Bank of America Is Outbanked

Bank of America (NYSE: BAC  ) , the second-largest bank in the land, didn't impress for yet another quarter and was easily outflanked by the competition. But there could be relief on the horizon.

Mighty B of A still managed to post a 5.2% net income increase during its second quarter, but its archrivals managed double-digit earning gains despite overblown subprime woes at the giant money center banks. Citigroup (NYSE: C  ) flexed its international muscle to post an 18% bottom-line gain, while JPMorgan Chase (NYSE: JPM  ) and Wachovia (NYSE: WB  ) relied on cost-cutting, lucrative investment banking fees, and fee-based strength to keep earnings chugging along.

Credit quality is clearly deteriorating at most banks, and B of A saw close to a 50% increase in year-over-year net charge-offs and an even bigger jump in its provision for credit losses. But overall, its diversification across commercial banking, asset management, investment banking, and credit cards should easily offset credit-related worries from the residential housing implosion. The same goes for the competition.

Still, the flat to inverted yield curve led to a net interest margin decrease to 2.59%, even though return on equity improved to 17.6%, meaning B of A is still earning strong returns for shareholders. Overall, it was definitely a mixed quarter from most key banking metrics, as decent loan and asset growth didn't flow through to earnings.

There could be help on the way, as B of A could soon win LaSalle Bank as a result of the merger frenzy surrounding ABN Amro (NYSE: ABN  ) . Barclays (NYSE: BCS  ) , Royal Bank of Scotland, Fortis, and Banco Santander Central Hispano (NYSE: STD  ) are also in the fray, but B of A looks ready to win LaSalle, vaulting it to a leadership position in the competitive but large Chicago land market.

As the second-quarter results demonstrate, B of A can't be counted on to grow on a consistent basis via organic or internal means. Winning LaSalle could provide another round of cost-cutting opportunities, which B of A has relied on as it has acquired its way to becoming one of the largest domestic banks.

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Bank of America and JPMorgan are Income Investor recommendations. Want to get paid to invest? Analyst James Early can show you how with a free trial to the newsletter service.

Fool contributor Ryan Fuhrmann has no financial interest in any company mentioned. Feel free to email him with feedback or to discuss any companies mentioned further. The Fool has an ironclad disclosure policy.

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