(Recasts to reflect share performance; adds comments, details throughout)
By Guillermo Parra-Bernal and Aluísio Alves
SAO PAULO, Aug 13 (Reuters) - Shares of Banco do Brasil SA sank on Thursday as the nation's largest lender raised estimates for loan-loss provisions this year and an unexpected jump in loan renegotiations in the second quarter fanned concerns that defaults may rise amid an economic slump.
Management led by Chief Executive Alexandre Abreu increased year-end estimates for growth in interest income, or revenue from loan-related transactions, to a range between 11 percent and 15 percent, from 9 percent to 13 percent. Provision estimates were raised too, a sign that more capital will be deployed to offset rising consumer and corporate defaults.
Abreu's newfound tack on loan renegotiations took investors by surprise. While renegotiated loans often go up during a credit downturn, the line's 90 percent jump on a quarterly basis sparked worries of an upcoming deterioration in the quality of Banco do Brasil's loan book.
The jump in renegotiations "raises a yellow flag," said Eduardo Rosman, an analyst with Banco BTG Pactual SA.
Shares of the state-controlled lender fell 4.8 percent to 19.37 reais, their steepest intraday drop in three weeks. The stock is down 36 percent this year, the worst performer among the nation's largest listed lenders.
In contrast, Banco do Brasil's rivals have just signaled that their loan-loss provisions peaked last quarter following sharp increases in recent months. More loan renegotiations helped lower Banco do Brasil's default ratio to 2 percent of total loans - the lowest among Brazil's top banks.
"We are anticipating loan refinancing to educate and discipline the borrower," Chief Risk Officer Walter Malieni said at a conference to discuss second-quarter results.
Lower provisions for consumer loans helped Banco do Brasil beat profit estimates in the past quarter. Recurring net income, or profit before one-time items, rose to 3.04 billion reais ($875 million) last quarter, above a Reuters poll forecast of 2.98 billion reais.
Still, despite the profit beat, some key operating metrics showed weaker-than-expected performance.
Had management provisioned 100 percent of fresh non-performing loans last quarter, profit would have been 1 billion reais lower than reported, Marcelo Telles, an analyst at Credit Suisse Securities wrote in a client note.
Interest income fell for the first quarter in nine as loan book growth and average borrowing costs came in below expectations. Recurring return on equity, a measure of profitability, was 14.2 percent, below the poll's 14.4 percent estimate and within the bank's guidance for the year.
$1 = 3.4765 Brazilian reais Reporting by Guillermo Parra-Bernal; Editing by Jason Neely, W Simon and Jonathan Oatis