April 14 (Reuters) - Citigroup's ( C ) first-quarter profit rose 42% as geopolitical tensions fueled market volatility and trading revenue, while strong dealmaking buoyed investment banking fees.

Trading desks benefited from heightened volatility across asset classes as the U.S.-Israeli war on Iran escalated tensions in the Middle East and obstructed oil shipping through the Strait of Hormuz, while concerns over AI-driven disruption triggered a sell-off in software stocks. The rebalancing of portfolios by clients and sharp price swings boost trading volumes.

Profit increased to $5.8 billion, or $3.06 per share, in the three months ended March 31, the third-largest U.S. lender reported on Tuesday. This compares with $4.1 billion, or $1.96 per share, a year earlier.

Shares of the bank rose about 1.3% in premarket trading after the results.

Citi beat its target for profitability in the first quarter, posting a 13.1% return over tangible common equity. The bank is aiming at 10% to 11% return for the full year.

"We remain very much on track to deliver the 10-11% RoTCE target this year," said CEO Jane Fraser in a statement.

Its results come after Goldman Sachs kicked off the earnings season for banks on Monday, beating expectations for quarterly profit, driven by strength in dealmaking and equities trading.

The largest U.S. lender, JPMorgan Chase ( JPM ) and Wells Fargo ( WFC ) beat estimates for first-quarter profit on Tuesday. Bank of America and Morgan Stanley will report on Wednesday, April 15.

Citi reported its highest quarterly revenue in a decade, $24.6 billion, boosted by market volatility during the first quarter which increased its total markets revenue by 19% over a year earlier to $7.2 billion.

Revenue in equities trading rose 39%, fixed income trading revenue was up 13% over a year earlier, rates and currencies revenue rose 6% and other fixed income rose 27%, driven by strong performance in commodities.

DEALS HOLD UP

Hot dealmaking activity by the investment bank increased Citigroup's ( C ) banking division revenue by 15% in the quarter. Fees in equity underwriting rose 64% and in M&A advisory, 19%. Fees with fixed income underwriting fell 6%.

Prolonged geopolitical uncertainty did not have a big effect on transactions in the first quarter, but may weigh on dealmaking and derail the strong momentum.

Industry-wide investment banking revenue rose nearly 14% to about $28.2 billion in the first quarter, according to Dealogic. Citigroup ( C ) ranked fifth by fees among global banks during the period.

"We've entered into the final phase of our divestitures and 90% of our transformation programs are now at or near our target state. We demonstrated our commitment to returning capital by repurchasing $6.3 billion shares during the quarter," said Fraser.

INTEREST INCOME RISES

Net interest income, the difference between what a bank earns on loans and pays out on deposits, rose 12%.

The wealth management and retail banking division had 11% growth in revenue, adjusting for the transfer of assets Citi did over the last 12 months. The division had the lowest return within the bank, 10.8% over tangible common equity.

Shares of Citigroup ( C ) have risen 104.9% over the past 12 months, outperforming Wall Street peers and the KBW bank index, as progress in its turnaround under CEO Jane Fraser boosted investor confidence. Citi's valuation still lags peers.