UPDATE 3-Banco do Brasil foresees robust loan growth after profit beat

Thu Feb 21, 2013 11:17am EST

* Recurring profit up 20 percent, above poll estimate

* Bank to boost loan book at faster pace than rivals

* Interest income surprisingly climbs; defaults fall (Adds details, comments from executives, analysts in paragraph 2-5)

By Guillermo Parra-Bernal and Aluísio Alves

SAO PAULO, Feb 21 (Reuters) - State-controlled Banco do Brasil SA said on Thursday it plans to boost lending this year at a faster pace than rivals, betting that a recovering economy, falling delinquencies and aggressive market share gains will bolster profit for the country's largest bank.

Disbursements may expand between 16 percent and 20 percent in 2013, slower than last year's 23.1 percent growth, but still far more quickly than the country's major private-sector banks. Banco do Brasil's loan book, which totaled 525.7 billion reais ($268 billion) in 2012, is Brazil's largest.

Betting that delinquencies will remain stable this year, Banco do Brasil plans to aggressively grow mortgage lending as faster economic growth helps propel "massively" funding of infrastructure projects, Chief Executive Aldemir Bendine said at an event to discuss fourth-quarter earnings.

Despite the strain that such fast growth might create on the bank's capital base, Bendine said profitability this year could top management estimates. Banco do Brasil projects return on equity (ROE), a widely-followed gauge of profitability among banks, between 14 percent and 17 percent this year.

"If our performance tops expectations in the first months of the year, don't be surprised if we move that guidance range up," Bendine told reporters.

Banco do Brasil reported earlier on Thursday higher-than-expected fourth-quarter earnings because of a drop in bad-loan provisions and increased charges to borrowers on the back of robust lending growth.

Recurring profit, which excludes one-time items, rose 20 percent to 3.180 billion reais ($1.6 billion) from the prior quarter, according to a securities filing. A Thomson Reuters poll of four analysts had forecast 2.464 billion reais.

Return on equity climbed to 21.2 percent in the fourth quarter from 18.1 percent in the prior quarter. The average estimate in the Reuters poll was 16.1 percent.

The bank's shares posted their biggest intraday gain in more than two months, after the company posted fourth-quarter profit that beat analysts' expectations. The stock rose as much as 3.7 percent to 25.20 reais, the second gain in three sessions.

SKEPTICAL ANALYSTS

Banco do Brasil, likewise its biggest shareholder, the federal government, is betting on a recovery across-the-board in an economy that has underperformed for the past two years. Brazilian President Dilma Rousseff has used the bank as a tool to kick-start the economy, in a strategy that has been questioned as too risky by financial industry analysts.

Net interest income surged 12 percent, running counter to trends among Banco do Brasil's rivals, as the lender charged more interest for some loans.

Net interest margin, or the interest earned from loans excluding funding costs, rose slightly to 5.1 percent from 5 percent in the third quarter even after borrowing costs in Latin America's largest economy fell to a record low.

While these margins, known as NIMs, are falling for all banks in Brazil as Rousseff presses lenders to cut borrowing costs, margin compression at Banco do Brasil has been surprisingly milder than at private-sector rivals despite its aggressive commercial approach.

"Overall results were encouraging, especially as NIMs and asset quality remained stable," said Mario Pierry, an analyst with Deutsche Bank Securities.

But some analysts questioned the quality of Banco do Brasil's profit beat, saying some trends are unsustainable.

Trading-related revenue almost doubled on a quarterly basis, while recoveries of non-performing loans were higher than expected in the poll. Those two items, coupled with a decline in provisions for legal suits in the quarter, propped earnings in an abnormal way.

"The lines which explain the beat to our numbers were not really high-quality lines," said Credit Suisse Group analyst Marcelo Telles. "Additionally, Banco do Brasil has been growing its loan portfolio very aggressively in an environment of still sluggish economic growth and higher consumer leverage - a pickup in provisions is yet to come, which would lead to decline in ROE."

The bank's loan book expanded 9.3 percent on a sequential quarter-on-quarter basis and 24 percent from a year earlier, well above the 2 percent to 4 growth posted by private-sector rivals. Lending growth was driven by corporate loans, which rose 12 percent on a quarter-on-quarter basis, and agriculture lending, up 10 percent. Consumer loans grew at a more moderate pace of 6 percent.

STRATEGY

Unlike Itaú Unibanco Holding SA, the nation's largest private-sector lender, Banco do Brasil stepped up lending both in risky segments, such as auto loans and mid-sized companies, and safer products like mortgage and paycheck-deductible credit where spreads tend to be smaller but defaults are less likely.

Bolstering recurring profit, Banco do Brasil cut provisions on nonperforming loans by 3.4 percent from the third quarter after short-, medium- and long-term defaults fell. Loans in arrears for 90 days or more, a benchmark gauge for delinquencies in Brazil's financial industry, fell to 2.1 percent of outstanding credit from 2.2 percent in the previous three months.

Net interest income should grow between 7 percent and 10 percent, while income from non-lending financial services - a category of revenue known as fee income - is expected to come between 10 percent and 14 percent.

($1 = 1.96 Brazilian reais) (Reporting by Guillermo Parra-Bernal; Editing by Lisa Von Ahn and W Simon)

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