Citigroup posted a smaller-than-expected drop in profit for the third quarter as debt underwriting propped up investment banking results.

The third-largest U.S. lender's dealmakers joined rivals at JPMorgan Chase and Wells Fargo in benefiting from a rebound in capital markets as corporate clients issued more debt and equity.

Still, Citi's shares slid about 3%. They are up about 24% this year so far.

Investment banking was a bright spot for the second straight quarter, as revenue jumped 31% to $934 million. Wall Street executives are optimistic the Federal Reserve's interest-rate cut last month will pave the way for more deals and initial public offerings.

"We're particularly proud of our progress," CEO Jane Fraser told analysts on a conference call. "In a pivotal year, this quarter contains multiple proof points that we are moving in the right direction," Fraser said, citing revenue growth, including from fees.

Citi's deal pipeline remained robust, Chief Financial Officer Mark Mason said in a call with reporters. In debt capital markets, a traditional area of strength, the bank benefited from investment grade issuance as clients looked to get back into the market, he said.

Citi's operating expenses declined 2% in the third quarter.

The bank increased its allowance for credit losses by about $1.9 billion, driving down net income to $3.2 billion, or $1.51 per share. That was down from $3.5 billion, or $1.63 per share, a year earlier.

It still handily beat analysts' average expectations of $1.31 per share, according to estimates compiled by LSEG.

In terms of consumer behavior, those on lower incomes are facing pressures, while middle-income clients are being more selective with spending, Mason said. The highest-earning consumers are driving most of the spending growth, focused on experiences and essentials, he added.

"The consumer in our portfolio is really continuing to perform as expected," and have returned to seasonal patterns, Mason said.

Services revenue climbed 8% to $5 billion, fueled by a 24% surge in revenue for securities services to $1.4 billion.

A stock-market rally at the end of the quarter propelled equities trading revenue up 32% to $1.2 billion, lifting overall markets revenue 1%.

But bond trading revenue lagged, falling 6% to $3.6 billion.

In the U.S. retail banking division, revenue climbed 3% to $5 billion, buoyed by 8% growth in credit card revenue to $2.7 billion.

Meanwhile, retail banking revenues fell 8%, and in the retail services arm handling credit card partnerships, revenue slipped 1%.

In the retail services unit that houses credit card partnerships, "it's really about, how do we improve the returns, repricing and in some instances, exiting those partnerships," Mason said.

He cited good returns on a credit card launched this year with retailer Dillard's, and said the bank was looking carefully at return levels when it renews card agreements.

Its wealth management division, a key part of Fraser's growth strategy, posted revenue growth of 9% in the quarter to $2 billion. Head of wealth Andy Sieg said higher clients' investment balances drove the growth. "Our clients have $5 trillion in assets invested, mostly elsewhere, and we're starting to increase our share in it.", Sieg said in a phone interview on Tuesday.

On Friday, Bank of America's profit in the third quarter fell on the back of lower interest income. Earnings at rival JPMorgan Chase and Wells Fargo beat estimates last week, underpinned by strong consumer finances.

REGULATORY EFFORTS

Fraser has sought to grow profits, streamline the company and fix its longstanding regulatory problems.

In 2020, the Office of the Comptroller of the Currency and the Federal Reserve fined Citi $400 million and ordered the bank to fix persistent risk management and data governance failures.

The regulators again fined Citi in July for failing to make enough headway on those problems. It got some relief this month when the Fed terminated a 2013 enforcement action on the bank's anti-money laundering programs.

Several analysts questioned executives about efforts to address the consent orders. Fraser outlined the bank's progress so far and said Citi did not expect any additional regulatory measures.

Fraser said the bank has simplified its structure to increase accountability, increased investments in its data reporting, enhanced stress testing and reduced high-risk processes with bolstered controls, she said.

The bank has tasked technology head Tim Ryan to work alongside Chief Operating Officer Anand Selva in fixing longstanding data management issues. The bank has also added a section to quarterly filings to address its work on its consent orders, or regulatory penalties.

Earlier on Tuesday, Reuters reported that Citi has struggled to adequately train employees in risk, compliance and data roles, citing the bank's own assessment from December 2023.

In response to the Reuters article, Citi said it had about 13,000 people dedicated to the project to overhaul controls and systems, with thousands more supporting the effort across the bank.

"We continue to invest heavily in talent and training to ensure we have the right people and expertise in critical areas such as data, risk, controls and compliance,” the bank said.

On Tuesday after releasing earnings, CFO Mason said, "We are still hiring, particularly in areas around transformation and around risk and controls to ensure we've got the appropriate level of resources to get after those things the way we need to."

Shares have gained 24% so far this year, including session moves, while an index tracking large-cap banks is up 28% and the S&P 500 index has climbed 23% over the same period.

(Reporting by Tatiana Bautzer in New York and Manya Saini in Bengaluru, editing by Lananh Nguyen and Devika Syamnath)