(Adds share performance, executive and analyst comments)
By Guillermo Parra-Bernal
SAO PAULO, May 12 (Reuters) - Shares in state-controlled Banco do Brasil SA sank on Thursday as soaring defaults and loan-loss provisions led Brazil’s largest bank by assets to miss first-quarter profit estimates and post the worst set of results in at least seven years.
Chief Executive Officer Alexandre Abreu cut an annual goal for profitability and raised another for loan-loss provisions, as the worst recession in decades sparked a slew of defaults and loan renegotiations. Interest and fee income fared worse than expected last quarter, forcing management to trim expenses to bolster earnings.
The stock fell as much as 5.6 percent in midmorning trading in São Paulo, the steepest intraday decline in five weeks. Investors warned that quarterly results reignited worries about Banco do Brasil’s balance sheet as escalating political turmoil hampers the outlook for Latin America’s largest economy.
Recurring net income came in at 1.286 billion reais ($373 million) last quarter, the lowest for any quarter in more than seven years. The result for the indicator, a measure of profit excluding one-time items, missed the average consensus estimate of 2.433 billion reais compiled by Thomson Reuters.
Loan-loss provisions jumped 31 percent last quarter to a record 9.145 billion reais, way above consensus and those of private-sector peers. Loans in arrears for 90 days or more, a benchmark for defaults, rose to 2.6 percent in the first three months of the year - the highest in for any quarter in over five years.
“We are concerned with the limited protection the bank now appears to have going into what should be the most difficult 18 months of” the ongoing credit cycle, said Carlos Macedo, an analyst with Goldman Sachs Group Inc in New York.
Speaking at an event to discuss results, Chief Executive Officer José Mauricio Coelho said the bank is comfortable with current bad-loan reserves, noting that the pace of provisioning should lose steam in coming quarters.
The numbers underscore a prevailing view among investors that state lenders will struggle more than their private-sector rivals with the impact of the recession, because of laxer provisioning policies and the legacy of years of government interference in their decision-making.
Analyst Natalia Corfield of JPMorgan Securities recently warned that using state banks as a policy tool could lead to loan book quality and capital issues down the road. The Senate on Thursday voted to put left-leaning President Dilma Rousseff on trial for allegedly using state banks to breach budgetary rules and raising spending to bolster her mandate.
Shares traded at 19.60 reais at noon, down 4.3 percent. The stock is up 23 percent this year.
The worse-than-expected first-quarter data could unleash a wave of analyst revisions of Banco do Brasil’s estimates, Bradesco BBI and Credit Suisse Securities said in notes to clients.
Fellow state lender Caixa Econômica Federal, which this week also posted another set of weak results, denied the need for a capital injection to mitigate the impact of rising defaults.
In a bid to limit the steep profit decline in the first quarter, Banco do Brasil reversed some non-recurring provisions by about 2 billion reais. Banco do Brasil had set aside a total 35.4 billion reais to cover bad loans in the 12 months through March, the highest level among peers in the country.
Abreu, whose first year in the job has been marked by the recession and fallout from a sweeping corruption scandal that hampered large clients, raised the guidance on provisions to a range between 4 percent and 4.4 percent of outstanding loans this year. He had originally set a 3.7 percent to 4.1 percent ratio for the year in February.
Still, soaring renegotiations, many of which are bearing high default probabilities, could force Banco do Brasil to step up provisions, said Marcelo Telles, an analyst at Credit Suisse.
In light of a rapidly rising formation of non-performing loans, including renegotiated loans, “the guidance could still be optimistic,” Telles wrote in a client note.
Return on equity, a widely followed gauge of profitability, fell to 5.6 percent, less than half the 13.2 percent consensus estimate and too low, investors said, for a bank considered as less capitalized than other publicly traded large Brazilian lenders.
The bank on Thursday lowered its 2016 target range for return on equity to between 9 percent and 12 percent from 11 percent to 14 percent.
$1 = 3.4464 Brazilian reais Additional reporting by Aluísio Alves in São Paulo; Editing by W Simon