By Tatiana Bautzer and Manya Saini

(Reuters) -Citigroup cut its closely watched profitability target in 2026 as it tackles rising regulatory expenses and, at the same time, announced a $20 billion share buyback program.

Citigroup beat estimates for fourth-quarter profit, fueled by strength in trading and dealmaking, sending shares of the third-largest U.S. lender up 7.4% in afternoon trading on Wednesday.

"2024 was a critical year and our results show our strategy is delivering as intended and driving stronger performance in our businesses," Citi CEO Jane Fraser said in a statement.

But the bank lowered its target for return on tangible common equity (ROTCE) for next year to a range of 10% to 11% from a 11% to 12%. Fraser described the new target as "a waypoint, not a destination."

The bank is investing more to address its compliance issues, Chief Financial Officer Mark Mason told reporters, referring to regulatory penalties for risk management and data governance.

"We saw the need to invest more in the transformation on data, on technology, on improving the quality of the information coming out of our regulatory reporting," he said.

In 2020, the Office of the Comptroller of the Currency and the Federal Reserve fined Citi $400 million for some risk and data failures. Last year in July, regulators fined Citi $136 million for insufficient progress in tackling those issues.

Citi's board approved a $20 billion stock buyback program, authorizing management to buy back up to $1.5 billion during the first quarter of 2025. The bank did not provide a timeline for additional purchases. The size of the repurchase program is a "show of force" by the bank, Piper Sander analyst Scott Siefers in a note to clients.

TRADING, INVESTMENT BANKING

Citi reported a net income of $2.9 billion, or $1.34 per share, for the three months ended Dec. 31, compared to a $1.8 billion loss a year earlier. Total revenue rose to $19.6 billion, compared with $17.4 billion a year earlier.

On an adjusted basis, Citi reported a profit of $1.34 per share in the fourth quarter, compared with analysts' average estimate of $1.22, according to data compiled by LSEG.

Trading desks benefited from a steep increases in U.S. equities, with the S&P 500 touching record-high levels in the fourth quarter. Markets revenue at Citi jumped 36% to $4.6 billion in the quarter, with fixed income and equity markets revenue spiking 37% and 34%, respectively.

Wall Street's dealmakers have also cashed in on a revival in mergers, acquisitions and initial public offerings after an almost three-year dry spell. Banks' capital markets businesses got a boost in the second half of 2024 as corporate clients issued more debt and equity. Citi's investment banking revenue rose 35% to $925 million in the fourth quarter.

Global investment banking revenue jumped 26% in 2024 to $86.8 billion, according to data from Dealogic. Citi earned the fifth-highest fees across banks, over the same period.

Mason said corporate clients are active and he expects an uptick in dealmaking.

"The sentiment globally is largely positive," he said, adding that clients are optimistic despite policy uncertainty from the incoming U.S. presidential administration. Overall banking revenue came in at $1.2 billion, up 27% from a year earlier.

Citi's stock surged 37% in 2024, outperforming the broader banking index and the equity markets, as investors cheered CEO Jane Fraser's efforts to transform the bank.

Fraser laid out a plan in late 2023 to grow profits, streamline operations and fix long-standing deficiencies in the bank's risk management and data governance, and much of the reorganization was carried out through last year.

The bank said it still expects to list its Mexican unit Banamex on Mexico's and U.S. stock exchanges this year, but regulatory approvals and market conditions may delay the transaction to 2026, Fraser told analysts. The bank concluded in December the separation of banking companies that was needed for the listing.

Revenue in Citi's wealth management division, a key part of Fraser's growth strategy, climbed 20% to $2 billion.

(Reporting by Tatiana Bautzer in New York and Manya Saini in Bengaluru; Editing by Lananh Nguyen, Shinjini Ganguli; Nick Zieminski and Anna Driver)