UPDATE 5-Brazil Itau Unibanco sees no sign of credit bubble

* Bank sees no sign of credit bubble

* Credit growth of 15-20 pct for 2011 is "strong bet"

* Net income jumps 21 pct y/y as return on equity soars

* Recurrent profit rises 21 pct but misses estimates

* Tumble in provisions helps offset doubling of expenses (Rewrites with comments from CEO, quote)

By Guillermo Parra-Bernal

SAO PAULO, Feb 22 (Reuters) - Brazil's largest private-sector bank, Itau Unibanco (ITUB4.SA), reported robust earnings on Tuesday and downplayed concerns over a possible credit bubble, saying that mortgage and consumer lending are growing at a sustainable pace.

Itau Unibanco's expected growth in loans of up to 20 percent is a "strong bet" on this year's economic expansion, CEO Roberto Setubal said. The estimate is "above" the central bank's projection for lending growth in 2011, he said.

"I don't see anything getting out of control. I see the central bank very cautious. In general, I don't see any signs of a credit bubble, in any modality of credit, at all," Setubal said at a news conference to comment on earnings.

Investors are concerned that rapid credit growth over the past five years could derail Brazil's fast-growing economy if it decelerates abruptly. But Setubal said all types of credit are gaining steam steadily, and the chances of some parts of the economy getting left behind while others boom are slim.

The bank is hopeful that mortgage lending will take off favorably this year.

Setubal's remarks come as Itau Unibanco reported an increase of 21 percent in its net income in the fourth quarter from a year earlier, as management slashed provisions for bad loans following a decline in defaults.

The Sao Paulo-based lender posted a profit of 3.89 billion reais ($2.34 billion), up from 3.21 billion reais a year earlier. Compared with the prior three months, profit surged 28 percent from 3.03 billion reais.

Excluding one-time items, fourth-quarter profit rose 21 percent to 3.40 billion reais, missing the average forecast of 3.47 billion reais among seven analysts in a Reuters poll. A year earlier, so-called recurring net income was 2.81 billion reais.

Analysts were at odds over the results. While some pointed to the sharp fall in bad loan provisions -- the biggest among the largest Brazilian banks -- others said expenses rose too much and defaults fell at a smaller pace than those of rivals.

Shares of Itau Unibanco fell for the third straight trading day on Tuesday, shedding 2.94 percent to 36.35 reais in Sao Paulo. The stock has gained 2.5 percent in the past 12 months, compared with a 1.2 percent decline in Brazil's main stock index, the Bovespa .BVSP.

"Fourth-quarter trends confirmed our assumptions, with strong top line boosted by sound credit growth and better asset quality offsetting rising operating expenses," wrote Jorg Friedemann, an analyst with Bank of America Merrill Lynch.

Setubal said the bank is in no "rush" to expand overseas.

RED-HOT CREDIT GROWTH

Like rivals Banco Bradesco (BBDC4.SA)(BBD.N) and state-controlled Banco do Brasil (BBAS3.SA), Itau Unibanco benefited from red-hot growth in Brazil's economy that has stoked demand for new credit and reduced defaults in consumer and corporate loans.

Interest income rose 12.3 percent as demand for financial services by companies and individuals helped offset a drop in businesses with rival lenders. Brazil's record job creation and wage growth helped borrowers stay current in their loans, allowing Itau Unibanco to trim provisions for bad loans by 67 percent in a year-on-year basis.

Provisions were roughly stable from the third quarter, despite a massive surge in credit in the last months of 2010.

The bank said about $1.6 billion in loan-loss provision reversals were categorized as one-time gains because of a change in the way it calculates credit-related risks.

The bank's return on equity, a key gauge of profitability, averaged 26.3 percent, up from more than 25.8 percent a year earlier and 21.6 percent in the third quarter.

Itau Unibanco's credit portfolio rose about 21 percent from a year earlier to 335.5 billion reais, fueled by an increase in consumer lending, mortgages and credit to small and medium-sized companies.

Net income reached 13.32 billion reais for all of 2010, compared with 10.07 billion reais in 2009. ($1=1.665 reais) (Editing by Lisa Von Ahn, John Wallace, Dave Zimmerman)