Shares in Bank of America slumped yesterday after it revealed a worse than expected plunge in third-quarter profits on the back of nearly $4 billion (£1.96 billion) worth of writedowns and trading losses.

America’s second-largest bank reported net income of $3.7 billion, or 82 cents a share, for its third quarter, well below the consensus analyst forecast of $1.06.

Kenneth Lewis, the chief executive, said: “While the significant dislocations in the capital markets have hurt most participants, we are still very disappointed in our third-quarter performance.” The bank’s shares fell by $1.42, or 2.8 per cent, to $48.61 in midday trading.

The investment banking division recorded a 93 per cent drop in profits to $100 million, as it suffered a surprise $607 million trading loss, $247 million of writedowns on leveraged buyout loans and a $527 million loss on structured products such as mortgage-backed securities. The bank was forced to increase the amount set aside to cover bad loans by 73 per cent to $2.03 billion.

Overall, the profit from Bank of America’s consumer and small-business banking unit, the group’s main business, fell by 16 per cent to $2.45 billion. However, wealth and investment management profit increased by 17 per cent to $599 million as the bank benefited from the $3.3 billion purchase of Charles Schwab’s US Trust private banking business.

Bank of America’s woes continued a difficult week for the country’s banking industry as the outlook for the housing market deteriorated and banks announced big writedowns that badly hurt their profits.

On Monday, Citigroup announced a 57 per cent decline in third-quarter net income, to $2.38 billion, its biggest profit decline in three years, as the housing slowdown fed through into $6.5 billion of writedowns.

On Wednesday, JPMorgan reported a 70 per cent drop in third-quarter profit at its investment banking division to $296 million after taking a $1.64 billion writedown on the value of leveraged loans and collateralised debt obligations, or pools of bonds, on its books.

JPMorgan’s retail bank, which operates under the Chase brand, saw profits fall 14 per cent to $2.21 billion as weakening house prices prompted a sixfold increase in credit loss provisions to $680 million. However, it recorded a slight increase in third-quarter net income, to $3.4 billion, form $3.3 billion the year before.

On the same day, Washington Mutual, America’s third-biggest mortgage lender, announced that its third-quarter profits fell by more than two thirds, from $748 million to $210 million. It was hit by a more than fivefold rise in provisions against bad home loans, to $967 million.

Etrade Financial, the online brokerage, added to the carnage on Wednesday as it increased provisions for loan losses to $187 million in the third quarter, from $30 million in the previous three months. The group also wrote down its securities portfolio by $197 million, taking it to an overall loss of $58 million, compared to a $153 million profit the year before.

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