UPDATE 4-Brazil's Bradesco cuts loan growth estimate after profit miss

Mon Jul 22, 2013 1:09pm EDT

* Recurring profit at 2.978 bln reais misses estimates

* Guidance cut suggests cautious take on Brazil economy

* Shares reverse early losses despite equity adjustment

* Return on equity slumps to lowest in over four years (Adds comments from executives, financial details, updates stock price)

By Guillermo Parra-Bernal and Natalia Gomez

SAO PAULO, July 22 (Reuters) - Banco Bradesco SA on Monday cut projections for lending and interest income growth for this year as an economic slowdown in Brazil and flagging trading-related results led the bank to miss second-quarter profit estimates.

Brazil's No. 2 private-sector bank, based in Osasco, forecasts growth on its loan book between 11 and 15 percent this year, down from a prior range of 13 to 17 percent. It also signaled efforts to boost revenue in areas other than credit.

The revision underscores growing caution among private-sector banks as Brazil enters a third year of below-trend economic growth. Bradesco's results, which fell short of expectations, reinforced the view that profitability trends in Brazil's banking industry remain fragile, with performance increasingly hinging on expense cuts as credit growth stagnates.

"Overall we still find management's guidance optimistic, particularly with regards to net interest income and loan growth," said Marcelo Telles, a senior banking analyst with Credit Suisse Securities in São Paulo.

Net income excluding one-time items, a widely used gauge of earnings known as recurring profit, totaled 2.978 billion reais ($1.33 billion), below the average profit estimate of 3.021 billion reais in a Thomson Reuters poll of eight analysts.

The profit miss came mostly in the wake of a slump in gains from trading of securities, which totaled 18 million reais - the lowest quarterly level since the start of 2009. Trading-related income plummeted from 197 million reais in the first quarter.

Dismal performance in the trading line, which affected Bradesco's banking and insurance operations equally as the value of the bank's government debt holdings fell by about 9 billion reais in the quarter alone, brought down shareholders' equity to 66 billion reais from 69.4 billion reais in the prior quarter.

"This won't impose any significant economic loss on the bank in coming quarters - this is not a trend," Chief Executive Luiz Carlos Trabuco told reporters on a conference call.

Shares reversed early losses, and were up 2 percent at 28.32 reais in early afternoon. Bradesco's preferred shares, the bank's most widely traded class of stock, are down 12 percent this year.

'NORMAL LEVELS'

Trabuco and Chief Financial Officer Luiz Carlos Angelotti said trading-related income is expected to return to "normal levels" between 200 million reais and 300 million reais a quarter in "the near future."

Recurring profit rose 1.2 percent on a quarter-on-quarter basis as an 8.3 percent rise in fee income helped offset the weak interest and trading income trends and provisions for bad loans, which did not decline. Recurring profit rose 3.9 percent from the same period a year earlier.

Net interest income fell to the lowest level in six quarters, while Bradesco's loan book rose 2.8 percent to 402.52 billion reais - slightly above the poll's 2.6 percent estimate. Management trimmed estimates for net interest income growth this year to a range between 4 and 8 percent, from a prior range between 7 and 11 percent.

The central bank's decision to raise the benchmark interest Selic rate twice in the quarter probably propped up Bradesco's net interest margin - or the average rate earned on loans - after four straight quarterly declines. The indicator, known as NIM among analysts, stood at 7.2 percent in the second quarter.

Still, Angelotti said that NIM faces "some downward pressure through the end of the year," adding that the indicator could fall to 7 percent.

For more than a year, Bradesco has reined in disbursements in riskier segments like auto loans and focused on mortgages and paycheck-deductible lending - two segments that charge lower rates but where defaults are less common.

Despite those efforts, return on equity - a measure of profitability in the banking industry known as ROE - fell to 18.8 percent on a recurring basis. While the result beat the poll's forecast of 17.4 percent, ROE slipped to its lowest level since at least the end of 2008.

Bradesco's loan book ended the quarter at 402.52 billion reais, up 2.6 percent on a quarterly basis. On an annual basis, lending rose 10.1 percent, below revamped guidance for credit growth between 11 and 15 percent this year.

Loan defaults for 90 days or more, the industry's benchmark for delinquencies, posted a steeper-than-expected decline in the second quarter to 3.7 percent of outstanding credit. In the first quarter, the so-called default ratio stood at 4 percent.

Analysts in the poll expected the default ratio at 3.9 percent at the end of June. Trabuco and Angelotti expect defaults to stabilize or even decline in coming months.

In spite of the lower loan delinquencies, Bradesco set aside 3.09 billion reais in provisions for bad loans, or 0.5 percent less than in the prior quarter, reflecting a cautious outlook for Brazil's economy in coming months.

($1 = 2.25 Brazilian reais) (Editing by Chizu Nomiyama and Matthew Lewis)

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