Edward "Ned" J. Kelly 3rd, Citigroup Inc.'s chief financial officer, has at least $65 billion of reasons to feel better about the company's prospects for the coming year.

That is how much Citigroup plans to add to tangible common equity, which currently stands at less than half that amount, as it completes deals to merge its Smith Barney brokerage unit with Morgan Stanley, convert preferred stock held by the federal government and other investors into common shares and raise money through a private placement with the Abu Dhabi Investment Authority.

And with quarterly revenue back to levels not seen since mid-2007, Kelly has all the more reason to be encouraged.

But it will take a lot more than an improved tangible common equity ratio and trading-driven revenue to put Citi back on solid footing.

During a week in which the top executives at Goldman Sachs Group and JPMorgan Chase & Co. advertised their eagerness to pay back federal bailout funds and get out from under the thumb of government officials, Citi was noticeably less aggressive on the matter, reinforcing investors' concerns about the New York company's relative weakness.

"We're acutely aware of our obligations to the government," Kelly said. "We're intent on making the government's investment profitable and we're interested in discharging our obligations as quickly as we can."

Kelly said there is little Citigroup can do about rival banks repaying TARP funds, a development that could remove pay restrictions at competing banks and tilt the level playing field that the government tried to create by spreading funds across all of the large U.S. banks. "But we will obviously try to operate as effectively as we can and to retain as many of our good people as we can" if competitors disengage from federal bailout programs, Kelly said.

And the rising loan losses Citi reported Friday as it disclosed its first-quarter results served as a stark reminder of the challenges that lie ahead.

"The thing that we're bracing ourselves for, I think as everybody is, is what is in fact going to happen to the economy and what is going to happen to the consumer," said Kelly, who became the CFO last month when Gary Crittenden was put in charge of selling off the company's noncore assets.

Attempting to soothe concerns about whether the company has set aside enough to cover potential losses, Kelly said its $24 billion of reserves would be enough to cover close to 5% of its consumer loans, and the reserve increase in the first quarter equaled more than four times the actual increase in loan losses from the previous quarter — the formula Citi typically uses to determine its reserve increase.

The company's fourth-quarter reserve build turned out to be overly aggressive, he said, but conditions could still deteriorate. "It [the loss level] came in a little lighter than we thought, but we're not getting overly optimistic and expect it may track back up in the second quarter," he said.

First-quarter credit costs jumped 76% from a year earlier, to $10.3 billion, including a $2.7 billion loan-loss reserve increase and $7.3 billion of net credit losses. But the company cut its operating expenses by 23% and nearly doubled its quarterly revenue, to $24.8 billion, helping it swing to a profit of $1.6 billion from a loss of more than $5 billion a year earlier.

But Citigroup's stronger-than-expected performance in the first quarter provided a running start for Kelly as he takes over the CFO position. It was Kelly, a lawyer turned investment banker and a former chief executive officer of Mercantile Bankshares, who fielded questions from analysts during the company's quarterly conference call Friday, while CEO Vikram Pandit led a town hall-style meeting with employees in New York.

In an interview, Kelly, who turns 56 soon, downplayed the idea that he might be seen as a successor to Pandit, given his CEO experience and broad knowledge of finance.

Pandit, at 52, "is younger than I am and enormously able, and I am here because of him and here to help, obviously, in any way that I can," Kelly said. The CEO has a "loyal and devoted following" within the company.

But long-simmering skepticism about Pandit's job security was reignited last month when federal officials forced out the head of General Motors Corp. as part of that company's government-aided restructuring.

"I think all of us would be extremely disappointed if anything were to happen [to Pandit] in that regard, and we certainly don't anticipate it," Kelly said.

He deflected multiple questions about Citi's decision to delay its preferred stock exchange offer until after the results of the government's stress tests on banks are disclosed.

Dividend payments to preferred stockholders left common shareholders with a loss of 18 cents a share, but that loss was 15 cents narrower than the average estimate forecast by analysts.

Another bright spot was the 4% increase in deposits for Citi's North American consumer business. Kelly attributed that result to a mix of new accounts and increased deposits from current customers.

"It's very reassuring for the system to see that a lot of these banks, even the ones having above-average risk like Citi, are retaining their deposits," said Jason Polun, a financial services industry analyst with T. Rowe Price Group Inc.

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