & Partners LP, had a favorable reaction to the Pandit memo, and he rated the company a buy with a target price of $3.50 a share.

"While we expected the firm to be profitable, excluding provisions and markdowns on troubled assets, we did not anticipate a bottom-line profit," Harte wrote in a research note. "Our estimates remain unchanged, but for the first time in a long time our outlook may have an upward bias."

Jason Goldberg, an analyst at Barclays Capital, said Citigroup seems to be benefitting from a rebound in the capital markets since the fourth quarter. Its performance is being helped by a stronger fixed-income market and the refinancing of home mortgages, he said.

"The fourth quarter was a really challenging quarter, and you have seen improvements this quarter," Goldberg said. "Spreads are wider, which aids profitability."

He said it is no coincidence that Pandit is touting good news just days after the New York company's shares hit a new low.

"When your stock trades below a buck, it has the ability to cause fears both inside and outside the company," Goldberg said. "They're trying to allay both customer and employee concerns."

In the memo, Pandit wrote that its earnings to date could "help absorb elevated credit losses, additions to loan-loss reserves and potential markdowns."

Though he did not give any guidance on how much those losses or provisions could be, David Hendler, an analyst at the research firm CreditSights Inc., wrote in a report last week that Citigroup could book $55.5 billion to $105.3 billion in loan-loss provisions this year as it faces significant pressure in its U.S. and foreign consumer loan and commercial loan portfolios.

Citigroup's revenue, excluding markdowns, was $19 billion through February, the memo said. In 2008, its quarterly revenue averaged an adjusted $21 billion.

"That said, we are still one month away from the end of the quarter, and market volatility could alter results," Pandit wrote.

Year-to-date expenses through February were $8.1 billion, less than the company had targeted.

Citigroup is now among a handful of big banking companies to tout their profitability this year. JPMorgan Chase & Co. chief financial officer Michael Cavanagh said last month that it should be profitable in the first quarter. And Bank of America Corp. CEO Kenneth D. Lewis also said last month that its January results were encouraging.

Pandit said that the latest round of assistance from the government could increase the company's tangible common equity to as much $81 billion. Last month, it said the government and some institutional investors would convert preferred shares into common stock in a transaction that would give the government a 36% stake in the bank.

The company's Tier 1 ratio was 11.9% at Dec. 31, he wrote.

The company had reduced risky assets in its securities and banking business to $112 billion at the end of 2008, he said, from $226 billion a year earlier, with $36 billion of those assets subject to mark-to-market accounting. He said that Citigroup has $30 billion in loan-loss reserves, or 4.3% of total loans as of Dec. 31.

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