Banco do Brasil Q2 profit rises more than expected

* Assets surge 44 pct on Nossa Caixa, other takeovers

* Loan portfolio expands 32.8 pct to 252.5 bln reais

SAO PAULO, Aug 13 (Reuters) - Banco do Brasil (BBAS3.SA), Brazil's largest state-run bank by assets, said early on Thursday its second-quarter profit surged 43 percent on increased lending and after it sold a stake in credit card processing company VisaNet.

Net income jumped to 2.35 billion reais ($1.28 billion) from 1.64 billion reais a year ago. Recurring profit, which excluded extraordinary gains from the VisaNet (VNET3.SA) stake sale, rose 18 percent to 1.73 billion reais, the bank said in a securities filing.

Banco do Brasil was expected to report a second quarter recurring profit of 1.5 billion reais, according to the average estimate of seven analysts in a Reuters survey.

Return on equity, a key gauge of profitability, averaged 33.2 percent in the second quarter, up sharply from 23.8 percent in the previous quarter and 27.9 percent a year earlier.

Banco do Brasil, like other public banks Caixa Economica Federal and state development bank BNDES, has expanded its loan book faster than private-sector banks, gaining market share in the country's financial system.

Its loan portfolio grew 32.8 percent year-on-year in the second quarter to 252.5 billion reais, led by a 69 percent increase in consumer credit and a 34.5 percent expansion in corporate loans.

By comparison, Brazil's two largest private sector banks, Itau Unibanco (ITUB4.SA) (ITUB.N) and Bradesco (BBDC4.SA)(BBD.N), saw 15.1 percent and 18.1 percent year-on-year growth in their loan books respectively.

Banco do Brasil said its bad debt provisions jumped 21 percent from the first quarter to 17.76 billion reais, reflecting "an adverse economic outlook." The bank did not provide year earlier figures for bad debt provisions.

Default rates, measured by loans that have remained unpaid for 90 days as a percentage of total debt, rose to 3.3 percent from 2.5 percent in the second quarter of 2008, the bank said.

Banco do Brasil finished the quarter with 598.84 billion reais in total assets, 43.9 percent higher than in the second quarter of 2008, after a series of acquisitions in recent quarters including Sao Paulo state bank Nossa Caixa.

The bank surpassed private-sector rival Itau Unibanco, which ended the second quarter with 596.4 billion reais in assets, to become the largest bank in Latin America by assets. ($1=1.834 reais) (Reporting by Elzio Barreto; Editing by Dhara Ranasinghe) ((elzio.barreto@thomsonreuters.com; Tel: +55 11 5644-7725; Reuters Messaging: elzio.barreto.reuters.com@reuters.net))