Bank of America's quarterly profit fell a much larger-than-expected 32 percent, hurt by mounting credit losses and poor trading results in its investment banking unit.
The news sent stocks lower and Treasury prices higher on expectations that slowing activity might prompt the Federal Reserve to cut interest rates.
Bank of America shares fell sharply.
"It was a very disappointing number," said Michael Mullaney, who helps invest $10 billion at Fiduciary Trust in Boston and owns the bank's shares.
"We knew the credit situation was going to be bad, but this was worse than expected," he said. "What causes us concern is the increase in reserves doesn't appear aggressive, and the
bank may need to reserve more in the future, which hits earnings. The real surprise was investment banking"
Bank of America's third-quarter net income dropped to $3.7 billion, or 82 cents per share, from $5.42 billion, or $1.18 a share, a year earlier.
Excluding items, profit was 84 cents per share, according to Reuters Estimates, below the analysts' average forecast of $1.06.
Revenue fell 12 percent to $15.93 billion, the Charlotte, North Carolina-based bank said. Analysts on average expected $18.01 billion.
"While the significant dislocations in the capital markets have hurt most participants, we are still very disappointed in our third-quarter performance," Chief Executive Kenneth Lewis said in a statement.
Bank of America joined Citigroup, JPMorgan Chase and other banks in reporting losses related to leveraged loans, mortgages, consumer credit, or a combination.
Bank of America results were a surprise given that its investment bank is smaller, relative to the company's size, than Citigroup's or JPMorgan's, and because the bank is not
involved in some riskier markets, including subprime mortgage lending.
Nevertheless, the bank generates a greater portion of its business domestically, leaving it more exposed to declining economic conditions.
More Credit Losses
Bank of America said it set aside $2.03 billion for credit losses, up more than 73 percent from a year earlier, and nonperforming assets doubled to $3.37 billion. It cited weakened housing conditions for some of the increases.
Corporate and investment banking profit sank 93 percent to $100 million from $1.43 billion, hurt by $717 million of trading and sales losses, $247 million of write-downs for leveraged and other loans, and a $527 million loss related to structured products, including mortgage debt. Revenue tumbled 44 percent.
Profit from consumer and small-business banking, the bank's main business, fell 16 percent to $2.45 billion.
Lending income was little changed at $8.62 billion, as net interest margin fell to 2.61 percent from 2.73 percent a year earlier, though it rose from 2.59 percent in the second quarter.
Consumer and business banking profit may rise in future quarters following the bank's $21 billion purchase on Oct. 1 of ABN AMRO Holding NV's LaSalle Bank.
Wealth and investment management profit rose 17 percent to $599 million, helped by the $3.3 billion purchase three months ago of Charles Schwab Corp's US Trust private banking
The bank ended the quarter with $1.58 trillion of assets.
As of Wednesday's close, Bank of America shares had fallen 6 percent this year, compared with a 12 percent drop in the Philadelphia KBW Bank Index.