Bank of America reported a hit of nearly $8 billion (£4 billion) from the credit crunch in the first quarter, which reduced its profit for the period by 77 per cent to $1.21 billion.

America’s second-biggest bank set aside $6.01 billion for bad loans, mainly relating to mortgages and second mortgages, as the number of defaults continued to rise.

It also recorded a $1.47 billion writedown on its portfolio of collateralised debt obligations (CDOs) — complex pools of asset-backed securities — and a $439 million writedown on leveraged loans to finance private equity deals.

Its writedown comes after a week in which Citigroup announced a hit of $15.2 billion from the credit crunch and Merrill a $6.5 billion writedown. In the same week, JPMorgan and Wells Fargo revealed credit crunch write-offs of $5.1 billion and $2 billion respectively and Wachovia declared a $4.4 billion hit.

Bank of America’s results came as National City, Ohio’s biggest bank and sub-prime lender, negotiated a capital injection of $6 billion to $7 billion from a consortium led by Corsair Capital, the New York hedge fund.

Under the terms of the deal being discussed, which could be announced as early as today, Corsair would get a 9.9 per cent stake in National City, America’s tenth-largest bank. Corsair’s vice-chairman Richard Thornburgh would also get a seat on National City’s board. Mr Thornburgh joined Corsair in 2006 after serving as vice-chairman of Credit Suisse’s investment banking group.

The problems of Bank of America and National City undermined confidence that banks are overcoming the sub-prime mortgage market’s collapse and helped to send the US stock market down after a week in which all the major indices rose more than 4 per cent. The Dow Jones industrial average closed down 24.30 at 12,825.00. Bank of America closed down 95 cents, or 2.5 per cent, at $37.61. National City was off $2.30, or 27.6 per cent, at $6.03.

Separately, it emerged last night that Citigroup had tapped Hewlett Packard (HP), the information technology company, for advice on how best to resist mounting calls from its shareholders to break the crisis-stricken investment and retail banking group into two businesses. Citigroup holds its annual shareholders’ meeting today.

It is understood that senior executives at Citigroup, which has suffered a $32 billion hit from the credit crunch, have spoken to their counterparts at HP to find out how they managed to resist calls from shareholders to spin off its computer operation from the rest of the group.

Talks with HP are understood to centre around how Citigroup could use economies of scale between the bank’s two main units, as HP did between its PC group and the rest of its business, to increase efficiency and strengthen the case against a split.

Times Recommends

• US stocks fall below 9,000 mark
• House price fall smallest in seven months
• Wary investors opt to keep cash in safes