* Profit of 2.66 billion reais excluding items beats
* CFO Monteiro expects lower expenses, provisions for bad
* Bad loan provisions come in slightly above forecast
By Guillermo Parra-Bernal and Aluísio Alves
SAO PAULO, Nov 8 Banco do Brasil SA
does not expect expenses and provisions for bad loans to decline
until next year, after rampant credit-related losses at a unit
hurt third-quarter earnings at Brazil's biggest lender,
executives said on Thursday.
The state-controlled bank said it would still set aside 3.5
billion reais ($1.7 billion) to 3.7 billion reais in the fourth
quarter to cover credit-related losses. Provisions should fall
next year, Chief Financial Officer Ivan Monteiro said at a news
Higher-than-expected provisions and expenses, coupled with
lower revenue after an aggressive reduction in borrowing costs,
led to an 11 percent drop in profit at the bank in the third
quarter. Excluding special items, earnings came in at 2.66
billion reais, slightly above the average estimate of 2.63
billion reais in a Reuters poll of seven analysts.
Lending-related and operational expenses rose faster than
revenue, underscoring the strain Banco do Brasil faces as it
expands its loan book almost twice as fast as rivals. Loans in
arrears rose slightly, yet within expectations, in the third
"We believe third-quarter results should generate a
meaningful reduction in Wall Street estimates for next year,
which are still over-optimistic," Credit Suisse Group analyst
Marcelo Telles said in a client note.
The higher provisions came after Banco do Brasil had to
tighten risk assessment controls at Banco Votorantim SA, in
which it holds a 49.99 percent stake. Votorantim lost money for
the fourth straight quarter as delinquencies in its auto loan
"We are implementing a very conservative approach to credit
risk assessment in Votorantim," Monteiro said. "We expect that
to bring about good results, including a return to profit at
Banco Votorantim, within the next two quarters."
An imminent "new normal" marked by tougher oversight, margin
compression and lower profits has weighed on shares of Brazilian
lenders this year. The Bovespa stock exchange's financial sector
index has shed 13 percent since April, when President
Dilma Rousseff began a crusade to force banks to cut lending
Shares of Banco do Brasil dropped for the second straight
day, shedding 2.2 percent on Thursday to 21.97 reais.
Expectations of weak quarterly results were behind a 2.5 percent
decline in the stock over the past month, analysts said.
DECLINING PROFIT TREND
The quarterly results that Brazil's top three private-sector
banks announced this week have reinforced investors' concerns
that profits at the nation's lenders are sinking. Return on
equity, the industry's most widely followed gauge of
profitability, looks set to tumble further in coming quarters,
industry executives and analysts said.
Banco do Brasil's return on equity tumbled to 18.6 percent
in the third quarter from 21.4 percent in the second quarter and
22.6 percent a year earlier. It still beat the average estimate
of 16.8 percent in the Reuters poll, though.
The bank forecasts ROE at between 17 percent and 20 percent
for 2012. Credit Suisse's Telles said he expected ROE at Banco
do Brasil to "continue to decline, making the operating outlook
Interest income, or revenue from lending and trading of
securities before provisions, fell 3 percent to 11.51 billion
reais from the second quarter as trading income slumped 18
percent. Revenue from lending-related transactions declined 7.3
"We don't wake up every morning and come to work thinking
about how good trading-related results will be," Monteiro said.
Banco do Brasil's asset quality indicators were within
expectations, but underperformed those of private-sector rivals
like Itaú Unibanco Holding SA and Banco Bradesco SA
Banco do Brasil set aside 3.76 billion reais to cover bad
loans in the quarter, more than it had forecast, because of
growing auto loan-related losses at Votorantim.
Payroll, administrative and general expenses rose on both an
annual and a quarterly basis, weighing on earnings and driving
the company's so-called efficiency ratio to 46 percent from 44
percent in the second quarter. The lower the ratio, the more
cost-efficient a bank is.
Loans in arrears for 90 days or more, the most widely
watched gauge of delinquencies in Brazil's financial system,
rose slightly to 2.17 percent of the bank's total in the third
quarter from 2.15 percent in the second quarter. A year earlier,
this default ratio was at 2.11 percent.
Banco do Brasil's domestic loan book rose to 439.28 billion
reais at the end of the third quarter, up 3.9 percent from the
prior quarter. Annual growth of 18 percent came within the
company's credit expansion estimate of 17 percent to 21 percent