SAO PAULO Brazil's largest private-sector banks are braced for another quarter of weak earnings as sagging economic growth continues to drag on demand for new loans while preventing defaults from falling more rapidly.
First-quarter data from the country's top three listed non-government banks should reinforce the view that profitability trends in the sector remain fragile, with performance hinging excessively on cost-cutting as interest income slips, a Thomson Reuters poll with analysts showed on Friday.
The business outlook for Itaú Unibanco Holding SA (ITUB4.SA), Banco Bradesco SA BBDC4.SA and Banco Santander Brasil SA (SANB11.SA) did not improve in the quarter, analysts said. Central bank data on the credit market pointed to disappointing loan book expansion, which likely weighed on top-line performance.
"Overall, we think the quarter is unlikely to be an inflection point signaling an acceleration of earnings momentum," said Saúl Martínez, a senior banking analyst with JPMorgan Securities in New York.
Banks have suffered in the face of government pressure to cut borrowing costs, a reluctance among indebted consumers to borrow and two years of flagging activity. Last year, industry profit fell for the first time in 15 years as banks had to focus on less-risky types of credit that charge lower spreads - the difference between the interest rate charged on a bank loan and the cost of funding.
Return on equity, a gauge of how well banks invest shareholder money, rose only for Itaú - suggesting that profit gains stemmed from stringent expense reductions and a focus on activities other than loans. Net interest margin, the average rate earned on loans, fell for a sixth quarter, the poll found.
This year's first quarter was probably the third in a row that banks saw default ratios receding, which, although positive, was more the result of a risk-off approach implemented by Itaú and peers in recent months than an improving economy, said Marcelo Henriques, an analyst with BTG Pactual Group.
In addition, income from the trading of bonds, stocks and other financial instruments fell on expectations that policymakers could raise borrowing costs to head off inflation. The trend likely continued into the second quarter, Henriques said.
TRENDS IN MARGINS, DEFAULTS
Shares of those three banks are up a combined 0.3 percent this year, while the benchmark Bovespa stock index .BVSP has dropped 14 percent. Potential swings in the price of those stocks hinge on underlying trends in interest income and margins, default ratios and provisions - the money they set aside to write off souring loans, analysts said.
Bradesco, Brazil's No. 2 private-sector lender, is scheduled to release first-quarter earnings on Monday before markets open. Net income excluding one-off items, known as recurring profit, is expected to rise by 2 percent to 2.98 billion reais ($1.38 billion) on a quarter-on-quarter basis, according to the average estimate of 10 analysts in the poll.
Return on equity, a gauge of profitability for banks known as ROE, likely sank by about 2 percentage points to 17.1 percent in the quarter, reflecting stagnant interest income, an uptick in expenses and lower net interest margin, the poll showed.
"Profitability levels should be lower than in previous quarters," Boris Molina, an analyst with Santander Investment Securities, said about Bradesco. Defaults remained stable in the poll.
Banco Santander Brasil, the nation's largest foreign lender, is forecast to post a 14.2 percent quarter-on-quarter drop in recurring profit to 1.33 billion reais. The 10 analysts polled expect strong loan-book growth, rising nonperforming loans and slightly higher provisions at the lender, which is set to post earnings on April 25 before markets open.
Santander Brasil's ROE probably plummeted to an average 9.5 percent in the quarter. Loan delinquencies climbed to 5.6 percent of total loans from 5.5 percent in the prior quarter.
"We expect another tough quarter for Santander due to the ongoing deterioration in credit quality and stronger-than-expected pressure on the top line," said Carlos Firetti, an analyst with Bradesco BBI.
Recurring net income at Itaú Unibanco, Brazil's most profitable bank, likely slipped 1.4 percent to 3.45 billion reais on a quarterly basis, a poll of 11 analysts showed. Despite the decline in profit, operational trends are expected to be more favorable, the poll found.
Provision expenses likely fell 7.5 percent to 4.619 billion reais, below management's guidance. Net interest margin came slightly lower in the quarter, the poll found.
Itaú reports earnings on April 30 before markets open. ROE is expected at 18.6 percent, up from 18.4 percent in the prior three months, after expenses fell an average 0.6 percent and the default ratio fell to 4.7 percent, the lowest level in seven quarters.
(Reporting by Guillermo Parra-Bernal; editing by Matthew Lewis)