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
"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
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
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.