(Recasts to add details, management comments, share performance throughout)
By Guillermo Parra-Bernal
SAO PAULO, Jan 28 (Reuters) - Banco Bradesco SA, Brazil's No. 2 private sector bank, expects loan book growth to slow and loan-loss provisions to rise significantly this year, highlighting the headwinds facing Latin America's largest economy.
Bradesco's loan book could grow between 1 percent and 5 percent this year, compared with a 4.2 percent rise last year, management said on Thursday at a call to discuss fourth-quarter results. The range, the lowest this decade, signals prudence as Brazil grapples with the longest recession since at least 1901.
In an indication that the worst of a credit market downturn that began a year ago is yet to come, loan-loss provision expenses are expected between 16.5 billion reais and 18.5 billion reais ($4.02 billion to $4.51 billion) this year. They rose 20 percent last year, the fastest clip in three years.
"The challenging outlook is demanding from us a careful handling of expectations," Chief Executive Luiz Carlos Trabuco said at the call.
Shares of Osasco, Brazil-based Bradesco seesawed as the recession and growing skepticism over President Dilma Rousseff's ability to revive growth kept dampening the outlook for Brazil's most profitable industry. Last year, banks extended loans to Brazilian consumers and companies at the slowest pace since at least 2008, central bank data showed this week.
Nevertheless, Bradesco beat fourth-quarter profit estimates as larger-than-expected gains in interest and fee income helped offset surging defaults and provisions. Net income before one-off items of 4.562 billion reais last quarter was up 0.6 percent from the third quarter, the statement said.
The result topped an average profit forecast of 4.298 billion reais in a Reuters poll.
Less ambitious goals for interest and fee income growth this year also indicate Trabuco's concern with sluggish demand for credit, which he said "flags serious signs of weakness." Rising defaults may partially offset the benefits of strong loan repricing even as borrowing costs stay close to their highest level in a decade.
"Asset quality should weaken in upcoming quarters and loan growth turn more sluggish," said Carlos Macedo, an analyst with Goldman Sachs Group Inc.
Last quarter, defaults rose to 4.1 percent of outstanding loans, a three-year high, from 3.8 percent in September. Early delinquencies fell slightly, and executives said they may remain stable this year.
Non-voting shares were flat at 17.40 reais in early afternoon trading in São Paulo.
$1 = 4.0467 Brazilian reais Additional reporting by Aluísio Alves in São Paulo; Editing by Greg Mahlich and Bill Trott