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(Recasts to add analyst comments, share performance throughout)
By Guillermo Parra-Bernal and Aluísio Alves
SAO PAULO, Nov 4 (Reuters) - Itaú Unibanco Holding SA could extend an impressive run of record profits into coming quarters as Brazil's largest bank by market value gets a boost from government policies.
Economists expect the central bank to raise the benchmark Selic overnight lending rate by about 1 percentage point over the next year to fight inflation, while officials are considering cutting funding costs for banks to fight Brazil's economic downturn.
Marcelo Kopel, Itaú's senior vice president for risk and compliance, suggested on a conference call on Tuesday that the positive earnings impact of Itaú's focus on the safest borrowers and declining defaults may be losing steam. A higher Selic may allow banks to charge more for their loans, he noted.
Itaú seems "to be approaching a peak impact of tailwinds in ... the non-performing loans cycle, though higher upcoming benchmark rate hikes could extend the effect," said Carlos Macedo, an analyst with Goldman Sachs Group Inc in New York.
The central bank unexpectedly lifted the Selic to 11.25 percent last Wednesday. Sources told Reuters recently that government measures to stimulate certain credit segments are in the offing, including efforts to alleviate banks' funding costs.
Itaú earned record profit in the third quarter, beating estimates by a large margin as revenue jumped and loan disbursements surprised on the upside. Recurring net income, which excludes one-time items, was 5.457 billion reais ($2.2 billion) in the quarter, beating a Reuters poll estimate of 5.029 billion reais.
Shares jumped as much as 3 percent at the open, and were 1.8 percent higher at 37.22 reais at noon on Tuesday.
Profit rose 9.7 percent on a quarterly basis as interest income rose for the third quarter in four, defaults fell for a ninth straight quarter, and the bank continued to reprice an increased share of its loan book.
Interest income rose to 14.37 billion reais, in line with the poll's estimate. Net interest margin, the difference between what a bank charges in interest for its loans and its cost of funding, remained at a 2 1/2 year-high.
The results highlight the success of Chief Executive Roberto Setubal's strategy of taking on less credit risk, which fanned profits despite weak credit demand and rising defaults in Brazil. Itaú's results have outpaced those of rivals for the past six quarters.
However, executives have acknowledged that earnings will be more closely linked to the economy's health going forward. Banks in Brazil are grappling with a fourth year of flagging growth, high inflation and eroding confidence.
Return on equity was 24.7 percent at the end of September, the highest in four years. Itaú's loan book rose 3.2 percent to 503.35 billion reais, above the poll's estimate of 497.38 billion reais.
Kopel said ROE, as the indicator is known, will stay above 20 percent next year but could slip to the levels seen in the third quarter.
$1 = 2.4953 Brazilian reais Reporting by Guillermo Parra-Bernal; Editing by W Simon and Meredith Mazzilli