WRAPUP 5-BofA bad loans jump, Europe banks step up disposals

* UBS sells Pactual for $2.5 bln for capital boost

* Allied Irish Banks to raise $2 bln, maybe by disposals

* RBS, ING, Lloyds, others could also sell assets

* Bank of America profit higher; troubled loans rise

* Bank of America shares down 24 pct (Updates with closing share prices)

By Jonathan Stempel and Katie Reid

NEW YORK/ZURICH, April 20 (Reuters) - Bank of America (BAC.N) showed the sector's troubles were far from over by reporting a big rise in bad loans, while two European banks stepped up efforts to reduce their reliance on state funding.

Bank of America shares plunged 24 percent after the No. 1 U.S. bank by assets reported on Monday a 41 percent leap in nonperforming assets. BofA was also helped by $4.1 billion in one-time gains, adding to a sense that better-than-expected results last week from Goldman Sachs (GS.N), JPMorgan Chase (JPM.N) and Citigroup (C.N) could be tough to replicate. [ID:nN20380236]

Bank of America has received $45 billion of taxpayer money, and some analysts believe it needs more. Bank of America Chief Executive Kenneth Lewis said on a conference call that "we absolutely don't think we need additional capital," but admitted conditions were tough.

"Make no doubt about it, credit is bad, and we believe credit is going to get worse," he said.

The Bank of America news quashed hopes raised earlier after Switzerland's UBS AG (UBSN.VX) agreed to sell its Brazilian business for $2.5 billion and Allied Irish Banks (ALBK.I) pledged to raise $2 billion, possibly through disposals.

Analysts remain wary that an improved first quarter will be sustained, although optimism has built that the global economy has turned a corner, sending world stocks on a six-week climb.

J.P. Morgan estimated U.S. banks could incur $400 billion more in losses from the credit crisis and said it expected certain institutions would need more capital. [ID:nBNG453139]

U.S. President Barack Obama warned of more pain ahead, and European Central Bank chief Jean-Claude Trichet said it was dangerous to read too much into recent data suggesting signs of life in major economies. [ID:nSP442805]

Adding to gloom about U.S. banks, analysts at Goldman Sachs said credit losses at Citigroup continue to grow at a rapid rate and estimated that the third-largest U.S. bank's underlying first-quarter loss was 38 cents per share. [ID:nBNG445204]

Citigroup shares slumped 19 percent, while the KBW Banks index .BKX lost 15 percent, its steepest decline since January. UBS shares fell 4.7 percent, reversing earlier gains after the BofA results.

BAILOUT HEADACHES

The U.S. sector came under further pressure after a blog said the results of the U.S. Treasury Department's stress tests showed several banks were "technically insolvent." [ID:nN20390864]

A Treasury spokesman said there was no basis for the report, adding the department had not yet received the results.

Separately, The New York Times reported on Sunday that administration officials have determined that they can avoid asking Congress for more bailout funds by converting existing loans to the largest U.S. banks into common stock. [ID:nN19354670]

Bank of America's results benefited from one-time gains, and its credit quality deteriorated as the economy weakened, housing prices fell and unemployment rose. The bank set aside $13.38 billion for credit losses in the first quarter, up from the fourth quarter's $8.54 billion.

Still, Lewis told analysts in a conference call that "we absolutely don't think we need additional capital."

The results did not muffle calls by dissident shareholders for Lewis' ouster.

Recent asset sales by Britain's Barclays (BARC.L) and Royal Bank of Scotland (RBS.L) showed a reluctance to sell assets at low prices may have shifted, with banks acknowledging that "self-help" is a preferable option to taxpayer cash, and selling non-core assets may be the best route to take.

Bank of America, meanwhile, is in the process of selling its First Republic private banking unit, Lewis said.

KEEN TO LIMIT STATE ROLE

UBS said on Monday it was selling Brazilian arm Banco Pactual back to its original owners just three years after buying it. It will take a small loss, but will lift its tier 1 capital ratio by about 0.6 percentage points. [ID:nLK560028]

Dozens of lenders in Europe and the United States have been shored up with rescue funds from governments, but many are keen to limit their reliance on the state, and selling profitable units is the most realistic alternative.

Barclays this month sold its fast-growing iShares asset management business for $4.4 billion to bring in a net gain of over $2 billion. [ID:nL9253562]

RBS last week sold half of a Spanish insurance joint venture for $560 million as the part-nationalized bank pulls back to its core markets and cuts risk.

RBS is also set to sell assets in Asia, and rivals including Lloyds Banking Group (LLOY.L) and ING (ING.AS) are expected to sell non-core businesses, according to bankers. [ID:nLF391509]

UBS, one of the European banks hit hardest by the credit crisis, said its Brazilian sale was part of a strategy to reduce its risk profile and strengthen its balance sheet.

AIB ASSET SALES?

Allied Irish Banks, Ireland's largest bank by market value, said it plans to raise 1.5 billion euros of core tier 1 capital by the end of this year to supplement a 3.5 billion euro state injection. [ID:nLK584165]

It said the extra capital could come from the sale of assets, in a move seen by analysts as preventing a slide toward nationalization. AIB shares rose 2.3 percent.

The Irish government took control of rival Anglo Irish Banks in January, but the finance minister said on Monday there was no intention to nationalize either of Ireland's two top lenders.

Bank of Ireland (BKIR.I) does not need capital beyond what it has already received, he said in response to the news of Allied Irish Banks' plans to raise funds. [ID:nWLA2081]

Also on Monday, Norway's largest bank, DnB NOR DNBNOR.OL, said it might tap state financing to help it reach its core capital ratio target, but only if the terms were attractive and existing shareholders were not penalized. [ID:nLK19253] (Reporting by Jonathan Stempel in New York and Katie Reid in Zurich; additional reporting by Andras Gergely in Dublin, Steve Slater in London, Christian Plumb in New York and John Irish in Dubai; Editing by Jon Loades-Carter, Tim Dobbyn and John Wallace)