(Recasts to add plan on provisions, share performance, comments throughout)
By Guillermo Parra-Bernal and Aluísio Alves
SAO PAULO, Nov 12 (Reuters) - State-controlled Banco do Brasil SA will increase loan-loss provisions if necessary to prevent rising defaults from further dampening the profit outlook for the nation’s largest lender by assets, executives said on Thursday.
Even if Banco do Brasil’s consumer and corporate delinquencies follow industry trends in coming quarters, management is prepared to raise excess and generic reserves or step up recurring provisions to mitigate any sign of erosion in credit quality, Chief Risk Officer Walter Malieni said.
The plan comes as bulkier provisions hammered third-quarter results. A sharp jump in early default indicators suggests loan book quality will suffer for a longer period, a fact that drove shares down as much as 3 percent on Thursday.
Provision trends are the main issue for local banks because of the country’s recession, which could turn out to be the longest since the 1930s. That, coupled with borrowing costs at a nine-year high, will stoke defaults until late next year, executives at rival lenders Itaú Unibanco Holding SA and Banco Bradesco SA recently said.
Last quarter, recurring profit was 2.881 billion reais ($766 million), the lowest in six quarters. The result, which missed a Reuters poll estimate of 3.017 billion reais, was down 5.2 percent and 0.2 percent on a quarterly and annual basis.
While interest and fee income revenue rose, taxes fell and expenses remained under control, Banco do Brasil used gains in the value of deferred tax assets to boost so-called excess and generic reserves, hurting profit. The 90-day default ratio rose to 2.2 percent, a three-year high.
Tier 1 capital, a gauge of financial strength that compares Banco do Brasil’s core equity and risk-weighted assets, slipped 0.6 percentage point to 8.1 percent. Recurring return on equity fell to 13.3 percent, the lowest in at least six years and below the poll’s 15.2 percent.
“While weaker growth assuages capital concerns, we are concerned that other factors, like profitability, could worsen,” said Carlos Macedo, an analyst with Goldman Sachs Group Inc.
Management trimmed their outlook for ROE to a range between 13 and 16 percent this year.
Provisions hit a record 6.407 billion reais, while excess reserves amounted to 2.370 billion last quarter. The coverage ratio, or reserves for bad loans, rose to a three-year high of 213 percent.
Executives expect loan renegotiations, which soared 26 percent on an annual basis, to remain stable in coming quarters.
$1 = 3.7629 Brazilian reais Editing by Jason Neely and W Simon