(Adds comments from analyst in paragraphs 5-7)
By Guillermo Parra-Bernal and Aluísio Alves
SAO PAULO May 7 (Reuters) - State-run Banco do Brasil SA missed first-quarter profit estimates on Wednesday after fee income fell short of expectations despite stringent expense controls and stable loan-loss provisions at the nation's largest bank by assets.
Recurring net income, or profit excluding one-time items, was 2.436 billion reais ($1.1 billion) in the quarter, up 0.5 percent from the prior three months and down 9.3 percent from a year ago, according to a securities filing. Analysts in a Reuters poll expected recurring profit of 2.512 billion reais for the quarter.
Interest income slipped as a shift towards less risky credit drove lending rates down in the quarter. Fee income, or revenue from financial services, sank 7.1 percent reflecting a seasonal pattern in which borrowers cut demand for cards and financial advisory. Expenses fell 8.1 percent amid Chief Executive Aldemir Bendine's efforts to make branches more cost-efficient.
Recurring return on equity slipped to 14 percent from 14.2 percent in the fourth quarter and 17.4 percent a year earlier. ROE, as the gauge of profitability among banks is commonly known, was expected at 13.6 percent in the poll. This was well below private sector peers Itaú Unibanco Holding SA's and Banco Bradesco SA's, which are above and close to 20 percent, respectively.
Shares shed as much as 1.5 percent on Wednesday.
"We see lackluster earnings evolution, a limited capital cushion, and a current return on equity that stands below what we consider to be the cost of equity," of about 17 percent, Saúl Martínez, a senior banking analyst with JPMorgan Chase & Co in New York, said in a client note. "At a high level, we think the results support our cautious stock view."
The company plans to discuss first-quarter results at a news conference later on Wednesday.
Gross interest income, or revenue from loan-related and securities trading-related transactions, fell 0.2 percent to 11.83 billion reais on a quarterly basis, but still above the poll's 11.70 billion estimate. Fee income was 5.74 billion reais, below the poll's estimate of 6.06 billion reais.
Sales, general and administrative expenses fell to 7.75 billion reais in the quarter after Banco do Brasil reworked third-party contracts with suppliers that resulted in cost savings. In the poll, the estimate was for expenses, which include payroll costs, of 8.41 billion reais.
Loan-loss provisions were stable as the 90-day default ratio fell slightly in the quarter, the bank said.
The bank's loan book reached 631.347 billion reais at the end of the quarter, below the poll's estimate of 634.428 billion reais. Consumer loans rose a meager 1 percent, while those to corporations and institutions rose 1.2 percent on a quarterly basis, fueled by loans to the government. Agribusiness lending rose 3.6 percent in the quarter.
The phase-in of deductions for the implementation of new Basel III capital rules began in the first quarter, with Banco do Brasil's Tier 1 capital ratio falling to 9.9 percent from 10.5 percent in the prior quarter. According to JPMorgan's Martínez, core Tier 1 ratio - which strips out hybrid capital instruments - fell to 7.8 percent from 8.2 percent in the same period.
($1 = 2.23 Brazilian reais) (Reporting by Guillermo Parra-Bernal; Editing by Chizu Nomiyama)