(Recasts to add share performance, details, comments)
By Guillermo Parra-Bernal
SAO PAULO, Feb 25 (Reuters) - Banco do Brasil SA seesawed on Thursday as management signaled declining profitability, loan book growth and a jump in loan-loss provisions this year that investors said fail to incorporate the country's longest and harshest recession in decades.
In a statement, state-controlled Banco do Brasil said interest and fee income could grow twice as fast as what private-sector rivals Itaú Unibanco Holding SA and Banco Bradesco SA expect this year. Expenses should rise within annual inflation, the statement said.
Still, provisions could come in at between 3.7 percent and 4.1 percent of average outstanding loans this year, compared with 3.6 percent last year. As a result, return on equity, a measure of profitability, is expected at between 11 percent and 14 percent this year, compared with 13 percent in 2015.
Investors are watching results and guidance from local banks to gauge how profitability would suffer as Brazil wrestles with what might be the longest recession since 1901. Banco do Brasil's less bearish guidance than Itaú's or Bradesco's could fan concerns that Chief Executive Officer Alexandre Abreu is understating risks tied to soaring defaults and loan losses.
"This highlights a major vulnerability in times of worsening backdrops: Banco do Brasil underearns relative to the size of its balance sheet," said Saúl Martínez, an analyst with JPMorgan Securities. "Though risk-weighted assets are 16 percent and 37 percent higher than Itaú and Bradesco, respectively, earnings are 51 percent and 35 percent lower."
Shares fell as much as 2 percent at market open on Thursday, before gaining 0.2 percent to 13.11 reais in late morning trading. The stock is down 40 percent over the past 12 months.
At an event to discuss fourth-quarter results, Abreu ruled out acquisitions or asset sales and looked comfortable with Banco do Brasil's ability to generate capital organically and reprice loans.
Recurring net income, or profit before one-time items, beat estimates as Banco do Brasil's increased ability to raise the cost of borrowing for new loans credit and charge more for financial transactions helped offset soaring loan-loss provisions.
The lender earned 2.648 billion reais ($669 million) last quarter, down 8.1 percent from the prior three months. The number beat an estimate of 509 billion reais in a Reuters poll.
The loan default ratio rose at the fastest pace in six years, hitting 2.4 percent. The amount of renegotiated loans also rose.
Interest income rose 5.7 percent in the quarter, beating the poll's estimate of 0.1 percent growth. Provisions, however, spiked 14 percent from the previous three months to 7.331 billion reais, way above the poll's estimate of 6.528 billion reais.
$1 = 3.9555 Brazilian reais Additional reporting by Aluísio Alves in São Paulo; Editing by Keith Weir and W Simon