Citi (C) made $1.3 billion, or 4 cents a share, for the fourth quarter. That reverses a year-ago loss of $7.6 billion, or 33 cents a share, but falls 4 cents short of the Wall Street analyst consensus estimate.

The bank said the latest quarter was hit by $1.1 billion of negative credit valuation adjustments as its debt spreads tightened, reflecting increasing market confidence in the bank’s health. Excluding those losses, the latest quarter’s profit would have matched estimates.

But those writedowns, an artifact of so-called mark-to-market accounting, weren’t the only sign that Citi’s recovery remains incomplete. The bank’s  revenue was $18.4 billion in the fourth quarter; Barclays Capital had predicted $20.4 billion.

Even excluding the fair value markdown, Citi’s revenue dropped 6% from a year ago to $19.5 billion, falling nearly a billion dollars short of the Barclays target.

Citi shares, which have surged more than 40% over the past year on hopes the bank will cash in on an economic recovery, slid 2% to $5 in early trading.

CEO Vikram Pandit was muted in his commentary on the quarter.

“Although the economic environment remains uncertain, our future path is clear: As America’s global bank, we’ve built a foundation capable of producing sustained profitability and our next goal is to achieve responsible growth,” said Pandit.

All told, Citi made $11 billion for 2010, after some $39 billion of losses over 2008 and 2009 that led to a massive taxpayer bailout. Treasury said last month in selling the last of its bailout-related shares that taxpayers cleared $12 billion on their assistance of Citigroup.

Citigroup recorded $6.9 billion in credit losses for the quarter, which is down 11% from the third quarter and marks its sixth straight decline. The bank released $2.3 billion of previous loan loss reserves into earnings. All told, its loan loss provision was $4.8 billion — about $600 million below the Barclays target.

Citi isn’t the only bank profiting from its bet on a continuing improvement in credit trends. Last week, JPMorgan Chase (JPM) posted a $4.8 billion fourth-quarter profit, fueled in part by the release of loan loss reserves in the bank’s credit card businesses. CEO Jamie Dimon said the bank saw the beginnings of a recovery in consumer businesses as the ranks of those late on payments thinned.

The danger for investors in both banks is that the optimism will prove premature and that a weak economic upturn will force them to add more to reserves in coming quarters, punishing profits again.