Bank of America's quarterly profit fell less than expected despite a surge in bad loans, causing shares of the largest U.S. retail bank and mortgage lender to soar.
The 41 percent drop in earnings was 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 near-record income from investment banking and a $357 million trading profit, following $8.55 billion of trading losses in the prior three quarters.
Bank of America became the fourth of the nation's five largest banks to top quarterly earnings forecasts, joining Citigroup, JPMorgan Chase and Wells Fargo.
"It suggests the credit crisis isn't as bad as people thought" for lenders, said Steve Roukis, managing director at Matrix Asset Advisors 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."
Bank of America also said its July 1 purchase of Countrywide Financial, once the largest mortgage lender, will add to profit in 2008, sooner than expected, and result in $900 million of cost savings, $230 million more than expected.
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 a record $20.32 billion, topping the average $18.26 billion forecast.
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.
Chief Executive Kenneth Lewis said on a conference call he does not see the economy slipping into a prolonged recession, but sees "sluggishness" through year end.
"We are not in denial," he said. "Credit losses are still going up." He said 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 morning trading, Bank of America shares rose $2.78, or 10.1 percent, to $30.27 on the New York Stock Exchange. The shares had bottomed at $18.44 on July 15.
Results excluded a $2.33 billion loss at Countrywide, which the bank said reflected about $3.7 billion of credit-related losses and write-downs. The bank plans to cut 7,500 jobs from the combined companies, or about 3 percent.
Chief Financial Officer Joe Price said another $12 billion to $13 billion of write-downs for Countrywide loans 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, though in an interview he said "our current thinking is susceptible to change all the way through payoff."
The cost to insure debt of Countrywide Home Loans 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.
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, on Friday posted a milder-than-expected $2.5 billion quarterly loss. 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 in Denver. "That's the first step of really forming a bottom in the financials."
Wachovia has said it may post a $2.6 billion to $2.8 billion loss, mainly from an ill-timed plunge in 2006 into mortgages when it bought California's Golden West Financial. The fourth-largest U.S. bank reports results Tuesday.
Bad Loans Soar
Bank of America's corporate and investment bank saw profit rise 3 percent to $1.75 billion, helped by improved trading, and as write-downs on collateralized debt obligations dropped to $645 million from the first quarter's $1.47 billion.
Profit in consumer and small business banking fell 66 percent to $812 million, though 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 in Jersey City, New Jersey.
Bank of America ended June with 6,131 branches in the United States and $1.72 trillion of assets. Through Friday, its shares had fallen 33 percent this year, compared with a 29 percent decline in the KBW Bank Index .