* Recurring profit down 5.5 pct but tops expectations
* Bank sees loan book expanding 10 percent this year
* Provisions and defaults jump, offset lower expenses
* Results come a day after bank names Zabalza as CEO
By Guillermo Parra-Bernal and Aluísio Alves
SAO PAULO, April 25 Banco Santander Brasil SA
expects to grow lending by at least 10 percent this
year, less than rivals, as the bank, Brazil's largest foreign
lender, struggles with flagging demand for credit, low interest
rates and a jump in defaults.
Santander Brasil, a subsidiary of Spain's Banco Santander SA
, grew its loan book by 6 percent in the 12 months ended
in March, one-third the average pace of Brazil's banking system.
Growth is expected in segments where clients pay less interest
but are less likely to default, such as mortgages, Chief
Executive Marcial Portela said.
"This reflects our strategy of migrating toward credit lines
of better quality," Portela, who will be replaced by Jesús
Zabalza around July as CEO, told reporters in São Paulo.
"However, we still feel that demand for credit is not strong."
Santander Brasil is implementing the risk-off approach taken
on by rivals such as Itaú Unibanco Holding SA amid government
pressure to cut interest rates, a reluctance among consumers to
borrow and two years of weak activity. Defaults at Santander
Brasil jumped in the first quarter, triggering a 5.5 percent
drop in earnings, the lender said on Thursday.
First-quarter recurring profit -- a gauge of net income
excluding one-time items -- fell to 1.518 billion reais ($755
million), down 14.4 percent from a year earlier, as stringent
cost-cutting failed to offset falling interest income and
soaring loan delinquencies.
Shares fell 2 percent. Investors balked at Santander
Brasil's strategy of aggressively trimming bad-loan provisions
to bolster profit, saying it is preventing the lender from
catching up with its rivals in terms of profitability.
"The quality of results was very poor and leads to downside
risk to our earnings forecast this year," Marcelo Telles, an
analyst with Credit Suisse Group, wrote in a client note. "We
think that management has to rethink the bank's strategy for the
future, as Santander has not been able to deliver the
long-promised return-on-equity convergence with private peers
for a long time now."
Return on equity, a gauge of profitability for banks known
as ROE, fell to 12 percent in the first quarter from 12.8
percent at the end of last year. ROE, also a measure of how well
banks spend shareholder money, was 14.6 percent a year earlier.
Interest income fell to the lowest level in two years, fee
income rose less than expected, and defaults climbed to the
highest level since at least 2010. The results illustrate how
low interest rates are weighing on bank profits in Brazil, and
highlight Santander Brasil's struggles with defaults as Latin
America's top economy enters a third year of sub-par growth.
Portela said that loans in arrears for 90 days or more,
which rose in the first quarter to the equivalent of 5.8 percent
of Santander Brasil's loan book, are expected to fall in coming
The so-called default ratio was 5.5 percent in the fourth
quarter of last year. Analysts expected a so-called default
ratio of 5.6 percent.
Even as banks in Brazil have consistently failed to
accurately predict default trends in the past two years,
investors have been particularly stingy with Santander Brasil
because of Portela's reluctance to hike provisions as asset
The spike in defaults made management at Santander Brasil
extra cautious. The bank's loan book fell 0.1 percent to 211.7
billion reais on a quarterly basis.
Bad-loan provisions rose 9 percent to 3.371 billion reais,
the highest level in four quarters. Portela had cut such
provisions, the amount set aside to cover credit-related losses,
by more than 700 million reais since the second quarter of last
Santander Brasil probably will cut provisions as defaults
recede, Portela said.
Despite the drop in profit, the first-quarter earnings did
top average estimates in a Thomson Reuters poll, in part because
analysts underestimated the extent of cost cuts implemented by
Portela, 68, in his 3-1/2 years as chief executive.
Near record-low interest rates in Brazil drove the bank's
net interest margin, an average measure of how much Santander
Brasil charges on loans, down to 7.1 percent in the first
quarter from 7.2 percent three months earlier and 10.3 percent a
Interest income fell 2 percent on a quarter-on-quarter
basis, while fee income -- revenue from banking transactions
other than lending -- rose 2.3 percent. Expenses dropped 5.8
percent to 3.891 billion reais, the lowest level in a year, and
taxes were unusually low for a second quarter.
Santander Brasil's results weighed on earnings at its
beleaguered parent. Banco Santander, Europe's largest bank,
posted a 26 percent drop in net income as slowing growth in some
South American markets added to the gloom at home in Spain.