Bank of America, GE weigh on recovery optimism

NEW YORK (Reuters) - A surge in credit losses reported by Bank of America Corp on Friday and a steep drop in General Electric Co's revenue weighed on recovery hopes after promising earnings and data earlier in the week.

A report showing a jump in U.S. housing starts and permits in June and signals from Germany's economy ministry that Europe's largest economy may have come out of recession helped temper the gloom over U.S. earnings, however.

Bank of America, the largest U.S. bank, said second-quarter net income fell 25 percent to $2.42 billion and warned results would continue to be hurt by troubled loans from credit card, mortgage and business customers due to the weak economy..

"Difficult challenges lie ahead from continued weakness in the global economy, rising unemployment and deteriorating credit quality that will affect our performance for the rest of the year and into 2010," Chief Executive Kenneth Lewis said.

No. 3 U.S. bank Citigroup reported a $4.3 billion quarterly profit, thanks to the merger of its brokerage arm into a new venture after struggling to survive the financial crisis.

Citibank took a $45 billion bailout from the U.S. Treasury last year as part of a $125 billion program to keep afloat top banks crippled by bad debts from the U.S. housing meltdown.

U.S. conglomerate GE's profits fell by nearly half as revenues dropped 17 percent, above analysts expectations, as the slump that hit its finance and media businesses dragged on its heavy industrial units.

U.S. stock markets closed Friday mixed following the reports, but positive earnings and economic data from Asia earlier this week led U.S. stock indexes to the biggest gains since mid-March for the week.

International Business Machines Corp rose more than 4 percent on Friday after sharply lifting its full-year earnings outlook and reporting a stronger-than-expected second-quarter profit late Thursday.

Goldman Sachs on Tuesday said quarterly earnings surged 33 percent while JPMorgan Chase & Co reported a 36 percent rise on Thursday.

U.S. HOUSING OPTIMISM

U.S. housing starts rose 3.6 percent last month while permits, an indicator of builder confidence, climbed 8.7 percent, suggesting some stabilization for the battered housing sector.

"It lends credence to the case that we're working our way through and that we've seen the worst," said Jim Awad, managing director at Zephyr Management in New York.

The head of the U.S. National Economic Council said the Obama administration's $787 billion stimulus package is working despite rising U.S. unemployment, which hit a 26-year high of 9.5 percent in June.

"Substantial progress has been made in rescuing the economy from the risk of economic collapse that looked all too real six months ago," Lawrence Summers said.

He added stabilizing the economy must take precedence over tackling the bloated deficit and health care and energy reform would lay the foundation for future prosperity.

CIT Group Inc is in talks with JPMorgan Chase & Co and Goldman Sachs about short-term financing as it looks for ways to avoid bankruptcy, a source close to the company said on Friday, lifting the lender's shares and bonds.

The 101-year-old lender, which services nearly one million small and mid-sized businesses, is in search of $2 billion to $3 billion of financing.

The euro zone exports plunged 24 percent year on year but imports fell by 27 percent, underlining weak domestic and external demand due to the recession.

Nonetheless, Germany's economy ministry said gross domestic product may have bottomed out in the second quarter after a record contraction in the first quarter.

"There is much to suggest that overall economic activity may have stabilized in the second quarter of this year," the ministry said in its monthly report for July.

U.S. Treasury Secretary Timothy Geithner told French newspaper Le Monde he was more optimistic about the economic outlook than he was three months ago.

"I think that we are doing better than we could have imagined at the beginning of 2009," he said.

(Editing by Kenneth Barry)