Can Citigroup continue to lift the stock market?

Stock soared Tuesday after Citi Chief Vikram Pandit said the bank was profitable in the first 2 months of 2009.

Citi is arguably the nation's sickest large bank,and any sign it can produce real earnings in this economic. What's more, if on road to profitability, there is a greater chance the government's bank-sector revival plan -- involving stress tests and possible equity injections -- will get financial firms through the downturn.

It is worth Mr. Pandit's comments. "We are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007," he said in a memo to employees Monday. A Citi spokeswoman said Mr. Pandit's measure of profits was net income, according to generally accepted accounting principles. In other words, Citi was profitable even after all its expenses, including write-downs and provisions for credit losses in the period, which are expected to be large...

Investors should treat the profit announcement carefully. First, Citi has assessed profitability for an arbitrary time period. Often banks don't know their true expenses until the end of a quarter. And the two-month profit is hard to square with analyst expectations that Citi will lose 32 cents a share in the first quarter, according to Thomson Financial.

It is possible that Citi's two-month net income got a boost from a low-quality source -- gains from marking up the value of its own debt as credit-default swaps on the bank reflected heightened fear.

Second, the timing of Mr. Pandit's comments looks opportune. His memo came the day after Sen. Richard Shelby of Alabama, the ranking Republican on the Senate banking committee, called Citi a "problem child." With the promise of profits, it might start to look less problematic on Capitol Hill and damp calls for more drastic approaches to the banks.

While investor caution is clearly warranted, it is possible to become too pessimistic about Citi's survival prospects -- especially when the Obama administration appears committed to drip-feeding banks with enough equity to get by.

Citi enjoys a government loss-sharing agreement on just more than $310 billion of assets. It also, like other large banks, stands to receive government equity injections if stress tests, currently being conducted, require it. And that equity will be issued at a preset share price well above current levels.

Bank stocks enjoyed a sharp relief rally Tuesday. But the worst-case scenario is still possible for the government -- that losses in the banking sector become so large that it is forced to take over several large institutions because their capital needs become too great. To dispel that fear, banks actually need to start reporting some stronger results.