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By Guillermo Parra-Bernal and Aluísio Alves
SAO PAULO, Oct 29 (Reuters) - Banco Bradesco SA, Brazil's No. 2 private-sector bank, is comfortable with loan-loss provisions at current levels even as the nation's worst recession in a quarter century and fallout from a massive corruption scandal at state firms threaten to hamper earnings in coming quarters, executives said on Thursday.
Last quarter, Bradesco used gains in the value of deferred tax assets to boost so-called excess and generic reserves while setting aside more money to cover loan losses. Both steps will cushion Bradesco from any worsening of Brazil's economy, said Chief Financial Officer Luiz Carlos Angelotti.
In recent weeks, soaring bankruptcy requests and a slumping currency reinforced signs of a weak business climate for Bradesco and peers in Latin America's largest economy. Still, Angelotti expects defaults to climb very gradually even if unemployment climbs and activity sags significantly next year.
Trends in provisions remain the biggest issue for Brazilian banks because of the recession, which could turn out to be the longest since the 1930s. This, coupled with fallout from a massive corruption scandal at state firms, could spur more defaults and weigh down industry profits.
"We can raise or cut provisions a little over the coming quarters, but the fluctuations will be minimal," Angelotti said at a conference call to discuss third-quarter results. "We are positive that the default ratio will stabilize at some point during next year, and so will loan-loss provisions."
Bradesco's coverage ratio, or a gauge of reserves for bad loans, at Bradesco rose to 205 percent in the quarter, underscoring Chief Executive Officer Luiz Carlos Trabuco's prudent approach to risk management.
Shares of the Osasco, Brazil-based bank fell 0.9 percent on Thursday, as investors overlooked Bradesco's third-quarter profit beat to focus on lingering loan book quality issues.
Recurring net income, or profit before one-time items, was 4.533 billion reais ($1.16 billion) last quarter, up 0.6 percent from the second quarter. A Reuters poll of seven analysts predicted recurring profit of 4.437 billion reais.
Trabuco boosted recurring provisions by 8.5 percent, the fastest pace in five quarters, as consumer delinquencies climbed. Loan-loss provisions rose to 3.852 billion reais, while so-called excess reserves were increased by 2.2 billion reais last quarter.
Consolidated provisions rose to 7.8 percent of Bradesco's loan book last quarter, the highest level since at least 2013.
$1 = 3.9053 Brazilian reais Editing by Jane Merriman and Andrew Hay