Bank of America profit falls 41 pct but tops views

NEW YORK (Reuters) - Bank of America Corp (BAC.N) reported quarterly profit on Monday that fell less than expected on record revenue, boosting the shares of the largest U.S. retail bank and mortgage lender, despite a surge in bad loans.

The bank became the fourth of the nation's five largest to top quarterly earnings forecasts, joining Citigroup Inc (C.N), JPMorgan Chase & Co (JPM.N) and Wells Fargo & Co (WFC.N).

Profit at Bank of America fell 41 percent, the fourth straight quarterly decline, as the bank more than tripled its reserve for loan losses because of falling home prices and a weak economy.

Offsetting this was a higher lending margin, near-record investment banking income and a $357 million trading profit, following $8.55 billion of trading losses in the prior three quarters.

"It suggests the credit crisis isn't as bad as people thought" for lenders, said Steve Roukis, managing director at Matrix Asset Advisors Inc in New York, which invests $1.4 billion. "A week ago there was tremendous fear about systematic risk to the system. There's definitely a floor here."

Second-quarter net income for Charlotte, North Carolina- based Bank of America fell to $3.41 billion, or 72 cents per share, from $5.76 billion, or $1.28, a year earlier.

Excluding merger costs, profit was 75 cents per share. On that basis, analysts expected 48 cents per share, according to Reuters Estimates. Revenue increased 4 percent to $20.32 billion, topping the average $18.26 billion forecast.

Bank of America also said its July 1 purchase of Countrywide Financial Corp, once the largest mortgage lenders, will add to profit in 2008, sooner than expected, and result in $900 million of cost savings, $230 million more than expected.

Countrywide lost $2.33 billion in the quarter, including about $3.7 billion of credit-related write-downs and losses, Bank of America said. About 7,500 jobs, or 3 percent, will be eliminated from the combined companies, the bank has said.

Bank of America set aside $5.83 billion for bad loans, up from $1.81 billion a year earlier, largely for home equity, residential mortgage and homebuilding exposure.

The provision was nearly as large as the first quarter's $6.01 billion. Net charge-offs more than doubled from a year earlier to $3.62 billion from $1.5 billion.

"NOT IN DENIAL" ABOUT CREDIT

Chief Executive Kenneth Lewis said on a conference call "we do not yet see the economy slipping into prolonged recession," but that "sluggishness" will persist through year end.

"We are not in denial," he said. "Credit losses are still going up."

He plans to maintain the bank's 64 cents per share quarterly dividend, dampening fears of a cut, but ending 30 straight years of increases.

In afternoon trading, Bank of America shares rose $1.90, or 6.9 percent, to $29.31 on the New York Stock Exchange. The shares bottomed at $18.44 on July 15.

Chief Financial Officer Joe Price said another $12 billion to $13 billion of Countrywide loan write-downs are possible, equal to about one-sixth of the loan book and toward the higher end of what the bank expected.

Price also said Bank of America does not now intend to guarantee billions of dollars of public Countrywide debt, although in an interview he said, "our current thinking is susceptible to change all the way through payoff."

The cost to insure Countrywide Home Loans debt rose to 2.35 percentage points, or $235,000 per year for five years to insure $10 million in debt, from 2.2 percentage points, according to Phoenix Partners Group.

Bank of America is the nation's second-largest bank by assets, including the acquisition of Countrywide, which was based in Calabasas, California.

Citigroup, the largest bank by assets, posted a milder-than-expected $2.5 billion quarterly loss on Friday. JPMorgan and Wells Fargo, the third- and fifth-largest banks, said profit fell a respective 53 percent and 23 percent.

"The key word is improvement," said Matt McCall, president of Penn Financial Group in Denver. "That's the first step of really forming a bottom in the financials."

Tuesday will be another day of reckoning for the sector.

Wachovia Corp WB.N, the fourth-largest bank, has said it may post a $2.6 billion to $2.8 billion loss, mainly because of mortgage exposure.

And analysts on average expect Washington Mutual Inc (WM.N), the largest savings and loan, to report a loss in excess of $1.1 billion, weighed down by mortgage losses.

Other lenders expected to report lower earnings on Tuesday include Fifth Third Bancorp (FITB.O), KeyCorp (KEY.N), Regions Financial Corp (RF.N) and SunTrust Banks Inc (STI.N).

SHAKE-OUT

Bank of America's corporate and investment bank saw profit rise 3 percent to $1.75 billion, helped by the improved trading, and as write-downs on collateralized debt obligations fell to $645 million from the first quarter's $1.47 billion.

Profit in consumer and small business banking fell 66 percent to $812 million, although net interest margin rose to 2.92 percent from the first quarter's 2.73 percent. Wealth and investment management profit fell 1 percent to $573 million.

Bank of America's Tier-1 capital ratio, a measure of its ability to cover losses, rose to 8.25 percent from the first quarter's 7.51 percent. Regulators deem 6 percent sufficient.

"There will definitely be a shake-out in banking, but Bank of America's earnings power is increasing," said Andrew Rothstein, a banking analyst at HGK Asset Management Inc in Jersey City, New Jersey.

Bank of America ended June with 6,131 branches in the United States and $1.72 trillion of assets.

(Additional reporting by Karen Brettell and Ellis Mynandu; Editing by Derek Caney and Andre Grenon)