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By Guillermo Parra-Bernal
SAO PAULO, Feb 3 (Reuters) - Returns at Itaú Unibanco Holding SA will end the year slightly above the cost of capital, meaning that Brazil's No. 1 bank by market value will create value for shareholders even as the country grapples with a deep recession, Chief Executive Officer Roberto Setubal said on Wednesday.
The economic and political challenges facing Brazil have raised the cost of capital, the opportunity cost of making an investment, to about 18 percent from 16 percent a few quarters ago, Setubal told investors on a conference call to discuss fourth-quarter results.
Based on estimates unveiled on Tuesday, recurring net income at Itaú could fall an average 15 percent this year under an effective tax rate of 35 percent, executives said. That would be the biggest profit decline in years, underscoring the challenges facing Setubal ahead of his retirement next year.
Under those estimates, loan disbursements could shrink while loan-loss provisions could rise up to 38 percent this year, with 95 percent of that being set aside in Brazil. Setubal's focus will be to strengthen Itaú's balance sheet to underpin earnings growth when Brazil's economy begins to recover, most likely next year.
Return on equity, a measure of how well a bank is spending shareholder money, could fall slightly below 20 percent this year, closer to the cost of capital, executives said, when investors asked about the outlook.
"We are trying to be realistic here," Setubal said. "We are positive that ROE will remain slightly above the cost of risk this year and improve" in subsequent years.
Return on equity slipped to 22.3 percent last quarter from 24 percent in the third quarter and 24.7 percent a year earlier. Many analysts expect ROE to fall to near 18 percent this year.
Slumping activity and fallout from a sweeping corruption probe into state companies are driving a record number of companies and households into arrears or insolvency in Latin America's largest economy.
The burden of a 27 percent increase in provisions and borrowers' reluctance to accept higher borrowing costs on new loans hurt profit at the bank in the fourth quarter. Profit excluding one-off items came in at 5.773 billion reais ($1.5 billion), the lowest in a year and down 5.6 percent from the prior three months.
The number topped the estimate of 5.510 billion reais in a Reuters poll of analysts.
Shares rose 4.2 percent on Wednesday, partially wiping out a 7.5 percent slump Tuesday.
$1 = 3.9493 Brazilian reais Reporting by Guillermo Parra-Bernal; Editing by James Dalgleish