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By Guillermo Parra-Bernal
SAO PAULO, Feb 4 (Reuters) - Rising borrowing costs, declining defaults and an unexpected jump in loan disbursements drove record profit for Itaú Unibanco Holding SA in the fourth quarter, even after expenses at Brazil's largest private-sector bank exceeded expectations.
Recurring net income, or profit excluding one-off items, came in at a record 4.680 billion reais ($1.95 billion) in the quarter, up 16.4 percent from the prior three months, according to a securities filing on Tuesday. A Thomson Reuters poll of seven analysts predicted profit of 4.144 billion reais.
On a quarterly basis, recurring profit rose at its fastest in nine quarters. Loan book expansion was the strongest in three years, delinquencies fell for a sixth straight quarter and net interest income reached the highest level in a year - taking most analysts in the poll by surprise.
The stunning results led shares of Itaú to post their biggest gain in 2 -1/2 years. Analysts at Grupo BTG Pactual raised their recommendation on Itaú to "buy," saying earnings data partially offset concerns over a weak economy in Brazil.
"Itau Unibanco is clearly ahead of the pack," wrote Credit Suisse Securities analyst Marcelo Telles in a client note. Fourth-quarter results "came to confirm Itaú is turning the business around very successfully."
The results underpin the success of Chief Executive Officer Roberto Setubal's strategy in the past 18 months, consisting of growing in mortgages and payroll loans rather than riskier credit, and controlling expenses. Setubal, Itaú's CEO since 1994, is steering the bank through three years of flagging economic growth and rising household debt.
"We are reaping what we sowed in recent years," Setubal said in a news conference at Itaú's São Paulo headquarters. "We are prepared to grow in a consistent, sustainable way going forward."
Return on equity (ROE) - a gauge of profitability that measures how well a bank spends shareholder money - jumped to 23.9 percent in the fourth quarter, the highest in three years. The poll expected ROE, as the indicator is known, of 21 percent.
ROE could fluctuate or even move downwards this year, because of market turmoil that could impact Itaú's trading-related income line, Setubal said.
Preferred shares in Itaú gained as much as 6 percent, the highest intraday jump since Sept. 1, 2011. Shares in smaller rivals Banco Bradesco SA and Banco Santander Brasil SA, whose prices fell last week as their quarterly results let investors down, got a lift from Itaú's jump.
Borrowing costs are rising in Brazil as part of central bank efforts to head off accelerating inflation. As a result, risk-adjusted net interest margin, or the average rate at which Itaú lends money, climbed to 6.9 percent in the fourth quarter from 6.5 percent in the prior three months.
Net interest income, or revenue from loan-related transactions, rose to a higher-than-expected 12.703 billion reais due to higher rates. Fee income, or revenue from financial services, rose 8 percent on a quarterly basis.
Loan book, fee income and expense growth estimates that Itaú released on Tuesday also indicate that earnings momentum will continue into 2014, analysts said.
Itaú forecasts loan book growth - or credit - to rise between 10 percent and 13 percent this year. Bad loan provision expenses could total between 13 billion reais and 15 billion reais this year. Based on the mid-point of Itaú's guidance, Telles, the Credit Suisse Securities analyst, expects Itaú's net profit to rise 21 percent this year.
Loan book growth, which had been modest during the first nine months of the year, accelerated in the fourth quarter - signaling that higher rates in Latin America's largest economy are beginning to offset lending risks. Outstanding loans at Itaú rose 5.9 percent in the quarter to 483.40 billion reais.
Credit card and large corporate loans drove growth in Itaú's loan book during the quarter, followed by rising disbursements of mortgage and payroll loans, the filing said. Loans across Latin America jumped too.
Last year, credit rose 13.3 percent, exceeding the bank's guidance of 8 percent to 11 percent loan book expansion.
Sales, general and administrative expenses rose at a faster pace than analyst estimates in the quarter, thanks to charges related to the integration of merchant acquiring unit Rede.
For 2013, SG&A expense growth of 7.4 percent surpassed the bank's own estimate between 4 percent and 6 percent, the filing said, citing the impact of Rede integration and a jump in payroll costs stemming from a new wage accord with unions.
Itaú seeks growth for the indicator between 5.5 percent and 7.5 percent excluding charges from the integration of consumer finance company Credicard, which it bought from Citigroup Inc.
Loan loss provisions surprised on the upside, despite a reduction in the loan default ratio. Provisions were 4.191 billion reais, above the poll's estimate of 3.981 billion reais.
Defaults for more than 90 days fell for a sixth straight quarter, hitting 3.7 percent of the bank's loan book. The poll expected a so-called loan default ratio of 3.8 percent.