By Christina Rexrode And Peter Rudegeair 

Citigroup Inc. said Thursday its first-quarter profit jumped a larger-than-expected 21% as the lender slashed costs to overcome a drop in trading revenue.

Shares rose 2.2% to $54.41 in midday trading.

The New York-based bank reported a profit of $4.77 billion, or $1.51 a share. That compared with $3.94 billion, or $1.23 a share, in the same period of 2014. Excluding one-time items, per-share earnings were $1.52 in the latest period, beating the $1.39 a share projected by analysts polled by Thomson Reuters.

Revenue slipped 2.3% to $19.74 billion, hurt partly by the dip in trading revenue. But the adjusted revenue of $19.81 billion was basically in line with what analysts had expected, $19.82 billion.

The bank's cost-cutting, with operating expenses falling 10% to $10.88 billion, was better than analysts had expected.

"This is a big deal," said BMO Capital Markets analyst James Fotheringham, who had predicted higher expenses.

Sanford C. Bernstein analyst John McDonald said that the quarter's narrative--Citigroup beating expectations via cost-cutting, even without the benefit of strong trading--validated the bank's overall strategy of shrinking and simplifying, a mission it has been on since it was battered in the financial crisis. Citigroup cut spending on compensation, equipment, advertising and other business costs. However, the strategy also raised questions about how the bank will improve efficiency when it can no longer pull the expense levers.

Legal expenses also fell. The bank set aside $403 million for litigation and related expenses, down 65% from $1.16 billion. The year-ago legal costs were higher because the bank was preparing for a mortgage-securities settlement with the Justice Department, which was reached in July.

Citigroup has said that it expects potential settlements on other issues, including industrywide probes over the alleged manipulation of currencies and interest rates, as well as the bank's compliance with anti-money-laundering rules. But the bank already set aside money for those potential expenses in the fourth quarter.

Profit in the consumer bank rose 3%, helped by a jump in U.S. consumer banking, which makes up the bulk of the retail bank. That offset declines in Latin America and Asia consumer banking.

Profit in the investment bank and related units were roughly flat, hurt by the drop in trading revenue.

Citigroup's trading revenue was down 9.5%, to $4.36 billion from $4.81 billion a year ago. That was worse than J.P. Morgan Chase & Co. and Goldman Sachs Group Inc., which logged increases, and Bank of America Corp., which fell by a smaller proportion, 5%. However, Citigroup's results were in line with the bank's warning last month.

Part of the difference among the banks' trading results relates to the types of products they focus on. J.P. Morgan tends to trade currencies and rate products, which had a strong quarter. Citigroup and Bank of America focus on so-called other products like mortgage-backed securities and corporate bonds, which had a weak quarter.

Chief Financial Officer John Gerspach noted lower levels of activity across distressed credit and lower issuance of muni bonds to explain the weak quarter for the fixed-income products--fluctuations that should be expected in a low-rate environment, he said on a call with reporters.

However, Citigroup's trading was also hurt by another factor: The bank lost money when the Swiss franc unexpectedly surged earlier this year, while J.P. Morgan and Bank of America both made money. Without the loss on the Swiss franc, rates and currencies trading revenue would have been up more than 20%, Mr. Gerspach said.

Like other banks, Citigroup is eager for interest rates to rise, which will allow it to charge more on loans. Citigroup's net interest margin, which measures how the bank makes money by charging more on loans than it pays on deposits, rose slightly over the year, to 2.92% from 2.9%. Analysts described Citigroup's net interest margin as resilient, particularly as other banks' margins have come under pressure.

Mr. Gerspach noted the bank wasn't just waiting for interest rates to rise, saying that its financial targets were never dependent on a big increase in rates.

In investment banking, Citigroup earned $298 million in fees from advising on mergers in the first quarter, up 70% from $175 million the year before. Merger advisory revenue was up 42% at J.P. Morgan and 50% at Bank of America, a signal that companies are eager for deal-making.

Overall, the tone was far calmer than earnings a year ago when Citigroup turned in better-than-expected results, but analysts and investors homed in on how the bank had failed the Federal Reserve's stress test just weeks before. Mr. Corbat at the time vowed to find an "industrial-strength" solution to the stress-test missteps. Last month the Fed approved Citigroup's stress-test request to raise its dividend for the first time since the financial crisis.

Write to Christina Rexrode at christina.rexrode@wsj.com and Peter Rudegeair at peter.rudegeair@wsj.com

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