Bank of America, which is buying Merrill Lynch, said it is bracing itself for harsher economic conditions by cutting its dividend by half to 32 cents a share in the third quarter from the previous quarter and looking to raise up to $10 billion in issuance of fresh stock.

Announcing its third-quarter results two weeks ahead of schedule, BoA said its net income plummeted to $1.18 billion from $3.7 billion in the same period a year ago. At its wealth management unit – which will be substantially boosted in assets by the acquisition of Merrill – BoA said global wealth and investment management revenue was affected by $630 million required to support cash funds and $123 million in losses on a commitment to buy back auction-rate securities from clients.

Also in the wealth division, average deposits increased by $3.9 billion from the second quarter to $161 billion, driven by a client flight to safety. The bank provided few other details about the financial health of this part of its business.

"These are the most difficult times for financial institutions that I have experienced in my 39 years in banking," said Kenneth Lewis, chairman and chief executive officer.

Explaining the bank’s dividend cut, he continued: "We believe it is prudent to raise capital to very substantial levels in this uncertain environment. Both economic and financial market conditions have changed significantly in the last two months. We were willing to operate at capital levels over the short-term that were good, but not at our targeted levels, given projections two months ago. We now believe it is important to be at or near our 8 per cent Tier 1 capital ratio target given the recessionary conditions and outlook for still weaker economic performance which we expect to drive higher credit losses and depress earnings."

BoA said its lower earnings in the third quarter compared with a year earlier were driven by a significant increase in provision expense, as credit costs continued to rise, partially offset by advances in various income categories largely as a result of the acquisition of Countrywide Financial Corporation on 1 July, 2008 and LaSalle Bank. Countrywide results were not included in prior period results, BoA said.

Investment banking income was up 22 per cent from the previous year to $474 million. Revenue in capital markets and advisory services was adversely impacted by $952 million in CDO-related charges, $327 million in leveraged loan and commercial mortgage related writedowns and $190 million in losses on a commitment to buy back auction-rate securities from clients, BoA said.