UPDATE 2-Brazil's Caixa to sharply slow lending growth this year

Wed Mar 26, 2014 3:29pm EDT

(Recasts to add comments, details on lending focus, background throughout)

By Guillermo Parra-Bernal

SAO PAULO, March 26 (Reuters) - Brazil's state-run Caixa Economica Federal plans to slow lending growth dramatically this year, in a sign the country's largest mortgage lender is seeking to preserve capital after years of rapid expansion.

Brasilia-based Caixa, which on Wednesday reported a sharp slump in fourth-quarter profit, plans to expand its loan book between 22 percent and 25 percent this year, down from 36.8 percent in 2013. At such pace, the bank would need no capital injection from the federal government, Caixa's sole owner, for 2014 and 2015, chief financial officer Marcio Percival said.

The bank will aim for Tier 1 and 2 capital ratios, or average regulatory capital under Basel II rules, of between 13.5 percent and 16 percent this year. The ratio ended last year at 15.1 percent. Currently, Caixa and the government are negotiating the dividend payout ratio that best helps bolster the bank's coffers, Chief Executive Officer Jorge Hereda said.

The move underpins government efforts to slow the pace of loan disbursements from state-owned banks and, with it, curtial National Treasury financing for them. Standard and Poor's, which on Monday cut Brazil's sovereign debt rating, remains skeptical of President Dilma Rousseff's ability to phase out a five-year-long strategy using state banks to ramp up credit ahead of the October election. Rousseff is expected to run for a second term.

"We believe we can grow and maintain the required balance in our business plan with this arrangement," Percival said at an event to discuss fourth-quarter earnings. With cash injections not coming as frequently from the government as in recent years, Caixa is considering other ways to replenish capital, he noted.

A potential offering of global bonds in international markets, which could help beef up the bank's capital base, will depend on whether market conditions are favorable, Percival added.

Caixa will focus primarily on mortgages and credit to infrastructure projects, and less on loans to large- and mid-sized companies and personal credit, executives said. Caixa's loan book rose above an average annual rate of 30 percent for the past three years, mainly under Rousseff's instructions.

Return on equity, a gauge of how well a bank spends shareholder money, is expected between 26 percent and 28 percent this year, compared with 26 percent in 2013. Profits should continue to grow at a faster pace than capital, the executives suggested.

Last year, the lender gave loan book growth guidance of between 32 percent and 40 percent. Outstanding loans at Caixa ended last year at 494.24 billion reais ($214 billion), the bank said in a statement.

EARNINGS

Caixa's net income rose 19.2 percent last year to 6.723 billion reais ($2.91 billion). Recurring net income, excluding one-time items, rose 20 percent to 5.195 billion reais in 2013, the statement said.

In the fourth-quarter, however, recurring net income tumbled 76 percent from the previous quarter to 399 million reais ($173 million). Compared with the year earlier, recurring profit fell 4.7 percent.

Recurring profit declined due to a surge in funding costs as the central bank raised interest rates throughout the year, the statement said. Caixa plans to compensate for the increase in funding costs by raising lending rates to the extent it does not drive customers to other banks, Hereda noted.

"We want to preserve our current market share, but we are conscious that we have a limit of 20 percent market share that we won't surpass," he said. Caixa's loans represented about 19 percent of the total banking system last year.

The bank's default ratio, or loans in arrears for 90 days or more, slipped to 2.3 percent of its loan book in the fourth quarter, from 2.4 percent in the previous three months.

($1 = 2.31 Brazilian reais) (Editing by Sophie Hares and Meredith Mazzilli)