Bank of America Corp., the second-largest U.S. bank, said on Thursday quarterly profit rose 5 percent, as private equity and investment banking gains offset lower retail banking earnings and worsening loan quality.

Second-quarter net income increased to $5.76 billion, or $1.28 per share, from $5.48 billion, or $1.19 a share, a year earlier.

Excluding items, profit was $1.30 per share, 10 cents above the average analyst expectation, according to Reuters Estimates. Revenue rose 7 percent to $19.56 billion, topping the average Wall Street estimate of $18.49 billion.

Fee income rose 17 percent, while lending income fell 3 percent. Expenses rose 4 percent to $9.09 billion.

Earnings were quite encouraging, said Marshall Front, who oversees $700 million at Front Barnett Associates LLC in Chicago. Margins are still being squeezed, but that's starting to ease.

Chief Executive Kenneth Lewis said on a conference call that revenue was a bit better than our expectations. Bank of America generates more of its business domestically than its main rivals, Citigroup Inc. and JPMorgan Chase & Co.

(We) remain a little concerned about domestic consumption spending, given the prolonged housing subprime issues and higher fuel prices, Lewis said.

Still, he said, We're well positioned going into the second half of 2007, with additional upside in 2008.

Bank of America shares fell 29 cents to $49.07 in afternoon trading on the New York Stock Exchange.

On Wednesday, JPMorgan, the third-largest bank, said profit rose 20 percent to $4.23 billion. Citigroup, the largest bank, is expected to report results Friday.


Charlotte, North Carolina-based Bank of America set aside $1.81 billion overall for credit losses, up 80 percent from a year earlier, while net charge-offs rose 46 percent to $1.5 billion.

Some of this stemmed from credit cards, including accounts from the former MBNA Corp., which the bank acquired last year for $34.2 billion.

Rising credit losses helped push down profit from consumer and small business banking, the bank's main business, by 23 percent to $2.46 billion.

This offset benefits from programs that offer free online stock trades and eliminate some fees on mortgages.

Net interest margin fell to 2.59 percent from 2.85 percent a year earlier, and from the first quarter's 2.61 percent.

There are headwinds from the flat curve and normalization of credit, principally in the consumer side following the 2005 (U.S.) bankruptcy reform, Chief Financial Officer Joe Price said in an interview. We feel we've produced very good results in the U.S. to offset this.

Profit from the corporate and investment banking unit rose 5 percent to $1.67 billion, including a 27 percent increase in investment banking income. Equity investment gains, meanwhile, soared to $1.83 billion from $699 million, including $600 million from the sale of private equity funds to Conversus Capital LP.

Results exceeded expectations, but not as much as the per-share figure would suggest because of the investment gains, said Chris Hagedorn, who helps invest $21.6 billion at Fifth Third Asset Management in Cincinnati.

Wealth and investment management profit rose 6 percent to $619 million, as fees and asset flows increased. The bank recently paid $3.3 billion for Charles Schwab Corp.'s (SCHW.O: Quote, Profile, Research) US Trust private banking business.


CEO Lewis reaffirmed his commitment to buying all of ABN Amro Holding NV's LaSalle Bank business for $21 billion. He dampened speculation he would keep the Chicago-area business and jettison operations in Michigan, where the economy is weaker.

We expect to have the entire company, he said. We like it as it is.

Separately, the bank said it expects to post a $1.4 billion fourth-quarter pretax gain when it finishes selling its Marsico Capital Management LLC unit back to founder Thomas Marsico. It bought the unit for $1.1 billion in two stages ending in 2000.

Bank of America operates 5,749 branches and ended June with $1.53 trillion in assets. Through Wednesday, the stock had fallen 8 percent this year, compared with a 3 percent drop in the 24-member Philadelphia KBW Bank Index.

(Editing by Brian Moss/Jeffrey Benkoe)