NEW YORK, April 9 (Reuters) - Citigroup ( C/PN ) investors

have rewarded CEO Jane Fraser with a share price boost after

Fraser announced a sweeping overhaul of Citi's sprawling

structure in September, cutting costs by laying off 5,000

employees. Next, they want to see growth in wealth management

and investment banking.

Wall Street investors have welcomed Fraser's overhaul, but

warned the CEO has major challenges ahead to boost returns and

catch up with rivals, including regulatory problems, lackluster

earnings and an unsettled workforce.

"If this was a chess game, I would say the opening phase is

over, and now the middle phase begins," said Peter Nerby, an

analyst at ratings agency Moody's.

Citi's stock is so depressed that it is hard to lose money

betting on it, said Daniel Babkes, portfolio manager at Pzena

Investment Management, which manages more than $60 billion and

owns Citi shares.

"We are confident the bank can control expenses after the

reorganization," and it has strong growth prospects in corporate

banking, he said.

Citigroup ( C/PN ) shares rose 49% since it announced the overhaul in

mid-September, outpacing a 26% climb for the KBW bank index. The

bank's stock trades at 0.57 of book value, a measure of

performance that falls short of JPMorgan Chase's ( JPM ) 1.73 or

Bank of America's ( BAC ) 1.1.

But the company's turnaround efforts also caused internal

turmoil. Workers avoided signing up to long-term projects during

the six-month reorganization because they were unsure if they

would be laid off, said a source who declined to be identified

discussing personnel matters.

The process was lengthy because it affected many levels of

the organization, said a separate source close to the company.

The outlook for Citi is improving because of its job cuts,

the quality of its loan portfolio and its reduced exposure to

paper losses on securities, said Ian Lapey, a portfolio manager

at Gabelli Funds, which oversees $30 billion and owns Citi

shares.

Citigroup's ( C/PN ) reshuffle represents an inflection point that

will increase its efficiency, said Hunter Doble, a portfolio

manager at Hotchkis & Wiley, which has $31 billion under

management and owns shares of Citi.

Meeting the bank's target of 11% to 12% return on tangible

equity would fuel big jump in the stock, given that its current

profitability is much lower and will get closer to industry

peers, Doble said.

Citi will report its first quarter earnings on April 12 and

hold a virtual shareholders meeting on April 30. It lost $1.8

billion in the fourth quarter after taking several one-off

charges that included losses with currency devaluation in

Argentina and higher contributions to the FDIC, that ensures

deposits.

The lender's biggest challenges are improving profits in

banking and wealth management, according to Nerby at Moody's.

CHALLENGES AHEAD

In an effort to boost performance, Fraser recently hired two

prominent executives to run the divisions: Viswas Raghavan,

former head of global investment banking at JPMorgan ( JPM ), and Andy

Sieg, who previously led Bank of America's ( BAC ) Merrill Wealth

Management unit.

The recruitment of highly-compensated executives was a snub

to internal talent and detrimental to morale as employees were

going through waves of layoffs, said the first source and

another two people who also declined to be identified discussing

personnel matters.

In September, Fraser acknowledged the morale issue,

saying the moves would not be "be universally popular within our

bank," but added that "our strongest performers are going to be

fully supportive of these moves, and it is absolutely the right

thing to do for our shareholders."

"Outsiders are what Citigroup ( C/PN ) needs now to really bring

change," said Bank of America ( BAC ) analyst Ebrahim Poonawala.

Fraser has said Citi will leverage its relationships with

the world's largest corporations to boost revenue in investment

banking and wealth management. She also plans to drive more

growth through a newly-created division focused on client

service. Still, analysts are awaiting more details on the

strategy for the key units.

Another area of focus is Citigroup's ( C/PN ) U.S. consumer business,

which is much smaller than rivals'. Retail deposits only account

for $105 billion of the company's total $1.3 trillion in

deposits, with corporate deposits making up the bulk of the

remainder. By contrast, JPMorgan Chase ( JPM ) and Bank of

America ( BAC ) each have $1 trillion or more in consumer

deposits.

The U.S. retail business is a drag on returns, finance chief

Mark Mason told investors in February when asked about the

bank's strategy, saying the bank has less than 700 branches.

Competitors have much larger networks.

When asked for comment about its plans in consumer banking,

Citi spokespeople referred Reuters to executives' earlier

statements on its goals: To grow in the six U.S. metropolitan

areas where it has more branches, boost digital channels and

prudently grow mortgages.

Overseas, Fraser has made progress on her commitment two

years ago to exit from 14 markets. Citi has completed sales of

nine businesses in Asia, including in Taiwan, Philippines,

Malaysia, India and Indonesia. The bank is also winding down

businesses in China, Korea and Russia, and will try to sell its

Polish bank and carry out an initial public offering for its

Mexican business next year.

Citi will showcase its services division -- which Fraser

refers to as the company's crown jewel -- at a June 18 event for

investors. The unit, which provides cash management, clearing

and payments services for the world's biggest corporations,

reported record revenue of $18.1 billion last year. The business

is helped by Citi's vast global presence in 95 countries.

As Citi proceeds with divestitures in international retail,

services will account for a bigger chunk of its future profits,

said Lapey at Gabelli funds.

"Despite disappointing earnings over the last couple of

years, the company appears to be well positioned now," he said.