UPDATE 2-Banco do Brasil profit sinks as race for market share weighs

Wed May 15, 2013 11:33am EDT

* Recurring profit at $1.3 bln misses estimates in poll
    * Drastic cut in provisions helped offset lower revenue
    * Management vows to maintain loan book growth guidance
    * Recurring ROE dips to lowest level in over four years


    By Guillermo Parra-Bernal
    SAO PAULO, May 15 (Reuters) - Banco do Brasil SA 
missed first-quarter profit estimates on Wednesday, as declining
revenue at Brazil's largest bank by assets offset the effects of
faster loan disbursements and a reduction in provisions for
souring credit.
    Recurring profit, a measure of earnings before one-time
items, slumped 15.6 percent from the previous quarter to 2.69
billion reais ($1.3 billion). A Thomson Reuters poll of five
analysts had forecast a recurring profit of 2.77 billion reais.
    The results corroborated a view among investors that the
state-run lender is sacrificing profits to gain market share at
the behest of the federal government, its main shareholder.
Interest income dropped sharply and return on equity slumped to
the lowest level in at least four years as the bank's loan book
expanded at the fastest annual pace in almost three years.
    Shares fell 0.4 percent on Wednesday on concerns a drop in
delinquencies in the first quarter may be reversed amid
aggressive disbursement policies. Provisions were slashed after
the loan default ratio slid to the lowest in almost two years.
    "The results are the clear proof that the profitability seen
in the fourth quarter of 2012 was far from sustainable," Credit
Suisse Group analysts led by Marcelo Telles said in a client
note. "We acknowledge, however, that earnings risk remains high,
given an expectation of a pick up in provisions in the coming
quarters."
    Banco do Brasil is betting on a recovery across-the-board in
an economy that has grown below potential 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 some financial industry analysts. 
    Growth in Banco do Brasil's loan book accelerated to 26
percent at the end of March, the fastest annual pace since the
second quarter of 2010. Alexandre Abreu, the senior vice
president in charge of retail banking, said Banco do Brasil has
no plans to revise its 16 percent to 20 percent estimate for
credit growth this year.
    Chief Financial Officer Ivan Monteiro sought to allay
concerns that fast credit growth could put the bank at risk in
the future, saying a focus on mortgages, payroll-deductible
loans, car and secured consumer lending could provide a cushion.
Some of those segments are considered safer than small
enterprise loans, for instance, because they are secured and
charge less in interest.
    On a quarter-on-quarter basis, credit rose 4.1 percent,
totaling 547.3 billion reais - above the poll's estimate of
545.1 billion reais.
    
    RETURN ON EQUITY SLUMPS
    Return on equity, a benchmark gauge for profitability in the
banking industry, tumbled to 17.4 percent in the first quarter
from 21.2 percent in the prior three months. The average
estimate in the Reuters poll for the indicator, known as ROE,
was 16.4 percent. 
    In order to buffer ROE from the impact of falling interest
income, management will keep reining in expenses, Monteiro said.
It "is still too early" to drive down management estimates on
expense growth for this year, he added.
    Net interest income slipped 7.8 percent, in tandem with
trends among private-sector rivals, as the bank agreed to
government demands to charge less on loans. The indicator was
expected to contract by 2 percent, according to the poll.
    The risk-weighted net interest margin, or the interest
earned from loans based on the risk assumed, slid to 3.1 percent
from 3.5 percent in the fourth quarter of last year. Borrowing
costs in Latin America's largest economy fell last year to a
record low. 
    Loans in arrears for 90 days or more, a benchmark for
delinquencies in Brazil, fell to 2 percent in the first quarter
from 2.2 percent in the prior three months, allowing Banco do
Brasil to slash provisions for overdue credit. Expenses related
to bad loan provisions tumbled almost 10 percent on a
quarter-on-quarter basis to 3.28 billion reais.
    A 5.8 percent drop in operating expenses from the previous
quarter also helped limit the decline in profits.
    "Results were mixed, with the weak margins offsetting an
impressive performance in asset quality and solid expense
control," said Carlos Macedo, a banking analyst with Goldman
Sachs Group in São Paulo. 
    According to Macedo, going forward "it is likely spreads and
margins come under further pressure." It is unclear, he added,
how the "aggressive" loan origination undertaken last year will
fare in the coming months, "which indicates a more cautious
stance."
    Monteiro said results in coming quarters could be boosted by
Banco Votorantim SA's return to profit - something
that could happen as early as the third quarter. Banco do Brasil
owns a 49.9 percent stake in Votorantim and is currently in
talks to increase its stake.
    Seven quarters of losses at Votorantim, a lender specialized
in car loans, have weighed on Banco do Brasil's profit, leading
to a 2 billion reais capital injection last year.
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