SAO PAULO (Reuters) - Banco Bradesco SA (BBDC4.SA)(BBD.N) on Monday cut its lending growth projections for this year as an abrupt economic downturn and a jump in loan delinquencies led Brazil’s No. 2 private sector bank to miss second-quarter profit estimates.
The Osasco, Brazil-based bank also signaled plans to boost revenue in areas other than credit and said it expects its loan book to grow 14 percent to 18 percent this year, down from a prior range of 18 percent to 22 percent.
Bradesco preferred shares shed 5 percent in morning trading.
The revision underscores growing caution among local bankers as Brazil enters what could be a second year of below-trend economic growth. The central bank sees bank lending growing 15 percent this year, down from about 18 percent in 2011, as consumers rein in debt and the economy cools not long after it appeared to overheat.
Bradesco missed most second-quarter profit as bad loan provisions hit the highest in more than two years after the fifth straight quarter of rising delinquencies.
Despite that, revenue jumped even as interest rates in Latin America’s largest economy fell to an all-time low.
Second-quarter net income rose 1.7 percent to 2.83 billion reais ($1.40 billion) from a year earlier, but missed the average estimate of 2.92 billion reais in a Reuters poll of 11 analysts.
An increase in fee, insurance and trading-related income helped offset lower interest rates, a jump in bad loan provisions and higher payroll expenses. On a quarter-to-quarter basis -- the gauge of operating performance most widely followed by analysts -- profit rose 1.4 percent.
Net interest income -- revenue from lending operations and the sale and purchase of financial securities -- jumped 16.5 percent from a year earlier, while fee income, or revenue from financial services, climbed 14 percent.
“Top-line trends were generally good, especially considering ample market concern about spread pressure,” a team of JPMorgan Securities analysts led by New York-based Saul Martínez wrote in a client note.
Loans in arrears for more than 90 days -- an industry gauge for credit delinquencies -- rose within expectations. The so-called default ratio rose to 4.2 percent of Bradesco’s total loans at the end of June from 4.1 percent in the first quarter and 3.7 percent a year earlier.
Behind the ratio increase was a considerable deterioration in the credit quality of corporate loans. The 90-day non-performing loan ratio for corporate loans jumped by half a percentage point to 0.9 percent -- significantly driving up the riskiest segment of its loan book, known as the E-H loan category.
The bank set aside more to cover bad loans. Provisions rose 39.8 percent from a year earlier and 10.1 percent from the prior quarter -- to 3.41 billion reais.
The bulk-up in provisions pushed return on equity (ROE) to its lowest level since at least the start of 2010. The profitability measure slid to 20.6 percent from 23.2 percent a year earlier and 21.4 percent in the prior quarter.
The Reuters poll predicted ROE at 20 percent.
Management is expected to discuss second-quarter results on a conference call later in the day.
Excluding one-time items, earnings rose 1.5 percent to 2.87 billion reais. Analysts expected 2.92 billion reais, according to the poll.
Despite the earnings miss, some numbers were viewed as encouraging, which might stoke investor hopes that the worst is over for a deterioration in the quality of Bradesco’s loan portfolio, the nation’s economic slowdown and government pressure on the sector to lower rates.
Among Brazil’s largest banks, only Bradesco shares have not fallen in 2012.
The bank’s preferred stock is up 0.5 percent this year, compared with a 2.6 percent decline in the MSCI Brazil Large Financials index .MIBR0FND0PUS.
Since April, Brazil President Dilma Rousseff has demanded private-sector banks boost lending and cut rates to help revive an ailing economy.
State-controlled banks Banco do Brasil (BBAS3.SA), the nation’s largest, and Caixa Econômica Federal CEF.UL did so to force rivals to follow suit.
Still, Bradesco Chief Executive Luiz Carlos Trabuco’s efforts to improve the quality of the company’s loan book mix paid off. The average interest rate the bank charges for all lending transactions remained stable at 7.9 percent in the quarter, despite a decline in Brazil’s benchmark Selic overnight lending rate to a record low.
Bradesco kept its 2012 projection for net financial margin growth at 10 percent to 14 percent, the equivalent to gross financial margin in a nonfinancial company.
The bank is reining in disbursements in riskier segments like auto loans and focusing on mortgages and paycheck-deductible lending -- two segments that charge lower rates but are less likely to default.
That is helping to stabilize defaults among individuals, the bank added. Bradesco’s ratio for overdue loans between 61 days and 90 days, a predictor of future trends in defaults, remained stable at 1 percent in June for the fourth month in a row.
While delinquencies for small-sized companies and individuals, a key source of concern in recent quarters, were stable sequentially, higher corporate loan defaults signaled the segment might be under strain as economic growth falters.
Bradesco expects fee income to expand this year by 10 percent to 14 percent, from a prior estimate of 8 percent to 12 percent.
It stuck with its expectation for growth in payroll, sales and administrative expenses at 8 percent to 12 percent.
The company’s loan book rose 14.1 percent to 364.96 billion reais from a year earlier, about 1.6 percent below analysts’ estimates.
($1 = 2.02 Brazilian reais)
Reporting by Guillermo Parra-Bernal; editing by Lisa Von Ahn and Jeffrey Benkoe