Oct. 18 (Bloomberg) -- Bank of America Corp., the second- largest U.S. bank, said profit declined 32 percent in the third quarter after trading losses, defaults and writedowns cost about $4 billion.

Net income fell to $3.7 billion, or 82 cents a share, according to a company statement, missing the $1.06 a share average estimate from 16 analysts surveyed by Bloomberg. The Charlotte, North Carolina-based bank set aside $3.3 billion for potential bad loans after U.S. home foreclosures rose to a record.

Bank of America fell the most in eight months in New York trading after Chief Executive Officer Kenneth Lewis called the results unacceptable. Lewis said during a conference call that the company plans to scale back its investment banking unit after trading mistakes led to $717 million of losses.

``The next couple of quarters will be messy for Bank of America,'' said Andrew Seibert, a fund manager at Pittsburgh- based Stewart Capital Advisors, which oversees $950 million and owns Bank of America shares. ``You are only seeing the beginning. The banks will be putting up a lot of money for reserves.''

Bank of America fell $1.42, or 2.8 percent, to $48.61 in 11:02 a.m. New York Stock Exchange composite trading. The bank's shares were down 6.3 percent this year through yesterday, compared with Citigroup Inc.'s 20 percent decline and JPMorgan Chase & Co.'s 4 percent drop.

Revenue Misses

Third-quarter revenue was $16.3 billion, falling short of analysts' estimates of $17.9 billion. The year-earlier profit was $5.4 billion, or $1.18, a share.

Return on equity, a gauge of how effectively the company reinvests profits, shrank to 11 percent, from 16.6 percent a year earlier.

Citigroup's return on equity dropped to 7.4 percent from 18.9 percent a year earlier, and JPMorgan's return on equity was unchanged at 11 percent. Citigroup, the biggest U.S. bank, reported earlier this week that third-quarter earnings slumped 57 percent after about $6.5 billion of costs for fixed-income trading and underwriting losses and bad consumer loans.

Lewis has helped transform Bank of America into the nation's largest by deposits, and the company derives more than 85 percent of its revenue from the U.S. He has spent about $25 billion this year to buy ABN Amro Holdings NV's LaSalle Bank in Chicago and U.S. Trust Corp. from Charles Schwab Corp. to increase Bank of America's retail banking and asset-management businesses.

Leverage Buyouts

He also invested $675 million in investment banking to compete with companies including New York-based Citigroup and JPMorgan for leveraged buyouts, merger advice and trading.

In the third quarter, profit at the corporate and investment-banking division plummeted 93 percent to $100 million from $1.43 billion a year earlier. The unit marked down the value of financing for LBOs and other lending by $247 million. Analysts at Citigroup had predicted a writedown of as much as $700 million.

Earnings at Bank of America's consumer and small-business banking unit fell 16 percent to $2.45 billion.

Interest income rose 1 percent as the year-over-year decline in long-term rates and a move of customer deposits into higher- yielding accounts made lending less profitable.

Interest Margin

Bank of America's net interest yield -- the difference between what it pays on deposits and earns from loan interest -- narrowed to 2.61 percent from 2.73 percent a year earlier. With almost 10 percent of total U.S. bank deposits, Bank of America should benefit from the Federal Reserve's move to cut its benchmark rate by a half a percentage point because the company can pay less to savers, Merrill Lynch & Co. analyst Edward Najarian said in a Sept. 18 report.

Bank of America Chief Financial Officer Joe Price said on Sept. 17 that ``unprecedented dislocations'' in credit markets were having a ``meaningful impact'' on third-quarter results. The company joined JPMorgan and Citigroup this week to set up an $80 billion fund that may help revive the asset-backed commercial paper market.

Credit markets froze in July, when the collapse of subprime mortgage trading led investors to shun bonds linked to home loans as well as debt for LBOs and commercial paper. The new fund will buy assets from structured investment vehicles, units set up to purchase securities such as bank bonds and subprime mortgage debt.

Countrywide Rescue

Bank of America invested $2 billion in Countrywide Financial Corp., the biggest U.S. home lender, in August when the Calabasas, California-based company was running short of cash. Bank of America's share of total U.S. mortgage originations climbed to 7.1 percent as of June 30 from 5.7 percent a year earlier, Credit Suisse Group analyst Moshe Orenbuch said in an Oct. 2 report.

U.S. foreclosures set a record in the second quarter and subprime loans, made to people with the worst credit, reached a five-year high, according to data compiled by the Washington- based Mortgage Bankers Association. Bank of America has avoided making subprime loans, which have the highest default rate, said Keith Gumbinger, vice president of HSH Associates, a mortgage research firm in Pompton Plains, New Jersey.

``Bank of America stayed outside the mortgage fray for a couple of years when things were getting liberal and loose,'' Gumbinger said. ``Citigroup was much more involved in subprime than Bank of America.''

To contact the reporter on this story: David Mildenberg in Charlotte, North Carolina, at 6587 or dmildenberg@bloomberg.net.

Last Updated: October 18, 2007 11:14 EDT