November 10, 2016 / 11:07 AM / 2 years ago

UPDATE 2-Banco do Brasil cuts ROE target after rise in bad debt provisions

(Adds analyst, details, background)

By Guillermo Parra-Bernal

SAO PAULO, Nov 10 (Reuters) - State-controlled Banco do Brasil SA has cut a key profitability target for this year after missing third-quarter profit forecasts, hit by an unexpected build-up in provisions against losses on a loan to an unidentified oil and gas firm.

In a securities filing, the Brasilia-based lender said its return on equity (ROE) could be between 8 percent and 10 percent this year, down from a previous forecast range of 9-12 percent. Estimated provisions as a share of outstanding loans were unaltered, reflecting slower credit disbursements.

The move underpins the challenge facing Chief Executive Officer Paulo Caffarelli in bringing ROE closer to that of smaller private-sector peers. Banco do Brasil’s cost of capital is currently outpacing ROE, which analysts blame on years of heavy state interference in the bank’s strategy.

“ROE guidance continued to be lowered, suggesting ongoing negative earnings momentum,” said Philip Finch, a London-based strategist with UBS Securities.

Banco do Brasil missed third-quarter profit estimates after higher taxes and expenses more than offset robust interest income. Recurring net income came in at 2.337 billion reais ($722 million) last quarter, below analysts’ average estimate of 2.469 billion reais.

As a result, ROE totaled 9.9 percent, slightly up from the second quarter but below the consensus estimate of 12 percent.

Management plans to discuss results with reporters later in the day. Thursday’s change in its forecast was the second this year.

Interest and fee income fared better than expected last quarter, giving management some leeway to bolster results. Provisions fell 20 percent from the prior quarter to 6.644 billion reais, although they came in well below the consensus forecast of 7.284 billion reais.

Loans in arrears for 90 days or more, a benchmark for delinquencies, climbed to a seven-year high of 3.5 percent and topped the consensus forecast of 3.4 percent. Taxes almost doubled last quarter, adding pressure on profits, the filing said.

$1=3.2365 reais Editing by Greg Mahlich and Mark Potter

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