* Adjusted EPS $1.00 vs Street view 89 cents * Net income falls 12 pct to $2.946 bln * Citi Holdings assets down 28 pct to $191 bln * Citi Holdings losses widen to $920 mln * Shares rise 0.6 percent By David Henry July 16 (Reuters) - Citigroup Inc said on Monday quarterly earnings fell 12 percent as it was stung by losses from credit crisis-era assets, but the bank's results were better than many analysts expected after cost-cutting. The third largest U.S. bank is still feeling pain from Citi Holdings, a unit set up in 2009 to house assets and businesses it was looking to shed after the 2007-2008 credit crunch forced multiple U.S. government rescues. Citi Holdings' losses widened to $920 million in the second quarter from $661 million in the same period a year earlier. Even though the U.S. government has exited nearly all its Citigroup investments, the bank is still dealing with bad assets from the credit crunch and struggling to grow. In March, Citigroup was one of the few major banks to have regulators reject its plans for returning capital to shareholders. On Monday, Chief Executive Vikram Pandit said he was not sure what he would ask regulators for when the bank files its 2013 capital plan with the Federal Reserve. The bank's results on Monday echoed themes from reports on Friday by JPMorgan Chase & Co, the biggest U.S. bank, and Wells Fargo & Co, the fourth-biggest. All three beat analyst estimates with help from cost-cutting, stronger mortgage businesses and better consumer delinquency rates, even as their profit margins came under pressure from low interest rates. Banks' reliance on cost cutting worries some investors. Citicorp, the Citigroup unit that houses its continuing businesses, posted a 6 percent increase in net income, with gains coming mainly from cost cutting and setting aside less money for bad loans. "The problem is they have no justifiable way to grow," said Jeff Sica, president of Sica Wealth Management in Morristown, New Jersey. Citicorp's assets grew just 1 percent in the period, although some areas, like commercial loans, posted better growth. Income in the bank's main retail unit fell 1 percent from the same quarter last year, with revenue barely changed. In a slow economy Citigroup will struggle to do anything more than slowly heal itself, said Allerton Smith, senior director of fixed-income capital markets research at Moody's Analytics. "It's hard for them and all big banks to find good loans," Smith said. Meanwhile, assets that the bank is looking to shed are still painful. Citigroup is not cutting costs in Citi Holdings as fast as revenues are dropping -- operating expenses fell 25 percent but revenue tumbled 62 percent. On a conference call with journalists, Chief Financial Officer John Gerspach said Citi Holdings' costs fell in line with its assets, which were down about 28 percent from the same quarter last year -- reaching $191 billion at the end of June 2012. In 2009, when the bank first posted results for Citi Holdings, the unit had about $650 billion of assets. Reducing assets in Citi Holdings improved the company's capital ratios under new Basel III requirements, Gerspach said. Unloading more of those assets should improve the bank's chances of winning permission from regulators to return capital to investors through share buybacks, but Gerspach declined to predict how long that will take. Another factor that could help capital ratios is the bank's expectation that it will sell a 14 percent stake in its brokerage joint-venture Morgan Stanley Smith Barney to Morgan Stanley in September, Gerspach said. The two sides were to exchange proposals later on Monday for the sale price. Gerspach said the prices would be so far apart that outside appraisals would have to be used to complete the transaction. The executives refused to provide details on government investigations of bank lending rates, such as LIBOR, although Pandit did caution that not every bank submitted bogus rates for Libor. Nor would Citigroup assess the impact on future revenues of Friday's settlement of lawsuits by merchants over credit card processing fees. Being more efficient Even with widening losses in Citi Holdings, the bank performed better than analysts estimated. Cost cutting helped, most notably in Citicorp's investment bank -- where it cut out $322 million of expenses, allowing the investment bank's net income to rise 18 percent to $1.402 billion. Citigroup has been laying off staff in its investment bank for three quarters or so, Gerspach said. There could be more layoffs in coming quarters, although they will not likely be significant, he added. "These are reductions that are geared towards just making sure we've got the capacity right and making sure we're the most efficient organization that we can be," he told reporters. Overall net income fell to $2.946 billion, or 95 cents per share, from $3.34 billion, or $1.09 a share, in the same quarter a year earlier. Overall operating expenses fell 6 percent to $12.13 billion. The results included a $424 million loss from the sale of a 10.1 percent stake in Akbank TAS of Turkey and a $219 million gain from changes in the market value of its own debt and that of certain trading partners. Excluding the debt accounting adjustments and the Turkish bank stake sale, earnings were $1.00 per share while net income was 1 percent lower than a year earlier. Analysts, on average, expected earnings of 89 cents per share, excluding special items, according to Thomson Reuters I/B/E/S. Citigroup shares rose 0.6 percent to $26.81 at the close of New York Stock Exchange trading. The price is only about half as much as the tangible book value per share of $50.90 that the company reported, based on the difference between its tangible assets and its liabilities. Reflecting the bank's struggles, this year Citigroup stock is up 1.9 percent, compared with a 7.9 percent rise in Standard & Poor's 500 stock index and a 16.4 percent rise in the KBW Bank stock index.