July 28, 2016 / 11:05 AM / 2 years ago

UPDATE 4-Bradesco shares sink as outlook for loan-loss provisions worsens

(Recasts with share performance, management actions throughout)

By Guillermo Parra-Bernal

SAO PAULO, July 28 (Reuters) - Shares in Banco Bradesco SA sank on Thursday as a grimmer outlook for loan-loss provisions this year reignited concerns that a harsh recession and a deluge of refinancing requests may hamper profits at Brazil’s No. 3 listed lender.

Bradesco’s preferred shares, its most widely traded class of stock, suffered their biggest drop since late May after the company said its provisions could end this year at between 18 billion reais and 20 billion reais ($5.52 billion and $6.14 billion). The prior range was 16.5 billion reais to 18.5 billion reais.

A 33 percent jump in provisions over the past year and signs of borrowers’ reluctance to pay more for loans led Bradesco to miss the consensus second-quarter profit estimates. The Osasco, Brazil-based bank earned recurring net income of 4.161 billion reais last quarter, below the consensus estimate of 4.213 billion reais.

While the new provisions forecast underscores Chief Executive Officer Luiz Carlos Trabuco’s steps to cushion Bradesco from soaring defaults, the market’s reaction “suggests asset quality weakened beyond the story told by reported figures,” said Carlos Macedo, an analyst with Goldman Sachs Group Inc.

The preferred shares tumbled 4.4 percent to 27.52 reais.

Adding to the bad news, a judge in Brasilia accepted charges against Trabuco and two other senior executives for allegedly plotting to avoid a 3 billion-real tax fine. The bank has repeatedly denied any wrongdoing by the executives.

Banks in Brazil are wrestling with slumping activity amid the country’s worst recession in eight decades as well as fallout from a sweeping corruption probe into state companies and large corporate borrowers. Both situations have stoked a doubling in Brazilian bankruptcy filings over the past year.

The nation’s banks had a record 197 billion reais, or 7 percent of outstanding loans, in the form of loan-loss buffers as of June, central bank data showed this week.


Some large companies, like rig leaser Sete Brasil Participações SA and phone carrier Oi SA, sought court protection from creditors during the second quarter. They had a combined 34 billion reais in loan borrowings at the time of their filings.

Bradesco’s loan-loss provisions came in at 5.024 billion reais in the second quarter, 4 percent above consensus. While interest and fee income was within expectations, slow growth may signal that the recession is weighing down on the lender’s ability to reprice new contracts.

Last quarter, the E-H category comprising the riskiest credit lines in Bradesco’s loan book rose to 4.8 percent from 2.8 percent in the prior three months. A 1.7 billion-real increase in the highest risk H bucket was due to an unidentified “single-case corporate borrower,” the bank said.

Bradesco moved about 600 million reais parked in generic reserves to recurring provisions, signaling an increasingly strained loan book. Both consumer and corporate loans in arrears rose above expectations, with early default indicators pointing to further deterioration in the future.

In a conference call to discuss the results, Chief Financial officer Luiz Carlos Angelotti said delinquencies could peak by the end of this year or early 2017, and that exceptional default cases among large corporate clients “are not expected.”

Bradesco’s benchmark 90-day default ratio climbed 0.4 percentage points to 4.6 percent in the second quarter, the biggest quarterly jump for the indicator in almost seven years.

“Delinquencies are rising but coverage ratio and loan-loss buffers remain elevated, providing reasonable protection,” said Philip Finch, a London-based strategist with UBS Securities.

In the second quarter, renegotiated loans jumped 6 percent from the first quarter and rose 20 percent versus the year-earlier quarter.

Trabuco managed to limit the adverse impact of provisions and defaults on Bradesco’s profits by accelerating staff reductions and taking advantage of a lower tax rate. As a result, return on equity fell slightly to 17.3 percent in the quarter, but was still about a percentage point below consensus estimates.

Loan book growth could stay flat or fall up to 4 percent this year, bucking Bradesco’s prior forecast of a 1 percent to 5 percent expansion. The bank also increased guidance on interest income growth for the year to a range of 7 percent to 11 percent.

$1 = 3.2591 Brazilian reais Editing by W Simon and Paul Simao

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