• ‘Credit is going to get worse,’ says under-fire chief Ken Lewis
• $4.2bn profit beefed up by one-off gains
• BoA and Citigroup’s shares slump

The embattled US financial services group Bank of America, which is facing a revolt by disgruntled shareholders, delivered a gloomy assessment of economic conditions as a surge in bad loans forced it to set aside $13.4bn (£9.22bn) to cover credit losses.

Bank of America reported a first-quarter profit of $4.2bn, compared with $1.2bn for the same period a year ago. But analysts said that after stripping out a series of large one-off gains, the bank’s underlying performance was closer to break-even.

The North Carolina-based firm has faced severe criticism over its recent takeover of Merrill Lynch. Discontent over losses arising from Merrill has prompted a movement to oust Bank of America’s chief executive, Ken Lewis, from his position as chairman of the board.

Lewis said he was “gratified” with the performance of both Merrill and the mortgage company Countrywide Financial, which Bank of America rescued from the brink of bankruptcy a year ago.

But he offered little optimism over short-term market conditions as the plunging economy prompts cash-strapped consumers to default on loans and credit card payments: “Make no doubt about it, credit is bad and we believe credit is going to get worse before it will eventually stabilise and improve.”

Speaking on a conference call, Lewis said the improvement could either come late this year or next year: “I’m not going to hazard a guess.”

During early trading on Wall Street, shares in Bank of America slumped by 15% to $9.01, dragging down the stock of fellow struggler Citigroup, which dropped by 13.7%. The drop put paid to a week-long rally in US banking shares, built on fragile hope that the worst may be over in the ongoing financial crisis.

Two influential US shareholder advisory firms, RiskMetrics and Glass Lewis, last week urged investors to vote for a split in the roles of chairman and chief executive at Bank of America. Critics say that the bank’s directors have exercised insufficient restraint on Lewis, a 40-year veteran of the firm.

Lewis has come under attack over September’s $50bn deal to buy Merrill, which subsequently revealed huge unforeseen losses. Unions have taken the opportunity to campaign for his dismissal, citing what they see as exorbitant interest rates on credit cards.

Bank of America said Merrill contributed $3.7bn to its profits, before taking into account merger costs of $510m. The company benefited from a $2.2bn gain on the upward revaluation of certain of Merrill’s structured notes, together with a $1.9bn exceptional profit on the sale of shares in China Construction Bank.

Mark Lane, a banking analyst at Barclays Capital, said that while Bank of America’s headline figures had beaten expectations, the “bottom line” was that excluding one-off items, the company’s performance “looks closer to break-even”.

Some $45bn of government funds have been pumped into Bank of America to support its balance sheet. The bank paid $402m in dividends to the US treasury and is awaiting the results of government “stress tests” being applied to all major US financial institutions.

Lewis brushed aside speculation that Bank of America may need to raise more money: “I absolutely don’t think we need additional capital.”