Bank of America Corp, the second-largest U.S. bank, posted a much larger-than-expected 32 percent drop in quarterly profit on Thursday, hurt by mounting credit losses and dismal investment banking results.

The news, the latest in a series of disappointing bank results, dampened confidence about the health of the U.S. consumer and the economy. Stocks fell, bond prices rose, and the dollar tumbled to a record low against the euro. Expectations rose that the Federal Reserve will cut interest rates this month.

We knew the credit situation was going to be bad, but this was worse than expected, said Michael Mullaney, who helps invest $10 billion at Fiduciary Trust Co. in Boston and owns the bank's shares.

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, he said. The real surprise was investment banking, where revenue plunged.

Bank of America's third-quarter net income fell to $3.7 billion, or 82 cents per share, from $5.42 billion, or $1.18 a share, a year earlier.

Excluding one-time items, profit was 84 cents per share, according to Reuters Estimates, below analysts' average forecast of $1.06.

Corporate and investment banking profit sank 93 percent to $100 million, from $1.43 billion, as revenue sank 44 percent. Results were hurt by a surprise $607 million trading loss, $247 million of write-downs for leveraged and other loans, and a $527 million loss from structured products, including mortgage debt.

Shares of Bank of America fell $1.80, or 3.6 percent, to $48.23 in morning trading on the New York Stock Exchange.

CEO DISAPPOINTED

Bank of America joined Citigroup Inc, JPMorgan Chase & Co and other banks in reporting losses related to leveraged loans, mortgages, consumer credit, or a combination.

Quarterly profit fell 57 percent to $2.38 billion at Citigroup, which lost $636 million from fixed-income trading. Profit rose 2 percent to $3.37 billion at JPMorgan.

While the significant dislocations in the capital markets have hurt most participants, we are still very disappointed in our third-quarter performance, Bank of America Chief Executive Kenneth Lewis said in a statement.

The bank's 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.

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.

Rising nonperforming assets would argue for a continued increase in reserves, said Chris Hagedorn, who helps invest $22.4 billion at Fifth Third Asset Management in Cincinnati.

CONSUMER PROFIT FALLS

Revenue fell 12 percent to $15.93 billion, the bank said. Analysts on average expected $18.01 billion.

Return on equity fell to 11.02 percent from 16.64 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 October 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 business.

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 .BKX>.

(Additional reporting by Ellis Mnyandu and Dan Wilchins)

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