By Saabira Chaudhuri and Christina Rexrode 

Citigroup Inc. delivered some unexpected good news for beleaguered investors on Monday, posting first-quarter earnings that beat analysts' estimates as the third-largest U.S. bank cut costs and benefited from fewer bad loans.

Citigroup reported a profit of $3.94 billion, up 3.5% from $3.81 billion for the first quarter of 2013. On a per-share basis, which includes the payment of preferred dividends, earnings were flat at $1.23. Stripping out one-time items and accounting adjustments, per-share earnings rose a penny to $1.30.

Still, revenue was lower than a year ago, edging down 0.6%--or 2.2% on an adjusted basis--to $20.12 billion. Analysts polled by Thomson Reuters had expected per-share earnings of $1.14 on revenue of $19.37 billion.

The results were enough to send shares shooting up 4% in early trading. Wells Fargo & Co. analyst Matt Burnell described Citigroup's results as "better than feared," particularly when compared with those of J.P. Morgan Chase & Co., which reported first-quarter results Friday.

J.P. Morgan fell 8%, the bank reported Friday. Wells Fargo, which also reported first-quarter results Friday, saw revenue fall 3%.

Investors' reaction Monday was likely a welcome respite for Chief Executive Michael Corbat, who has been grappling with a number of problems after early momentum in his new role.

Last month, the bank failed to get Federal Reserve approval to reward investors with higher dividends and stock buybacks, a blow that took the bank's executives by surprise. The Fed's decision in its annual stress tests for banks came after Citigroup disclosed potential fraud at its Mexico unit that led it to restate results for 2013.

In a statement Monday, Mr. Corbat said he would "dedicate whatever resources and make whatever changes necessary to achieve this critical goal" of meeting the Fed's expectations.

In the numbers, Citigroup's trading results also proved more resilient than some analysts expected, with fixed income trading falling 18% and stock trading rising 13%, driven by improved derivatives revenues.

"Their business mix...would suggest they would have had a relatively tough quarter in trading, but they came out better than J.P. Morgan," said Jeff Harte, an analyst with Sandler O'Neill.

J.P. Morgan was hurt by a 17% year-over-year drop in revenue from trading stocks and bonds. But Citigroup's trading revenue fell less, by 13% over the year to $4.7 billion--better than Chief Financial Officer John Gerspach's earlier warning that revenue there would fall by "a high midteens percentage."

Citigroup's trading results had improved since Mr. Gerspach made the prediction in early March, the CFO said Monday in a call with reporters. Still, he said he expected bond-trading results to be down for the year, adding that the business is "somewhat of a shrinking pie."

Like the other big banks, Citigroup's results were also hurt by lower mortgage originations, as the refinancing boom wanes amid higher interest rates. Mortgage originations tumbled 71% to $5.2 billion, from $18 billion a year earlier. Mortgage originations were down 68% at J.P. Morgan, and down 67% at Wells Fargo.

As expected, litigation expenses remained high. The bank spent $945 million on legal and related expenses, compared with $710 million a year ago.

In the call with reporters, Mr. Gerspach said the bank had boosted the resources devoted to control and compliance issues by about 33% over the past three years, and had about 500 employees who spent more than half their time working on the Fed's stress-test process. But Mr. Gerspach also said it was "really hard to imagine a scenario" where the bank would be able to meet its previous target of a 10% return on tangible common equity next year, something the bank was shooting for before the rejection on the stress test.

Concerns about Banamex, the Mexico unit that Citigroup says was defrauded, are still weighing heavily on the bank. Mr. Gerspach said Citigroup had discovered potential fraud at another company that is a supplier to Pemex, Mexico's state-owned oil company. He declined to give details, except to say it was much smaller than an earlier billing issue related to oil services company Oceanografia that forced the company to restate its 2013 results.

Mr. Gerspach also said that the bank had "no indication" that the Fed's decision to reject its capital plan "had anything to do with Banamex."

After disappointing investors in the fourth quarter, Citigroup was able to cut costs in early 2014. First-quarter operating expenses edged down 1.1% from a year ago to $12.15 billion even as expenses tied to furthering Citigroup's cost-cutting efforts rose. The bank trimmed expenses tied to compensation, benefits and equipment, among other areas.

Like its peers, Citigroup has also been benefiting from loan-loss reserve releases, which generally accompany improved consumer health but which some investors view as a non-sustainable source of earnings for banks. For the first quarter, the bank was helped by its loan-loss reserve release rising 3.5% from a year earlier to $673 million. Meanwhile, provisions for loans gone bad dropped about 20% to $18.9 billion.

One of the most internationally focused of the U.S. megabanks, Citigroup's shares took a beating earlier this year amid investor concerns over weakness in emerging markets. The bank Monday said revenue fell in its consumer banking unit during the first quarter in North America, Latin America, Asia, and across the division that includes Europe, the Middle East and Africa.

Investment-banking revenue fell 10% from a year earlier to $1.05 billion, driven by a 19% decline in debt underwriting revenue and a 14% drop in advisory revenue.

The bank continues to pare the drag on earnings from running legacy assets that it has been looking to shed since the financial crisis.

Citi Holdings, the division containing those assets, generated a $292 million loss in the first quarter on an adjusted basis compared with a $798 million loss a year earlier. Average assets at Citi Holdings fell 25% and revenues at the unit surged 61%.

Sandler's Mr. Harte said the bank's results will help to settle people's concerns in the wake of the Mexico loss and the problems with the stress tests.

Oppenheimer analyst Chris Kotowski added in a note to clients: "Any way you slice it, it was good versus expectations."

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com

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