(Adds share performance, comments throughout)
By Guillermo Parra-Bernal and Aluísio Alves
SAO PAULO, Nov 5 (Reuters) - State-run Banco do Brasil SA on Wednesday cut its estimate for loan book growth this year, a sign that management is increasingly cautious about the challenges facing the nation's economy next year.
Brazil's No. 1 bank by assets lowered its forecast for credit expansion this year to a range of 12 percent to 16 percent. It had previously expected 14 percent to 18 percent.
In the third quarter, Banco do Brasil's loan book grew 2 percent, the slowest pace in a year, and expanded 13.2 percent on an annual basis, near the low end of the new target. The grimmer outlook indicates weaker consumer spending, a cooling labor market and languid confidence may extend into next year.
"There is a clear retraction of the consumer that has created this overhang," Chief Financial Officer Ivan Monteiro said at a São Paulo event to discuss earnings.
Shares of the bank, which in recent years expanded rapidly by grabbing market share from private-sector peers by slashing borrowing costs, fell 7 percent, their steepest intraday plunge since Oct. 23.
Also on Wednesday, Banco do Brasil posted the weakest set of quarterly results among Brazil's top four banks, with profit missing estimates as an expansion in interest income fell short of expectations.
Earnings before special items came to 2.885 billion reais ($1.2 billion), below the 3.014 billion reais average estimate of five analysts in a Reuters poll. Profit slipped 3.9 percent from the previous three months despite a 32 percent tumble in income tax payouts as well as lower-than-expected loan-loss provisions and operating expenses.
Interest income rose less than expected as Chief Executive Officer Aldemir Bendine put the brakes on disbursements of consumer and corporate loans, although average borrowing costs climbed marginally.
The widely watched gauge of recurring return on equity came in at 16.1 percent, slightly above the poll's 15.9 percent estimate but below the second quarter's 17.1 percent.
Banco do Brasil's loan book totaled 662.4 billion reais at the end of September. The tepid growth in the quarter was due to the soccer World Cup that Brazil hosted in June and July, a delayed start of this year's harvest and the presidential campaign, Monteiro said.
In another negative development, loan delinquencies rose for the first quarter in four, reaching their highest level in almost two years. Analysts including JPMorgan Securities' Saúl Martínez warned that state-run banks looked more exposed to a stagnant labor market that should spark an uptick in defaults and force them to make additional loan-loss provisions.
Provisions were roughly stable at 4.571 billion reais, well below the poll's estimate.
The 90-day default ratio edged higher to 2.1 percent of outstanding loans, compared with 2 percent in the second quarter.
$1 = 2.4959 Brazilian reais Reporting by Guillermo Parra-Bernal; Editing by Lisa Von Ahn