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 almost $4 billion.

Net income fell to $3.70 billion, or 82 cents a share, from $5.42 billion, or $1.18, a year earlier, the Charlotte, North Carolina-based company said today in a statement. The average estimate of 16 analysts surveyed by Bloomberg was $1.06 a share. Bank of America shares fell more than 3 percent after the earnings announcement.

Chief Executive Officer Kenneth Lewis's strategy of focusing on the U.S. instead of expanding overseas hurt earnings in the latest quarter when Bank of America set aside more than $3 billion for credit losses and reported $717 million of sales and trading losses at its investment bank. Citigroup Inc., the biggest U.S. bank, reported a bigger decline in earnings, and JPMorgan Chase & Co., the third-largest, posted a 2 percent gain.

``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's third-quarter revenue was $16.3 billion, missing analysts' estimates of $17.9 billion. The company said it had trading account losses of $1.5 billion.

Return on equity, a gauge of how effectively the company reinvests profits, narrowed to 11.02 percent, from 16.64 percent a year earlier.

Citigroup's Return

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.

Bank of America fell 13 cents yesterday to $50.03 in New York Stock Exchange trading. The shares are down 6.3 percent this year, compared with Citigroup's 20 percent decline and JPMorgan's 4 percent drop.

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.

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

Investment Banking

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. The bank also reported a $607 million trading revenue loss on credit products, and a $527 million loss in its structured products unit, which includes mortgage-backed securities.

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.

Margins Narrow

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 company will buy assets from structured investment vehicles, units set up to purchase securities such as bank bonds and subprime mortgage debt.

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.

More Foreclosures

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 .