(Recasts with comments from analysts and executives, share performance; adds details)
By Guillermo Parra-Bernal and Aluísio Alves
SAO PAULO Aug 5 Itaú Unibanco Holding SA , which beat estimates to post record net income for the second quarter on Tuesday, sees solid profits through year-end despite a tepid economy, executives of Brazil's biggest private-sector bank said.
Return on equity, lending spreads, defaults and loan-loss provisions should stay stable, while steps to curb expenses may provide support for earnings in coming quarters, Marcelo Kopel, Itaú's senior vice president for risk and compliance, said on a conference call held to discuss quarterly results.
While a focus on low-risk lending segments and high interest rates in Brazil has given Itaú a strong profit push for the past two years, earnings after this year will hinge more on how quickly an economic recovery takes place, Kopel said. Banks in Brazil are grappling with a fourth year of weak economic growth, above-target inflation and eroding business and consumer confidence.
"The economy will be an important component of how sustainable earnings are going forward," Kopel said.
Shares rose to a record intraday high on Tuesday, validating Chief Executive Officer Roberto Setubal's choice to pick profits over market share. The results marked the second time in three quarters that Itaú has posted record profits.
Recurring net income, or profit excluding one-time items, was 4.973 billion reais ($2.2 billion) in the quarter, above the 4.634 billion reais estimate in a Reuters poll.
On a quarterly basis, interest income rose at its fastest pace in five years. Loan book expansion gained momentum after a hiccup in the previous quarter, defaults fell for an eighth straight quarter and income from trading of financial securities hit the highest level in two years.
"These results should certainly dismiss the more apocalyptical views ... as they provide reassurance of very benign profitability outlook despite slow volume growth," said Marcelo Telles, a senior banking analyst at Credit Suisse Securities.
A surge in interest income propelled by rising mortgage and payroll loan disbursements, and higher borrowing costs helped offset higher expenses and loan-loss provisions. Itaú will not change its loan book growth estimates for this year, Kopel said.
Interest income climbed 8.8 percent to 13.593 billion reais, compared with the poll's 13.231 billion reais estimate. Net interest margin, or the average rate charged on loans, rose to 7 percent, the highest level in 2 1/2 years.
Recurring return on equity, a measure of profitability, was 23.7 percent, compared with 22 percent in the poll. ROE, as the indicator is known, should remain around that level this year, Kopel said.
Provisions were 4.465 billion reais, above the poll's estimate of 4.002 billion reais. Expenses rose to 9.577 billion reais, above the poll's forecast of 8.886 billion reais.
Itaú's loan book expanded 1.6 percent on a quarterly basis, reaching 487.6 billion reais. The 90-day default ratio fell to 3.4 percent from 3.5 percent in the previous quarter.
($1=2.26 Brazilian reais) (Editing by W Simon, Andrea Ricci and Peter Galloway)