By Guillermo Parra-Bernal and Aluísio Alves
SAO PAULO Feb 13 Banco do Brasil SA expects to lend less this year due to flagging demand for credit among households and companies, a further sign that a weak economy and rising loan loss provisions will likely cut profits at Brazil's largest lender by assets.
The state-run lender, which reported unexpectedly weak fourth-quarter results on Thursday, unveiled guidance for loan book expansion between 14 percent and 18 percent this year, down from a range of 17 percent to 21 percent last year.
More modest disbursements coupled with efforts to expand credit in the least risky segments will lead to low single-digit growth in interest income, it said in a securities filing.
The lender's cautious guidance comes as Brazil's economy enters what is expected to be a fourth straight year of anemic growth, and data points to tepid consumption and job creation trends, which could hamper Banco do Brasil and its peers.
Banco do Brasil's shares fell more than 5 percent in early trading on the weak earnings and concerns about its potential operational performance and asset quality trends for 2014. Based on guidance for recurring return on equity, profit at Banco do Brasil this year could fall up to 13 percent this year, Bradesco BBI analysts said in a client note.
Recurring net income, or profit excluding one-off items, reached 2.424 billion reais ($1 billion) in the quarter, down 7.1 percent from the third quarter and 23.8 percent from the year-earlier period. A Reuters poll of eight analysts expected recurring profit of 2.606 billion reais for the quarter.
Banco do Brasil said it missed analyst estimates because of higher funding costs and a spike in loan loss provisions. Higher interest rates failed to spur the revenue gains that bolstered private-sector rivals, while expenses rose way above expectations.
"Though operating trends were mixed, we think the quarterly result is supportive of our view that earnings momentum will remain challenged in 2014," Saúl Martínez, an analyst with JPMorgan Securities, wrote in a client note.
Banco do Brasil expects demand for credit among farmers, households and companies across the board to lose momentum. Fee income, or revenue from financial services, could also grow at a slower pace than in 2013, underscoring the challenges the company faces to cross-sell different products.
Recurring return on equity, a gauge of profitability among banks, fell to 14.2 percent in the quarter, below the poll's 15.7 percent average estimate and the lowest level for the indicator since at least 2006.
Banco do Brasil estimates recurring ROE, as the gauge is commonly known, rising 12 percent to 15 percent this year, down from 14 percent to 17 percent in 2013.
Still, guidance for loan book growth and ROE remains "rather conservative" and could be raised over the course of this quarter, Chief Executive Officer Aldemir Bendine said at an event to discuss the quarterly results in São Paulo.
Shares fell 5.6 percent, the steepest intraday drop since July 2, to trade at 20.67 reais.
Bradesco BBI analysts led by Carlos Firetti cut their recommendation on Banco do Brasil's shares to "market perform" from "outperform" and put the price target under review. Goldman Sachs Group Inc analyst Carlos Macedo also put his recommendation and target for Banco do Brasil on review, citing the "disappointing" results and guidance.
Net interest income fell 0.9 percent to 7.77 billion reais despite a 6.7 percent jump in loan disbursements during the fourth quarter, which seasonally is a strong period because of the year-end holidays.
A sharp jump in funding costs in the wake of a series of central bank-led rate hikes to fight inflation signaled Banco do Brasil's growing dependence on market funding, analysts said.
Operational trends at Banco do Brasil contrasted with that of its fiercest rival, Itaú Unibanco Holding SA, in the quarter. Despite migrating toward low-risk lending segments, interest income at Itaú is falling, funding costs are receding and profitability is likely to rise further in 2014.
Banco do Brasil's loan book totaled 623.42 billion reais at the end of last year, representing annual expansion of 18.6 percent.
Loan spreads, or the difference between the rate that a lender charges and the cost of funding, contracted for a sixth consecutive quarter, yet the contraction was the smallest in six quarters. Loan growth remained well above the average among Brazil's banks, although it is slowly losing momentum.
Sales, general and administrative expenses rose a higher-than-expected 14 percent on a quarter-on-quarter basis, cutting into profits. Loan loss provisions rose 7 percent - the only case in which provisions rose among Brazil's four largest listed banks.
Delinquencies for over 90 days were stable at about 2 percent of outstanding loans in the fourth quarter. However, JPMorgan's Martínez said the result could have been helped by rapid loan book growth in the fourth quarter.
Bendine said provisions and defaults are expected to remain unchanged from levels seen throughout 2013.