By Guillermo Parra-Bernal and Natalia Gómez
SAO PAULO Oct 22 Brazil's Banco Bradesco SA
, grappling with hefty bond losses and weak credit
demand, expects intense competition from state-run banks to
limit any attempt to raise borrowing costs and offset slower
growth in interest income.
Executives at the Osasco, Brazil-based bank said on Tuesday
that recent increases in the benchmark Selic overnight lending
rate are more likely to raise fundraising costs in the short
term than lending spreads. Spreads are the difference between
the interest rate a bank charges on a loan and the lender's cost
Despite higher domestic interest rates, a mix that favors
disbursements of less risky types of credit such as mortgages
and paycheck-deductible loans should continue driving down the
bank's net interest margins going forward, Chief Financial
Officer Luiz Carlos Angelotti said in a conference call with
investors to discuss third-quarter earnings.
"The reality we are faced with is one of intense competition
and our commitment to a plan to focus on less riskier segments
in the credit markets," he said.
Slow loan book growth, coupled with a drop in shareholder
equity after the value of Bradesco's government bond holdings
slumped, is fueling concerns over revenue trends at Bradesco for
coming years. On Monday the bank trimmed its estimate for growth
this year in net interest income, revenue exclusively from
lending activities, for the second time in three months.
The estimate reduction came even as the bank's third-quarter
profit beat expectations, partly because of a healthier top
line. Earnings before one-time items, or recurring profit,
totaled 3.082 billion reais ($1.42 billion), above the 3.066
billion reais estimate from a Thomson Reuters poll of seven
According to Morgan Stanley & Co analyst Jorge Kury, despite
the profit beat, Bradesco posted weak results, hurt by margin
pressure and no growth in fee income and in so-called
interest-earning assets. Bradesco shares were up 0.9 percent on
Tuesday, practically reversing most of Monday's losses.
Angelotti, who declined to provide estimates for lending
growth next year, said he expects "the credit market in 2014 to
be very similar to this year." Bradesco's loan book should
expand close to 11 percent next year because "asset quality
remains a key priority at this point," he added.
'AVAILABLE FOR SALE' SECURITIES
To prevent problems in the bank's bond holdings from hurting
future earnings, management is considering transferring some
bonds from the "available for sale" line to the "hold to
maturity" line, Angelotti said. That would help reduce the risk
that further accruals of losses in the value of those securities
would hamper the bank's bottom line.
Bradesco's position on government debt, known in Brazil as
NTNs and booked as "available for sale" securities, kept having
a negative impact on shareholder equity. For the third straight
quarter, the bank booked an equity writedown related to the
market value of "available for sale" securities, leading to an
accumulated unrealized loss of 2.3 billion reais.
"The unrealized losses ... means a reduced likelihood of
higher net interest income growth in coming years, given that
the bank has locked in a yield below the current market price,"
said Regina Longo Sánchez, an analyst with Itaú BBA.
Angelotti expects trading-related income to average 200
million reais in coming quarters, above results in the second
and third quarters. Three months ago, he expected an average
between 200 million reais and 300 million reais going forward.
With loan disbursements expected to grow at the bottom of
the bank's 11 percent to 15 percent estimate range for this
year, Bradesco is focusing on banking services such as credit
cards, investment-banking activities and insurance to offset
weak trends in interest- and securities trading-related top
Angelotti expects provisions on bad loans in the fourth
quarter to stay around levels seen in the third quarter. The
bank, which set aside about 2.88 billion reais from earnings in
the July-to-September quarter to cover overdue credit, is likely
to "see the indicator fluctuating around this number," he said
on the call.
Management cut provisions on bad loans for the fifth
straight quarter as loan delinquencies fell, especially in
consumer lending. The reduction in provisions, which directly
boosts earnings by freeing up capital, was 7 percent from the
second quarter and 13 percent from a year earlier.
According to Morgan Stanley's Kury, further declines in
provisions - the main item behind Monday's profit beat - may not
be sustainable. He said the third-quarter's annualized provision
charge of 4.2 percent represented a six-year low for Bradesco.