UPDATE 5-Brazil's Bradesco sees modest growth after profit miss

Mon Jan 28, 2013 9:57am EST

* Recurring profit 2.92 bln reais, misses poll estimate

* Provisions fall from third quarter, helping net income

* Loan book expands slightly below guidance for last year

* Stock drops for third straight day, sheds 1.1 percent

By Guillermo Parra-Bernal

SAO PAULO, Jan 28 (Reuters) - Banco Bradesco SA forecast modest lending growth this year after a small decline in provisions, stubborn loan delinquencies and a continuing squeeze on margins led Brazil's No. 2 private sector bank to miss fourth-quarter profit estimates.

Bradesco on Monday projected credit growth for this year between 13 percent and 17 percent. The bank's loan book expanded 11.5 percent last year, below guidance of 14 percent to 18 percent provided to investors last July.

The forecast underscores growing caution among private-sector lenders as Brazil's economy enters what could be the third consecutive year of below-trend economic growth. Bradesco is reining in disbursements in riskier segments like auto loans and focusing on mortgages and paycheck-deductible lending -- areas where interest rates tend to be lower but defaults are less likely.

"We feel that our policy of disbursements is adequate ... We are not putting the brakes on credit," Chief Executive Luiz Carlos Trabuco told reporters in a conference call to discuss quarterly earnings.

Profit at Bradesco slightly missed analysts' estimates as lower insurance-related income and higher operating expenses offset the positive impact of a decline in bad loan provisions.

The lender earned recurring profit, or net income excluding one-time items, of 2.918 billion reais ($1.44 billion) in the quarter, up 0.9 percent from the prior three months. The number was below the average estimate of 2.950 billion reais in a Thomson Reuters poll of six analysts.

Provisions fell a smaller-than-expected 2.8 percent from the third quarter but remained at still-high levels. Insurance income, or the difference between underwritten premiums and casualties, sank 7.2 percent from the prior quarter and expenses rose, all of which limited profit gains.

"We expect a slightly negative reaction from markets," UBS Securities analysts led by Philip Finch wrote in a client note. "Elevated loan-loss provisions were the main reason for the profit miss."

Preferred shares of Bradesco fell for a third straight day on Monday. The stock shed 1.7 percent to 37.13 reais, the lowest level in about two weeks.

EARNINGS QUALITY

Last year, Bradesco's loan book rose to 385.53 billion reais, slightly below management guidance. Trabuco said the rise was less than expected partly because the slowing Brazilian economy sapped demand for new credit among companies and consumers.

"We are optimistic that this year things will get better on the credit front," Trabuco noted.

Loans in arrears for more than 90 days, a gauge for credit delinquencies, remained unchanged for a second straight quarter. The default ratio was 4 percent of Bradesco's total loans in the fourth quarter, in line with forecasts.

Defaults will ease only gradually throughout this year, Chief Financial Officer Luiz Carlos Angelotti said in the call, adding that a reduction in provisions will be closely linked to the behavior of delinquencies.

Even after recurring profit came in at the highest level since at least the first quarter of 2009, investors will likely question the decline in net financial margin - the interest Bradesco earns from loans excluding funding costs - and tepid expectations for increases in fee and insurance income.

Return on equity, a gauge of industry profitability referred to as ROE, slid to a four-year low of 19.2 percent in the fourth quarter from 19.9 percent in the third quarter. That was above the 18 percent forecast in the poll but still the lowest in almost four years.

Angelotti said ROE may end between 18 percent and 20 percent this year.

Analysts predict Bradesco's data could reinforce the view that profitability in the sector will keep declining as record-low interest rates hamper revenue and force lenders to roll over maturing loans at a discount. In their view, ROE will likely keep sinking throughout this year for Bradesco and its peers.

The net financial margin fell for a third straight quarter to 7.3 percent due to a decline in market interest rates coupled with a change in the loan book mix. Central bank policymakers trimmed the benchmark overnight Selic rate to a record-low 7.25 percent in the fourth quarter.

About 40 percent of Bradesco's loan book will mature by June and could be re-priced at a lower interest margin, Angelotti said. He expects net interest margin to fall "on a gradual manner" toward 7 percent by year-end.

Bradesco expects net interest income, or revenue stemming from loan-related transactions, to expand between 7 percent and 11 percent this year, compared with growth of 8.3 percent in 2012. It forecast fee income growth between 9 percent and 13 percent, following a rise of 14.4 percent last year.

Operational expenses would rise between 4 percent and 8 percent this year, a sign that Bradesco might put additional emphasis on operational efficiency, Trabuco added.