(Adds interest income guidance in paragraph 3, CEO comments on headcount in paragraph 9, rates outlook in paragraph 13)

By Saeed Azhar and Mehnaz Yasmin

NEW YORK, April 16 (Reuters) - Bank of America shares fell almost 4% after its profits in the first quarter were depressed as it set aside more money to cover souring loans, while predicting a rebound in interest income later this year.

BofA's net interest income (NII) -- the difference between what it earns on loans and pays for deposits -- slid 3% to $14 billion as it paid more to customers to park their money while demand from borrowers stayed modest.

"We continue to expect that Q2 will be the low point for NII and we expect the back half of 2024 to grow," Chief Financial Officer Alastair Borthwick told analysts on a conference call on Tuesday.

JPMorgan, the largest U.S. lender,

slightly increased its estimate for net interest income

, disappointing investors who hoped that the bank would reap even greater benefits from a prolonged period of higher interest rates.

BofA's net charge-offs, or debts that are unlikely to be recovered, rose to $1.5 billion in the first quarter from $807 million a year earlier, mainly from credit card losses. The charge-offs are from delinquencies in the fourth quarter, but are beginning to stabilize, Borthwick said.

While worsening credit quality "may worry some investors," it was expected for credit card borrowers, said David Wagner, portfolio manager at Aptus Capital Advisors, who owns BofA shares. "I don’t think the bump in delinquencies is going to get worse."

BofA's CEO Brian Moynihan told analysts that the bank will reduce headcount as predicted in January and has already cut the workforce by more than 4,700 employees from the first quarter of 2023.

SHIFTING EXPECTATIONS

Excluding one-off items, Bank of America earned 83 cents a share in the first quarter, ahead of analysts' average estimate of 76 cents a share, according to LSEG data.

Still, shifting expectations for U.S. interest rate cuts and an uncertain economic outlook have made it more difficult to predict future profits, banking executives said last week.

If the Federal Reserve keeps rates higher for longer in the coming months, lenders that made bumper profits from rising interest rates in the last two years could build on their gains. But their earnings could diminish if a potential economic slowdown deters borrowers from taking out loans.

"Generally speaking, higher for longer is probably better for banks," said Borthwick. "Inflation is under control ... that appears to be the case. So that's obviously a good place."

A resilient U.S. economy, buoyant equities and a flurry of large deals have reignited hopes of a nascent recovery in dealmaking, although industry executives have expressed guarded optimism.

Investment banking fees jumped 35% to $1.6 billion from a year earlier, partially offsetting a decline in interest payments due to slow demand from borrowers.

Last month, Borthwick said he expected investment banking revenue to jump 10% to 15% in the first quarter.

Revenue from the segment also rose at rival JPMorgan Chase and Citigroup in the first quarter, fueled by gains in debt and equity capital markets.

BofA's sales and trading revenue rose 2% to $5.2 billion with equities contributing a 15% jump and fixed income currencies and commodities (FICC) posting a 4% decline.

Moynihan said the business "continued their strong 2023 momentum" by reporting the best first quarter in over a decade.

COMMERCIAL REAL ESTATE

Bank of America set aside $1.3 billion in provisions for credit losses in the first quarter, up from $931 million a year earlier. It also took more writedowns on office loans, which partly increased loan losses for its commercial division. Still, its CFO said the lender was carefully managing its CRE exposure.

"We've got a pretty small exposure overall to a limited number of names and that allows us to go, name by name, through any non-performing loans, to just make sure we're out in front of it," Borthwick said. The bank is reviewing ratings, property appraisals and sales, he said.

Revenue from Bank of America's consumer unit sank 5% to $10 billion in the quarter, primarily due to lower deposit balances.

Bank of America also took a $700 million charge in the reported quarter to replenish a government deposit insurance fund, drained by $16 billion to cover depositors of two banks that collapsed in 2023.

Profit from BofA's Merrill wealth management division rose about 10% to $1 billion as rising equity values generated higher fees with record revenue and client balances.

The division grew assets under management to $1.4 trillion from $1.3 trillion in the fourth quarter. (Reporting by Mehnaz Yasmin in Bengaluru and Saeed Azhar in New York; Editing by Lananh Nguyen, Shinjini Ganguli and Nick Zieminski)