Bank of America Corp Chief Executive Kenneth Lewis, whose bank sold $13.47 billion of common stock this month, on Wednesday said the worst of the economic downturn has likely passed and that conditions will not worsen as much as feared.

We are on the cusp of what will turn out to be a slow but sustainable economic recovery, Lewis said at a conference in London. There will continue to be a lot of pain ... but I think the worst is most likely behind us. He projected modest U.S. and European economic growth in the second half of 2009.

Lewis, whose bank bought Merrill Lynch & Co on January 1, also said corporate and investment banking pay practices must be reformed, with pay being tied to performance and banks being able to claw back pay from people who took on too much risk.

Reuters obtained a copy of Lewis' speech.

Regulators this month ordered Bank of America to find $33.9 billion of capital in light of a government stress test of the largest U.S. bank's ability to withstand a deep recession.

Bank of America was among 19 big banks subjected to such tests. Ten were ordered to find new capital; Bank of America was told to raise more than twice as much as anyone else.

The shortfall occurred even though the Charlotte, North Carolina-based bank had already taken $45 billion from the federal Troubled Asset Relief Program, including $20 billion in a January bailout to help it absorb Merrill.

Late Tuesday, Bank of America said it sold 1.25 billion shares this month at an average price of $10.77 each. The sales dilute the holdings of existing shareholders and amount to close to 20 percent of shares already outstanding.

The bank benefited from a rise in its stock price, which has more than quadrupled since bottoming in February. But the shares remain far below their $55.08 peak in November 2006.

Several other large banks have also issued stock, debt or both this month, including Citigroup Inc , Morgan Stanley and Wells Fargo & Co .

Capital markets are healing, said Bill Hackney, chief investment officer of Atlanta Capital Management Co, which invests $6.5 billion. Banks have raised a lot of private capital, and liquidity in the financial system is coming back.

In morning trading, Bank of America shares were up 27 cents at $11.52. Analysts said the share price already took into account some expected dilution from common stock issuance.

LEWIS URGES PAY REFORM

Bank of America has raised about $20.8 billion this month, including $7.3 billion from the sale of part of its stake in China Construction Bank Corp <601939.SS>. It has said it may sell its Columbia asset management unit and the First Republic Bank unit, which it inherited when it bought Merrill.

Regulators said that in a severe downturn, Bank of America could face a potential $136.6 billion of losses from loans, investments and trading in 2009 and 2010.

Lewis said this outcome is much, much worse than anything that is likely or anticipated, but added that credit losses will take a heavy toll over the next few quarters.

Last month Lewis was stripped of his post as Bank of America chairman amid shareholder anger over the Merrill merger and the bank's falling share price.

Regulators are examining Merrill's award of $3.6 billion of bonuses to its employees, many in units that caused the company to lose $27.6 billion last year, while the merger was pending. Bank of America has said it did nothing improper.

Lewis said it would be disastrous for the government to legislate compensation practices, but said many investment banking pay practices have been unsustainable for a long time and need to be reformed.

He said reforms must include pay for performance that supports long-term growth, and a reduction of incentives for inappropriate risk-taking through forfeitures and clawbacks.

(Reporting by Jonathan Stempel; editing by John Wallace)

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