(Corrects U.S. dollar conversion of recurring net income in paragraph 3 to $1.74 billion, not $1.74 billion reais. Removes word “reais” after U.S. dollar figure)
* Recurring profit $1.74 bln
* Cost controls, lower provisions bolster earnings
* Operating expenses fall 2.5 percent
By Guillermo Parra-Bernal
SAO PAULO, April 30 (Reuters) - Profit at Itaú Unibanco Holding SA , Brazil’s largest bank by market value, beat estimates in the first quarter as lower bad loan provisions and expenses helped offset flagging revenue trends that are likely to extend into coming quarters.
Itaú’s results suggested profit was boosted by a year-long policy to avoid riskier loans, not the effects of an improving economy. Itaú’s net interest margin - average interest earned on loans - declined for the sixth straight quarter, and the bank’s shares fell 1.1 percent.
The São Paulo-based banking giant on Tuesday reported recurring net income, a measure of profit excluding one-time items, of 3.51 billion reais ($1.74 billion), up just 0.3 percent from the 2012 fourth quarter. A Thomson Reuters poll of 11 analysts expected recurring profit of 3.45 billion reais.
Brazil’s 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, profits in the industry fell for the first time in 15 years as banks focused on less-risky types of credit that charge lower spreads, the difference between the interest rate on a bank loan and the cost of funding.
Itaú’s results reinforced the view that profitability trends in the banking sector remain fragile, even after defaults fell from record highs last year. Itaú’s smaller rivals Banco Bradesco SA and Banco Santander Brasil SA last week reported credit growth below estimates for this year, with steep declines in revenue.
“Itaú’s results are consistent with our views that the bank should be able to compensate for net interest margin compression with improved asset quality and operational efficiency gains,” said Mario Pierry, head of equity research with Deutsche Bank Securities.
Itaú Chief Executive Roberto Egydio Setúbal has said that making the lender more cost-efficient should partially offset the effects of low borrowing costs in Brazil and flagging demand for credit among households. His focus on caution is beginning to pay off as Itaú is choosing financial health over growth in an environment of extreme uncertainty for banks.
Profit suffered little from a plan to restate some income over the past two years. Yet interest income fell for the third quarter in a row, securities trading declined more than expected, and loan disbursements grew slightly below estimates on an annual basis.
Net interest income, or revenue from lending transactions, slid 6.8 percent, while trading of securities dropped 32 percent. Fee income fell for the first quarter in a year, reflecting declining activity in investment banking, asset management and cooling credit card purchases.
Net interest margin, known as NIM, began to stabilize after six quarters of dramatic declines. Risk-weighted NIM, or interest earned taking into account the credit risk embedded, fell to a multi-year low of 5.9 percent in the first quarter from a revised 6 percent in the prior three months and 7.3 percent a year earlier.
The bank revised higher its estimates for growth in fee income this year, to a range of 15 percent to 18 percent, compared with 11 percent to 14 percent previously.
Bolstering profit, Itaú slashed bad-loan provisions by 12.1 percent to 4.42 billion reais, below estimates of 4.62 billion reais. The bank sees provisions totaling between 19 billion reais and 22 billion reais this year, below analysts’ average forecast of 24 billion reais.
Operating expenses fell 2.5 percent to 8.28 billion reais in the first quarter, below expectations of 8.41 billion reais.
Loans in arrears for 90 days or more, an industry benchmark for defaults, slipped to the equivalent of 4.5 percent of outstanding loans, from 4.8 percent in the prior quarter. Analysts had expected a so-called default ratio of 4.7 percent.
“Itaú massively outperformed its private peers on asset quality this quarter,” Marcelo Henriques, an analyst with BTG Pactual Group, wrote in a client note.
But the bank saw a spike in short-term defaults, an indication that asset quality is suffering as households and companies remain overleveraged. Loans in arrears between 15 and 90 days jumped to 4 percent of total loans in the three months ended in March, the first quarter of worsening delinquencies in five.
$1 = 2.01 Brazilian reais Reporting by Guillermo Parra-Bernal; Editing by Jeffrey Benkoe, Grant McCool and John Wallace