Amid all the noise in a typically messy quarter for Citigroup Inc. lay a beacon of hope for bankers everywhere: a shrinking pile of loans gone bad.

Net credit losses at the embattled company were $7.1 billion in the fourth quarter, a data point still earning wariness but nonetheless heartening next to the $8 billion reported in the previous quarter, and the $8.4 billion in the quarter before that. Total credit costs at Citi, including reserve builds for loan losses and policyholder benefits and claims, fell 10% from the third quarter, to their lowest level since mid-2008.

Several cautions are appropriate before branding Citi a bellwether. The New York banking company has a huge international component, with the particular good fortune of being able to capitalize on the economic rebound already underway in Asia and Latin America. Citi also is relatively shielded from the commercial real estate market, one of the few trouble spots it managed to sidestep during the build-up to the crisis. And even the company's biggest cheerleader, Chief Executive Vikram Pandit, warned Tuesday that credit costs could tick back up in the current quarter.

"We have different stories in different parts of the world," Pandit told analysts on a conference call, saying he felt "pretty constructive" on overseas credit trends and that the U.S. credit situation "right now comes mostly down to the mortgage portfolio" and will depend a great deal on the domestic economy's health.

Citi's North American consumer business accounted for 80% of managed net credit losses in the fourth quarter.

Loan workout programs for mortgage and credit-card customers helped keep a lid on reported losses and delinquencies. The government's Home Affordable Modification Program, for example, reduced losses in the quarter by about $200 million, Chief Financial Officer John Gerspach estimated, but much of the impact on the bottom line was offset by corresponding increases in reserves designed to accommodate potential losses that could emerge at the end of the forbearance process.

Citi reported a fourth-quarter loss of $1.4 billion, or 6 cents a share, before accounting for costs associated with the company's repayment of government bailout funds. Including the repayment expenses, the loss was $7.6 billion, or 33 cents a share, dragging Citi into the red for the full year.

A bevy of other one-time items and special circumstances dashed analysts' hopes of finally seeing "normalized earnings" data they could plug in to their financial models for a company that has burnished its reputation as the most complex of the big U.S. financial firms.

Tightening in Citi's own credit spreads lopped off $949 million of revenue in the securities and investment banking division, a quirk of fair-value accounting based on the controversial premise that a company's liabilities rise and fall with the cost of redeeming its own debt.

Though these gains and losses are largely viewed by investors as red herrings, Citi did itself no favors on the credibility front by reporting an additional $840 million downward pretax adjustment to correct several years of errors in accounting for so-called credit valuation adjustments, or CVAs.

These adjustments were more than double the amount that Sandler O'Neill & Partners LP analyst Jeff Harte expected, and they helped pull trading revenue from the investment bank 54% below his estimate for the quarter. The company also reported a better-than-expected tax benefit of $7.4 billion, owing to income derived from countries with lower tax rates.

"A revenue miss and tax benefit enhancing the bottom line are not likely to make investors smile," Harte wrote in a note to clients. "However, the improvement in credit is a positive that may take awhile to sink in."

In reality, it did not take very long for investors to get through the company's 80-plus page presentation and decide that the stock deserved to be bid up. Citigroup's stock price rose 3.51% Tuesday, to $3.54 a share. Optimism stemming from Citi's report helped lift other bank stocks, suggesting a possible bellwether effect; the KBW Bank Index rose 1%.

The gain was in sharp contrast to the market's reaction to JPMorgan Chase & Co.'s earnings report Friday, when investors heeded warnings from its executives not to read too much into the fourth quarter's positive developments.

Early-stage delinquencies at JPMorgan Chase improved from the third quarter, but CFO Michael Cavanagh told analysts, "We know this might not continue."

JPMorgan Chase shares, which fell 2.26% on Friday, shed another 0.92% Tuesday to close at $43.28.

Though Citi has long found itself on the unfavorable end of comparisons with competitors like JPMorgan Chase, its fourth-quarter results helped Citi set itself apart, especially in its international business.

In addition to improving credit trends in Latin America and Asia, the company benefited from the reach of its global transaction services division, where higher deposits and increased volumes cemented the strength of a business that Gerspach said is at "the heart" of the company's corporate strategy.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.