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Updated from 2:52 p.m. EDT



shares fell as much as 11% on Friday after the company said that it planned to delay the conversion of the U.S. Treasury's preferred stake to common shares until after the stress tests were completed.

The news came as the New York-based institution reported first-quarter results that amounted to a narrower-than-expected loss of 18 cents a share, due to the conversion of convertible preferred stock issued last year into common shares.

The bank reported net income of $1.6 billion and net revenue of $24.8 billion, thanks to strong trading activity in its investment bank. But the results were diluted on the conversion of $12.5 billion convertible preferred stock issued in a private offering in January 2008. The new stock reduced income available to common shareholders by $1.3 billion, or 24 cents a share. Dividends paid to preferred shareholders also cut into income available to common shareholders by $1.3 billion.

Analysts polled by Thomson Reuters had expected a loss of 34 cents a share on revenue of $21.94 billion.

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Citigroup reported a loss of $5 billion, or $1.03 a share, in the same period a year earlier.

The company said in a separate release that it continues to finalize its documentation for the U.S. government to convert up to $25 billion of its preferred stake to common shares and the firm is working to complete customary

Securities and Exchange Commission

review process with respect to the exchange offers announced in late February.

Still, in light of the government

stress tests

, Citi said that it would not launch the exchange offers until after the tests were completed.

Citi said it plans to continue paying dividends on its preferred shares until the closing of the offers. The firm reiterated its intention not to pay dividends on its common stock during this period. Citi said at the time of the exchange offer in late February that it would suspend dividends on all preferred and common stock shares, except trust preferred shares. It reiterated that it has no plans to suspend distributions on its trust preferred securities, the company said.

Citi shares, which rose before the market opened, fell all day and closed down 9% to $3.65 as shorts rushed in to cover their positions in a popular

arbitrage strategy


Investors seemed to be concerned on the delay of the preferred exchange rather than fundamentals, says Goldman Sachs analyst Richard Ramsden.

"With the cost to borrow at phenomenally high levels, time is money, and further delaying the exchange until after the stress test would squeeze investors who are arbitraging the preferred versus the common," he writes in a note. "Moreover, there will be questions about Citi's commitment to the exchange on the announced terms -- given that this plan was announced two months ago, and that the stress test pre-dated the preferred swap, why does it need to be delayed?"

But during the company's conference call, new CFO Edward 'Ned' Kelly briefly said that since the stress test is of "great interest to the market," the reason for the delay is "to allow for the digestion of information" coming from the stress tests. He said investors should not be concerned of Citi's commitment to the offer. He declined to discuss the stress test further.

The company reported its Tier 1 capital ratio rose to about 11.8% at the end of the quarter, compared with 7.7% in the first quarter of 2008.


decline in the U.S. economy

continued to pressure Citi's earnings as well. Its credit costs were 76% higher than the prior year's quarter -- at $10 billion -- because of $7.3 billion in loan losses and a $2.7 billion increase in reserves for future losses.

The firm's losses were primarily related to its U.S. consumer banking, credit card and securities and banking businesses, it said. About $754 million of its reserve position was due to its overall credit card business and securities and banking businesses as the global economy declines.

Citi said its total allowance for loans and leases and unfunded lending commitments was $32.7 billion.

Analysts remained concerned about the company's exposure to the consumer and that its loan loss reserves did not increase as much as expected.


The consumer charge-off ratio increased to 4.64% -- worse than most peers' -- in the first quarter, compared to 3.93% in fourth-quarter 2008," Standard & Poor's analysts write in a note. "Citi made $2.7 billion of net additions to loan-loss reserves, bringing overall reserve coverage to 4.82%. We assume further significant reserve additions will be necessary for at least the next year."

"Citi beat our estimates and the street, but earnings were still negative for the quarter," Morgan Stanley analyst Betsy Graseck wrote in an early note. "While credit costs came in below forecast (reported net charge-offs were $7.3 billion, vs. our forecast of $7.6 billion), nonperforming loans continue to increase, signaling higher losses to come."

Large-cap rivals

JPMorgan Chase



Wells Fargo


posted solid results, despite the deepening of a consumer-led recession.

Bank of America


reports earnings on Monday.

Still JPMorgan Chase's

consumer credit costs

spiked in the first quarter as the economy worsened.

"It's reasonable to expect additional increases to credit reserves if the economic environment worsens," CEO Jamie Dimon said in an earnings statement on Thursday.

Citi has been shedding businesses in order to pare back expenses and making progress in overhauling its board, now with the government as its largest shareholder. The company noted it had closed the sale of its Latin American credit card operation Redecard for an after-tax gain of $704 million in the quarter.

The company is rumored to be pursuing a sale of its Japanese brokerage operations Nikko Cordial. Media reports pegged Japan's top three banks including

Mitsubishi UFJ Financial



Sumitomo Mitsui Financial


Mizuho Financial


involved in a bidding war for the business. More recently speculation has increased that Citi was considering adding other Japanese operations to the deal.

Citi CEO Vikram Pandit said in early March that the firm was so far profitable and having its best quarter to date since the third quarter of 2007.

Pandit said in a statement Friday that he was "pleased" with Citigroup's performance.

"While we and the industry face challenges in the coming quarters as we work through the weak economy, we will remain focused on strengthening the Citi franchise," he said. "We will continue to reduce our legacy risk, aggressively manage expenses and improve efficiency."

Michael Gannon and the Associated Press contributed to this report.