Updates with stock reaction, CEO and CFO quotes from earnings call

By Utkarsh Shetti and Tatiana Bautzer

July 14 (Reuters) - Citigroup C.N beat Wall Street estimates as it reported surging trading revenues but its stock slid as investors worried about potentially worse results in the second half due to a rise in expenses.

Citi shares were down 4.2% in early afternoon, even after the bank reported the highest quarterly revenue in a decade and sharp growth in net income.

The bank's stock had been outperforming peers and reducing its valuation gap as investors saw progress in a sweeping restructuring devised and executed by CEO Jane Fraser. The bank had been reaping results after years of divestitures of its international consumer units, organizational simplification and work on consent orders that punished the bank in 2020 for lack of controls and risk management.

The bank had a 13% return on common tangible equity in the second quarter, a level that Citi was only expecting to reach in 2027 or 2028. But after the bank said it was keeping its 10% to 11% target for this year, investors were confused.

Analysts such as Wells Fargo's Mike Mayo and Bank of America's Ebrahim Poonawala questioned on the earnings call if that meant that Citi was expecting a worse second half of the year and mentioned the stock's fall. Fraser said the bank is considering whether to 'pull forward' some investments that were planned for the medium term.

Citi faced numerous questions on the call about its forecast for expenses. Fraser said many of those expenses were explained during the bank's investor day last May, but added she is not planning any large acquisition.

Citi reported the highest quarterly revenue in a decade in the second quarter, led by gains from robust trading in a volatile market and higher investment banking fees.

The U.S.-Iran war has rattled global markets and driven sharp moves in oil prices and other assets, leading investors to rejig their portfolios and adjust risk exposure. Volatile markets typically help lift trading revenues at big banks.

Lighter regulation under the Trump administration has bolstered confidence among executives to pursue acquisitions, while the scramble for AI-related assets has added momentum to dealmaking activity.

Global M&A volumes have already surpassed $3 trillion this year, with Citi advising on deals worth over $300 billion, per Dealogic data. In the second quarter, Citi was among the underwriters of SpaceX's record-breaking $75 billion IPO and advised the $44.8 billion combination of Unilever and McCormick's food businesses.

Its revenues from investment banking jumped 44% in the quarter to $1.55 billion. Total banking revenues rose 34% to $1.92 billion, despite a 4% fall in corporate lending revenue.

"Clients pivoted towards equity and debt capital markets," Chief Financial Officer Gonzalo Luchetti told reporters. Luchetti said the escalation in the Middle East conflict has yet to hit deal pipelines.

MARKETS A BRIGHT SPOT

Trading desks across Wall Street have been reaping bumper revenues from the volatility, which has also extended to a highly lucrative AI-trade that has seen stocks rallying this year.

Citi's revenue in equities and fixed-income markets jumped 45% and 7%, respectively, from a year earlier. Rates and currency trading rose 1%, while other fixed income revenue, which includes commodities, came in 25% higher.

The bank reports results alongside the largest U.S. lenders on Tuesday, whose earnings offer a window into the health of the economy. JPMorgan JPM.N, Goldman Sachs GS.N, Wells Fargo WFC.N and Bank of America BAC.N reported strong quarters with a jump in profit across the board.

OVERHAUL IN FOCUS

CEO Jane Fraser is trying to show investors the sweeping overhaul she has led to slim down the bank through the sale of consumer businesses, management structure simplification and regulatory fixes. Net income jumped 45% jump in net income to $5.8 billion, or $3.15 per share. Analysts on average expected it to report a profit of $2.74 per share, according to data compiled by LSEG.

Its revenue was $24.8 billion, up 14% from a year earlier, also above Wall Street expectations.

ROBUST INTEREST INCOME

The U.S. consumer has remained remarkably resilient despite elevated borrowing costs, supported by a still-solid labor market and wage growth, though spending patterns have become increasingly divided as lower-income households face rising living costs.

The cards division's revenue rose by 1% but net income was up 12% to $852 million. Citi's overall net interest income, the difference between what it earns on loans and pays out on deposits, rose 13% in the quarter.

SPOTLIGHT ON WEALTH MANAGEMENT

Citi has been trying to grow its wealth management business to emulate Wall Street peers that lean on its steadier, fee-based revenue compared with the volatility of trading.

The unit raked in $3.18 billion in revenue in the quarter, 13% above a year earlier, thanks to a broad recovery in markets that has pushed up asset values. It posted a 14.4% ROTCE, still substantially lower than peers.