Credit quality deterioration, this year’s top profit concern for banks, is apparently going to stick around as a major issue for at least another year.

Bank of America warned Wednesday that rising credit costs and slower capital markets activities would result in profits sharply lower than expected for the fourth quarter.

The bad news did not stop there. Executives from the Charlotte, N.C., banking company who were in New York to make a presentation to investors said they were budgeting for “significantly higher loan losses and credit costs in 2001” and that the sluggishness in market-related businesses was likely to continue.

Earnings for the fourth quarter were expected to be $1.4 billion, or within a range of 85 cents to 90 cents per share, against the consensus estimate of $1.17. For the full year Bank of America said operating profits would likely be $8 billion, within a range of $4.72 to $4.77 a share, compared with the consensus of $5.03, according to Thomson Financial/First Call.

James H. Hance Jr., vice chairman and chief financial officer, said Bank of America would keep investing in e-commerce and payments systems projects and in its asset management business, and that the result would be increased expenses. “We continue to see good momentum in a number of our core product lines,” he said. “In a way, we are giving a tale of two companies. For the next few quarters, clearly credit costs will be the single biggest factor driving results.”

Many on Wall Street expect banks to treat the fourth quarter as a “kitchen sink” period — to toss in as much bad news as possible. So analysts said they were not caught off guard by the fourth-quarter guidance so much as they were by the stated expectations set for next year.

Mr. Hance offered a forecast for full year 2001 earnings per share in a range of $5.10 to $5.20, well below the current consensus of $5.46. “They’re not going to get the resurgence in capital markets activities that we saw in 1999 and early 2000,” said George Bicher, an analyst at Deutsche Banc Alex. Brown. “It’s not just a B of A event.”

The disclosure came during early-afternoon trading and had a bruising effect on financial stocks (see article on back page). Bank of America shares dropped 9%. Shares of First Union Corp., a fellow North Carolina bank that has also forecast higher credit costs for the quarter and next year, dropped almost 10%. FleetBoston Financial Corp. declined 5%.

Bank of America is not alone in predicting higher credit costs or seeing its capital markets revenues dry up because of market volatility that particularly affected loan syndication and high-yield bond underwriting. “Trading is also not as robust as expected, and we anticipate writedowns in the fair value of equity investments,” Mr. Hance added.

The revelations came halfway into a day in which financial stocks had been climbing, extending a rally that began on Tuesday when Federal Reserve Chairman Alan Greenspan delivered a speech in which he appeared to soften his stance on interest rates. “Everyone was feeling a little better about the capital markets” before the disclosure, said David Berry, director of research at Keefe, Bruyette & Woods. “The very natural thing is to expect that other banks will have the same problems.”

Bank of America said it expects $1.1 billion to $1.2 billion in chargeoffs during the fourth quarter, and nonperforming loans are expected to be 20% higher than the $4.4 billion at the end of the third quarter.

Last month the company said it classified a large loan as nonperforming and that much of it would be charged off in the quarter. Though it did not reveal more details about the loan, Goldman Sachs & Co. analyst Lori Appelbaum and others have identified it as part of a $1.7 billion credit underwritten in 1998 for Sunbeam Corp., the appliance manufacturer. Bank of America and First Union Corp. hold about $500 million each of the loan.

The company said the chargeoffs for the quarter include $100 million for a one-time accounting adjustment .

For next year, the company said net chargeoffs were not likely to exceed a range of 0.45% to 0.75% of loans. Return on equity was expected to be 16.5% at the end of this year and between 16.5% and 18% next year.

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