* CEO Portela sees defaults easing in first half
* Shares decline as earnings quality disappoints
* Recurring profit beats forecast in Reuters poll
* Rise in defaults weighs on parent's profit
By Guillermo Parra-Bernal and Aluísio Alves
SAO PAULO, Jan 31 Fourth-quarter profit at Banco
Santander Brasil SA disappointed investors despite
beating analysts' expectations, raising questions about the
ability of Brazil's largest foreign lender to stem the impact of
record-low borrowing costs and rising delinquencies.
Interest income dropped to the lowest level in a year, fee
income rose but fell short of expectations, and expenses topped
analysts' forecasts, the bank reported on Thursday. The results
confirmed the extent to which lower interest rates are weighing
on profits and highlighted the bank's struggles in dealing with
stubborn defaults as the Brazilian economy enters a third year
of sub-par growth.
Santander Brasil, a subsidiary of Spain's Banco Santander SA
, earned recurring profit, or income excluding one-time
items, of 1.598 billion reais ($803 million), up 6.5 percent
from the third quarter. In a Thomson Reuters poll, six analysts
forecast, on average, recurring profit of 1.29 billion reais.
Santander Brasil shares fell as much as 3.2 percent on
Thursday after investors balked at Chief Executive Marcial
Portela Alvarez's strategy of aggressively trimming bad-loan
provisions to bolster profits and offset the impact of sliding
revenue and rising delinquencies. Profit was also propped up by
an abnormal slump in the effective tax rate for the quarter.
"The headline beat doesn't tell the story," JPMorgan
Securities analysts led by Saul Martinez wrote in a note.
"Santander Brasil remains a 'show me' story, in our view."
Management cut bad-loan provisions to 3.096 billion reais,
the lowest level in three quarters. The banks has cut such
provisions, the amount set aside to cover credit-related losses,
by more than 700 million reais in the past two quarters.
As banks in Brazil have failed to accurately predict default
trends in the past two years, they have had to increase bad-loan
provisions. Unlike peers, Santander Brasil saw delinquencies
rise in the fourth quarter, and forward-looking indicators
signaled this trend would continue.
Loans in arrears for 90 days or more, the benchmark for
delinquencies, rose to the equivalent of 5.5 percent of its loan
book, compared with 5.1 percent in the third quarter. Analysts
expected a so-called default ratio of 5.2 percent.
According to Credit Suisse Group analysts led by Marcelo
Telles, Santander Brasil is under-provisioned by between 700
million reais and 1 billion reais at current default levels. "We
do not believe the bank will be able to sustain provisions at
such low levels vis-à-vis the asset quality deterioration in the
quarter, and a pick-up should be expected," they wrote in a
WEAK LOAN BOOK EXPANSION
Portela Alvarez, speaking at a news conference in Sao Paulo,
said defaults are "not a worrisome issue for us." He expects
delinquencies in the corporate loan book to start easing in the
first half of the year, with consumer defaults falling before
Part of the spike in delinquencies in the fourth quarter was
because Santander Brasil "put the brakes on loan renegotiations,
especially with consumers," he said. For several quarters,
analysts have pointed to the high level of credit renegotiations
as one of the biggest risks for Santander Brasil's asset quality
Compared with the 2011 fourth quarter, recurring profit
dropped 2.7 percent. Investors in Brazil follow
quarter-on-quarter results more closely than annual comparisons.
The jump in bad loans in Latin America's largest economy
weighed on the parent company's 2012 results. The Spanish giant
Banco Santander struggled last year as defaults rose in Latin
America and particularly in Brazil, which generates 26 percent
of its earnings and where growth is faltering.
Santander Brasil's net interest income, or proceeds from
lending transactions excluding funding costs, fell to 4.717
billion reais from 4.883 billion reais in the third quarter. Fee
income, or revenue stemming from insurance, brokerage and
investment-banking services, rose 3 percent, well below
expectations in the poll.
Lending rose 2.2 percent from the third quarter to 211.96
billion reais but was below estimates of a 3.7 percent gain.
Expenses rose 3 percent, below the poll's estimate of 4.6
The annualized return on average equity at Santander Brasil
rose to 12.2 percent from 11.7 percent in the third quarter.
ROE, a widely used indicator for profitability in the sector,
was 13.5 percent a year earlier. Analysts in the poll expected
Loan book growth at Santander Brasil confirmed a trend of
slow expansion among private-sector lenders. On Monday, Banco
Bradesco SA reported weak growth in disbursements as
demand for fresh credit remains subdued.