Bank of America Corp and Citigroup Inc raised huge red flags on Friday with quarterly results that suggested the U.S. consumer remains sorely injured as the global recession drags on.

Both Bank of America, the largest U.S. bank, and Citigroup, No. 3, reported big increases in delinquencies among credit card customers and warned that things will get worse.

The results also indicated it will take time to scrub the worst effects of soured loans to mortgage and business customers off the banks' balance sheets.

All in all, our quarter comes down to mortgage and credit card losses, said Citigroup Chief Executive Vikram Pandit. Cards and mortgages are what we need to work through.

That could signal more trouble for an industry whose failures large and small helped drive the economy into recession 19 months ago, a downturn that shows little evidence of coming to an end.

Credit issues are already serious, and we still haven't seen the full fallout from commercial real estate, said Bill Fitzpatrick, an analyst at Optique Capital Management in Milwaukee. Bank of America and Citigroup have raised a lot of capital, which can help them stomach the losses we know are coming.

The banks' results contrast with much better performances reported earlier this week by Wall Street rivals Goldman Sachs Group Inc and JPMorgan Chase & Co.

But the results didn't shock analysts and were enough to help financial stocks hang on to strong recent gains.

Shares of Bank of America dropped 2 percent on the New York Stock Exchange, while Citigroup was fractionally higher. The S&P Financial index, which jumped more than 10 percent in the first four trading days this week, was down 1.15 percent.

UNRESERVED RESERVING

Bank of America, under pressure to integrate its shotgun acquisition of Merrill Lynch & Co, warned of a fresh surge in loan delinquencies, especially in credit cards, and set aside $13.38 billion for bad loans for a second straight quarter. Net income was $2.42 billion, topping Wall Street forecasts.

Citigroup, whose headline $4.28 billion quarterly profit was due to gains from the sale of its Smith Barney brokerage into a joint venture, said credit costs jumped by $12.4 billion, including the addition of $3.9 billion to loan loss reserves.

They both seem to reserve a lot for credit losses in all parts of the business. That's the bad news, said Walter Todd, portfolio manager at Greenwood Capital Associates in South Carolina. The good news is the bank earnings looked really strong, which should be the case.

Still, the results could sharpen scrutiny of the banks' management, particularly their ability to manage risk after the U.S. government stepped in with a series of bailouts and a $787 billion economic stimulus program. Bank of America and Citigroup each received $45 billion of taxpayer funds.

Consumer surveys show concern over mounting U.S. job losses, and mixed views of the Obama administration's strategy for economic recovery. U.S. home foreclosure activity rose to a record high in the first half of the year.

The banks' results also underline how the industry, girding for the most sweeping regulatory reform since the Great Depression, is still under immense pressure from credit losses.

You look at these numbers and I would have to think there's still a lot of caution, said Fred Ketchen, director of equity trading at ScotiaMcLeod in Toronto. I don't think they have taken any of that concern away. There are still some challenges to overcome in the U.S. financial sector.

Most remaining large U.S. banks are due to report quarterly results next week, including Wells Fargo & Co and Morgan Stanley.

Vikram pandit Investment Citigroup Bank of america