By Arasu Kannagi Basil and Nupur Anand

(Reuters) -Bank of America's third-quarter profit dropped as it paid more to customers to hold their deposits, but its earnings beat estimates, driven by investment banking and trading.

The gains echoed those at rival JPMorgan Chase, Goldman Sachs and Citigroup, which also benefited from better conditions for dealmaking as client sentiment improved.

Investment banking fees jumped 18% compared with a year earlier to $1.4 billion as increasing confidence among clients spurred them to issue more debt and equity.

"Our customers' deposit balances and asset quality are healthy, and we believe we have good opportunities to grow," Chief Financial Officer Alastair Borthwick told journalists.

Regarding investment banking, Borthwick said, "We feel pretty good looking forward. We've got a good pipeline."

CEO Brian Moynihan called the earnings "solid," citing growth in investment banking, asset management fees and sales and trading revenue. He predicted that the bank's interest income will start to improve after it reaches a trough this quarter.

A revival in mergers and acquisitions also boosted BofA's advisory fees, while the Federal Reserve's interest rate cut last month could spur even more dealmaking.

Shares were up almost 2% in midday trading.

BofA's underwriting income jumped 39.7% in the quarter, while syndication fees rose 31%.

Moynihan said last month that he expected investment banking revenue to be broadly steady.

"With capital markets driving the revenue upside, we expect more muted upside in the stock," wrote David George, an analyst at Robert W. Baird.

Sales and trading revenue jumped 12% to $4.9 billion, the 10th consecutive quarter of year-on-year growth, as equities climbed 18% while fixed income, currencies and commodities rose 8%.

Equities trading was bolstered by buoyant markets. Stocks rallied in the third quarter as investors speculated that the Federal Reserve would cut interest rates and spur economic activity.

Wealth and investment management revenue climbed 8% to $5.8 billion and saw client balances jump 18% to $4.2 trillion thanks to rising market valuations and client flows.

"The bank seems to be saying that things are getting better for them and all the challenges that they have faced in the last couple of years are easing," said Dave Ellison, a portfolio manager at Hennessy Funds, which holds BofA stock.

NII SEEN GROWING

BofA's net interest income (NII) - the difference between what a bank earns on loans and pays out on deposits - fell 3% to $14 billion in the third quarter from a year earlier. But it climbed 2% from the second quarter, marking an inflection point as the bank focuses on growing NII from here, Borthwick said.

The bank expects its NII to be at $14.3 billion or more in the fourth quarter, executives said.

"That's going to set us up quite well" for 2025, Borthwick said, as the bank reacted quickly to the Fed' rate cut.

"We put ourselves in a good position to grow from here," Borthwick said.

Chris Kotowski, an analyst at Oppenheimer, welcomed the NII guidance.

It's "a step in the right direction, and we're optimistic that the uptrend can continue," he wrote in a note.

Banks have been paying out higher interest rates amid intense competition for deposits to prevent customers from fleeing to lucrative alternatives such as money market funds.

BofA's provision for credit losses climbed to $1.5 billion in the quarter from $1.2 billion a year earlier.

Higher interest rates are pressuring borrowers and increasing risks of defaults, prompting banks to build bigger provisions for cover for such loan losses.

Still, U.S. consumer credit is "pretty good," while loan delinquencies and defaults have flattened out as expected, Borthwick said.

The second-largest U.S. bank's net income fell to $6.9 billion, or 81 cents per share, from $7.8 billion, or 90 cents per share, a year earlier. Analysts on average expected BofA to earn 77 cents per share, according to estimates compiled by LSEG.

(Reporting by Arasu Kannagi Basil in Bengaluru and Nupur Anand in New York; Editing by Lananh Nguyen, Anil D'Silva and Mark Porter)