Citigroup today posted a lower than expected quarterly profit as cost cuts failed to make up for a drop in fixed-income revenue.

The third-largest US bank said its fixed-income revenue fell 15.5% to $2.33 billion in the fourth quarter, in what it called a "challenging trading environment."

Rising bond yields are cutting into demand for issuing debt as investors prepare for higher interest rates, a shift that has affected trading, underwriting and investment income for Wall Street banks.

Citigroup's fourth-quarter adjusted net income rose to $2.60 billion, or 82 cents per share, from $2.15 billion, or 69 cents per share, a year earlier, the bank said.

Analysts on average expected earnings of 95 cents per share, according to Thomson Reuters I/B/E/S. The average estimate came down 10 cents in the last two weeks, partly in expectation of weak fixed-income market revenue.

"Although we didn't finish the year as strongly as we would have liked, we made substantial progress toward our key priorities in 2013," chief executive Michael Corbat said in a statement.

Citigroup's latest quarterly report included the first full-year results under Corbat, who was appointed to the job in October 2012 after directors pushed out Vikram Pandit.

Pandit held the post as the company restructured under heavy federal government ownership after the financial crisis

The bank said that its fourth-quarter operating expenses declined 6% to $11.93 billion, on an adjusted basis.

Revenue fell 2% to $17.94 billion by the same measure, as US mortgage loan refinancing volumes declined.

Citigroup drew down loan loss reserves by $670m, compared with $91m a year earlier.

Its investment banking revenue rose 3% to $1.04 billion, helped by a rebound in the stock market.

Citigroup's operating expenses in the quarter included $809m in legal and related expenses, down from $1.3 billion a year earlier, as the bank worked to leave behind legal troubles that stemmed mainly from the mortgage crisis.

But its legal troubles might not be over. A source told Reuters today that US regulators sent investigators to its London headquarters as part of an international investigation into alleged manipulation of the global currency market.

Citigroup said last night that it is selling mortgage servicing rights of $10.3 billion Fannie Mae residential first mortgage loans as it looks to reduce assets and expenses within its Citi Holdings division.

Citi Holdings houses the portfolio of troubled mortgage assets the bank is winding down after they led to huge losses since the financial crisis.

Citi Holdings' assets, which totaled $117 billion, or about 6% of the company's total assets at the end of December, have long been a drag on the company, tying up capital and generating losses. They once accounted for about 40% of total assets.

While Corbat has said that dealing with Citi Holdings is a priority, he has warned that there is no practical way to quickly get rid of the rest of those troubled assets.