* Recurring profit 2.89 bln reais vs analysts' view 2.88 bln
* Net interest income down 0.6 percent from 2nd quarter
* Return on equity drops to 19.9 pct
* Default ratio falls for first time in six quarters
By Guillermo Parra-Bernal
SAO PAULO, Oct 22 Third-quarter profit at Banco Bradesco < BBDC4.SA> n arrowly b eat estimates o n Monday as smaller provisions for ba d loans he lped offset lo wer re venue and flagging growth in loan disbursements.
Defaults fell for the first time in six quarter s, an early sign that credit quality issues that recently hampered earnings m ay be su bsiding. Bu t ret urn on equity fell below 20 percent for the first time in at least four years, underscoring the eff ects of a go vernment crusade to push down bor rowing costs.
Recurring net income, a gauge of profit that excludes one-time items, rose 0.9 percent from the second quarter to 2.89 billion reais ($1.43 billion), the bank said in a statement. Nine analysts poled by Reuters expected, on average, 2.88 billion.
Despite the earnings beat, Bradesco's results reinforced the view that banks are headed for a pe riod of declining profitability. As record-low interest rates keep re venue un der pressure, b anks will have to use ex pense con trols a nd fas ter loan growth to maintain profits, analysts said.
Bradesco's net interest income fell 0.6 percent from the second quarter to 10.91 billion reais because of a decline in revenue from trading financial securities and a small drop in the average rate it charges customers for loans.
" After Bradesco ' s results, we also understand that other banks will have d ifficulties s howing n et interest income ex pansion, considering the sector's ongoing ma rgin pr essure," Bank of America Merrill Lynch analyst Jorg Friedemann wro te in a client note.
Shares in Bradesco tumbled, shedding as much as 2.1 percent to 31.65 reais, t he steepest intraday drop in two weeks. The stock has gained about 15 percent this year b ut is down 8 percent over the past month.
Return on equity, an indicator widely used to measure profitability at banks, fell to 19.9 percent from 20.6 percent in the second quarter and 22.4 percent a year earlier. The Reuters poll had forecast 18.1 percent.
IS ASSET QUALITY IMPROVING?
Bradesco's loan book rose 1.8 percent, missing estimates, as the lender took a more prudent approach on credit and demand for new loans remained weak. L ending rose 11.8 percent on an annual basis, well below the 14 percent to 18 percent range the bank is a iming for this year.
Lending rose to 371.67 billion reais at the end of September.
Loans in arrears for more than 90 days - the industry's most widely watched gauge for credit delinquencies - fell in line with expectations in the poll. The so-called default ratio slipped to 4.1 percent of total loans at the end of September from 4.2 percent in the second quarter.
The decline in the indicator followed a tumble in delinquencies at the largest corporate borrowers, Bradesco said. The 90-day non-performing loan ratio for large companies more than halved to 0.4 percent, while that for consumer loans remained at 6.2 percent for the third straight quarter.
However, according to BTG Pactual Group analysts Marcelo Henriques and Eduardo Rosman, part of the improvement i n the default ratio re sulted from an increase in loan renegotiations and write-offs.
The lower default ratio allowed the Osasco, Brazil-based lender to cut net provisions for bad loans by 3.1 percent from the second quarter to 3.303 billion reais. The lower provisions helped prop up return on equity, despite sliding interest-, trading- and insurance-related revenues.
Bank m anagement was scheduled to hold a conference call later on Monday.