By Saabira Chaudhuri And Christina Rexrode 

Bank of America Corp. and Citigroup Inc. disappointed investors with falling earnings that landed short of Wall Street's diminished expectations.

Bank of America, the nation's second-largest lender by assets, reported Thursday that its fourth-quarter profit sank 11% as the banking giant was hit by a slump in trading and the continued effects of low interest rates.

An hour later, Citigroup reported that its fourth-quarter profit plunged 86% as the New York bank was afflicted by the same slow trading environment and was also hit with a $3.5 billion legal and repositioning charge.

Both banks' earnings-per-share fell short of analyst expectations, Bank of America by six cents and Citigroup by three. Bank of America shares fell 3.4% in morning trading, the most of the big banks Thursday, while Citigroup fell 2.5%.

With the latest bank earnings Thursday morning, three of the four largest big U.S. banks have now reported earnings that fell short of analysts' expectations, measured by Thomson Reuters.

Only Wells Fargo & Co., which doesn't have a trading business, met earnings expectations with its fourth-quarter report this week.

J.P. Morgan Chase & Co. reported earnings that fell 6% and came in 11 cents lighter than analysts expected, prompting Chairman and Chief Executive James Dimon to defend his company's big-bank business model in front of analysts Wednesday morning.

The difficult quarter for banks reflects a confluence of headwinds: elevated legal costs largely due to a continuing investigation into foreign exchange trading at Citigroup and J.P. Morgan, the effects of low interest rates hitting a debt portfolio at Bank of America and a sluggish trading environment for fixed-income, currency and commodities, or FICC, divisions at all three banks.

It's a "weak environment for revenues," noted Morgan Stanley analyst Betsy Graseck in a research note Thursday morning.

She noted Bank of America is executing well on keeping costs down, but that many things on the revenue side are outside of banks' control. In future quarters, weaker revenue are likely to be offset by lower expenses, she added.

Wells Fargo, by contrast, was criticized by some analysts this week for not slashing costs further. The San Francisco lender, the largest by market value in the U.S., said spending was rising on things like incentive compensation and cybersecurity and compliance spending. It also said it couldn't guarantee it would be able to cut much in future quarters, given the need to invest in the business.

Shares of Wells Fargo, long a stock-market darling among banks, are down about 4% this week through early afternoon trading Thursday, compared with a 7% drop at J.P. Morgan, a 9% fall at Bank of America and a 6% fall at Citigroup. Goldman Sachs, which has declined about 4%, reports earnings Friday. Morgan Stanley, down 6% on the week, reports earnings Tuesday after the Monday holiday in the U.S.

Charlotte, N.C.-based Bank of America reported a profit of $3.05 billion, or 25 cents a share, down from $3.44 billion, or 29 cents a share, a year earlier. Analysts polled by Thomson Reuters had expected per-share earnings of 31 cents.

Revenue fell 13% to $18.73 billion, or to $18.96 billion on a tax equivalent basis, which is comparable with analyst estimates. Analysts had expected $20.94 billion.

Meanwhile, litigation expense fell sharply, to $393 million from $2.3 billion a year earlier.

Citigroup reported a profit of $350 million, which includes $3.5 billion in legal and repositioning charges, compared with a year-earlier profit of $2.46 billion. On a per-share basis, Citigroup reported a profit of six cents. Analysts had expected earnings of nine cents a share including the charges.

The bulk of the $3.5 billion in legal and repositioning costs came from legal costs. The bank had already warned last month that it would spend that amount, though it ended up spending more than expected on legal costs and less on repositioning costs.

The bank said it set aside $2.85 billion for legal expenses, after Mr. Corbat said last month that the bank would set aside $2.7 billion.

The bank also set aside $655 million for repositioning costs, less than the $800 million that Mr. Corbat said last month that the bank would spend.

In only one other quarter under Mr. Corbat's watch has the bank spent more on legal expenses: the second quarter of this year, when the bank paid for its $7 billion settlement with the Justice Department. In the same period a year ago, Citigroup set aside $809 million for legal fees.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com and Christina Rexrode at christina.rexrode@wsj.com

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