February 16, 2017 / 11:32 AM / 3 years ago

UPDATE 4-Banco do Brasil sets profitability as priority over market share

(Updates annual consensus data, share performance )

By Guillermo Parra-Bernal and Aluísio Alves

SAO PAULO, Feb 16 (Reuters) - Brazilian state-controlled Banco do Brasil SA will put profitability above market share to reduce a return-on-equity gap with private-sector peers, Chief Executive Officer Paulo Rogêrio Caffarelli said on Thursday.

At an event to discuss fourth-quarter results, Caffarelli said management targets this year aimed to pursue “profitability, efficiency and capital resilience” at Brazil’s No. 2 bank by assets.

Steps to reprice older loans and toughen risk standards will be accompanied by some asset sales to sharpen Banco do Brasil’s profitability focus, he said.

Earlier, Banco do Brasil announced 2017 targets with two new indicators - recurring net income, which excludes special items, and net loan-loss provisions - that domestic rivals use in their outlooks.

The bank’s shares gained as much as 3.1 percent to an all-time high of 32.86 reais on Thursday as new guidance presented a brighter picture for a lender long hobbled by Brazil’s harshest recession ever and years of state involvement.

The stock had fallen at the open as quarterly profit missed estimates because unexpectedly high loan-loss provisions offset resilient interest and fee income.

Banco do Brasil projects recurring profit of 9.5 billion reais to 12.5 billion reais ($3.11 billion to $4.09 billion) this year, an increase of up to 74 percent based on some adjusted numbers. Provisions could fall as much as 24 percent to between 20.5 billion reais and 23.5 billion reais.

The average estimate compiled by Thomson Reuters for recurring net income is 11.246 billion reais this year, slightly above the forecast’s midpoint.

Goldman Sachs analyst Carlos Macedo said the outlook “appeared conservative and achievable.”

Return on equity at Banco do Brasil, which has remained at single-digit numbers for an entire year, was one-third of larger rival Itaú Unibanco Holding SA’s 21 percent last quarter and a fraction of smaller peer Banco Bradesco SA’s .

Itaú unseated Banco do Brasil as Brazil’s largest bank by assets last quarter, partly reflecting Caffarelli’s bid to downsize the lender.

“Our steps are putting us on track to generate return on equity readings in line with those of our private-sector competitors,” Caffarelli said. “That’s why we’re more concerned about profitability than market share trends.”

The bank’s shares have doubled since May, when he was tapped as CEO to revamp the overstretched lender.


Recurring profit in the fourth quarter fell 25 percent from the third quarter to 1.747 billion reais, below the analysts’ average estimate of 1.927 billion reais.

Recurring return on equity slumped to 7.2 percent, the lowest in at least seven years, and missed the consensus estimate of 8.2 percent.

While most analysts expected a profit miss, investors including Azimut Brasil’s Ivan Kraiser instead looked to Caffarelli’s turnaround to improve the bank’s balance sheet.

With its regulatory capital ratio at a one-year high of 18.5 percent, Banco do Brasil has no need to request more funds from the National Treasury, its largest shareholder, executives said.

At the event, Caffarelli reiterated plans to sell unessential assets while keeping those that generate fee income. He does not see the need for another round of voluntary worker retirement plans, which last year helped reduce payroll by more than 10 percent.

Caffarelli’s efforts to reverse a deficit at pension fund Previ and his insistence not to hedge a mismatch between loans and deposits helped bolster Banco do Brasil’s bottom line and propped up interest income.

Interest income rose 2 percent from the third quarter, slightly below expectations. Fee income gained 6 percent, in line with estimates.

Provisions rose 13 percent on a quarterly basis, in line with consensus estimates, as Banco do Brasil had to write off loans for an unspecified corporate client in the oil and gas industry.

The increased provisions came after Banco do Brasil ramped up complementary loan reserves by 1.5 billion reais on a recurring basis, because of credit problems with specific clients.

The 90-day default ratio, a benchmark for delinquencies, came in below expectations, ending the year at 3.3 percent of outstanding credit. Banco do Brasil expects its consolidated internal loan book, which shrank 8.5 percent last year, to grow between 1 percent and 4 percent in 2017.

$1 = 3.0565 reais Editing by Bill Trott and Lisa Von Ahn

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