With immediate threats to survivability plainly in the rearview mirror, and capital ratios comfortably higher than what regulators are likely to require, Citigroup Inc. is finding that earnings-per-share performance matters again.

When the company on Tuesday reported a fourth-quarter profit of 4 cents a share, versus the 8-cent average forecast of Wall Street analysts, investors moved quickly in pre-market trading to knock the stock back below the $5 threshold it had crossed just last week.

It was an old-fashioned earnings miss, and a stark contrast from recent history, when Citi and many of its peers seemed to get a pass regardless of how they performed against expectations. In the immediate aftermath of the financial panic, the market was more interested in metrics like tangible common equity. Meanwhile Citi's lengthy quarterly laundry lists of one-time gains and charges had pushed analysts' estimates so far apart that measuring results against the median seemed like an arbitrary standard anyway. Forecasts for the first quarter of 2009, for example, ranged from a profit of 10 cents a share to a loss of $1.14 a share.

This quarter, only 4 cents separated the high and low estimates, according to Zacks Investment Research. And when Citi just barely met the bottom end of the range, the market noticed. The culprits were subpar revenues from fixed-income trading and a bigger-than-expected accounting hit tied to the tightening of spreads on Citi's own bonds and derivatives.

The "negative surprise," in earnings season parlance, overshadowed optimistic developments on the credit trend front, as well as comments that Citi executives made about their plans for investing in the business. Citi shares fell 6.4% to $4.80, after falling to as low as $4.78 during the session.

Portfolio managers who sold on the news were "shooting first," said Anton Schutz, president of Mendon Capital Advisors and manager of the Burnham Financial Industries Fund, which owns Citi shares. "What's more important: [the accounting hit], or credit getting better?"

Stripping out the accounting hit, known as a credit valuation adjustment, and the trading revenue shortfall, which Citi executives blamed on a poor run at monetizing the bid-ask spread on fixed-income securities, fourth-quarter results essentially were in line with analysts' forecasts. Net credit losses fell 11% from the third quarter to $6.9 billion, marking the sixth straight quarterly decline, while the total provision for credit losses and for benefits and claims fell 18% to $4.8 billion, the lowest level since mid-2007.

All of the trends underlying these improvements had a negative effect, however, on the credit valuation adjustment, or CVA, an accounting quirk tied to liabilities for which a company has elected to use fair value. The premise is that as a company's outlook improves and spreads on its bonds and credit default swaps tighten, it would cost more to redeem those liabilities, resulting in the recognition of a loss. Conversely, a widening of spreads would result in a gain from the CVA.

Analysts have gotten used to seeing wild swings in Citi's CVA, but they have not yet perfected the art of predicting them.

"This credit value adjustment of $1.1 billion that we took [in the fourth quarter] I think will surprise a lot of people," John Gerspach, Citi's chief financial officer, told reporters. He surmised that analysts missed an important component of the CVA.

"Most people tend to focus on the credit default swap [spreads], but the biggest movement for us during the quarter was on the cash spread, our bond spread," Gerspach said. The narrowing of the cash spread, which took the risk premium on Citi's five-year debt from around 250 basis points over Libor at the start of the quarter down to 160 basis points by the end of the quarter, was far more dramatic than the narrowing of the spread on Citi's credit derivatives, and accounted for $800 million of the $1.1 billion CVA hit, Gerspach said.

All told, Citi posted net income of $1.3 billion, or 4 cents a share. In the year-ago quarter, it lost $7.6 billion, or 33 cents a share.

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