(Recasts to add details on guidance, context, comments throughout)
By Guillermo Parra-Bernal and Paula Arend Laier
SAO PAULO, Jan 9 (Reuters) - Shares in Banco do Brasil SA suffered their biggest drop in almost a month on Monday after the country's No. 1 bank by assets cut profitability targets and raised loan-loss provision estimates for 2016.
On Saturday, the state-controlled bank said loan-loss provisions probably ended last year between 4.5 percent and 4.6 percent of average outstanding loans, from 4 percent to 4.4 percent previously.
Return on equity, or ROE, is seen between 7 percent and 8 percent, compared with a prior range of 8 percent to 10 percent.
Banco do Brasil's decision to trim the estimates likely will prompt analysts to revise their estimates of fourth-quarter and full-year results, which are expected to be released next month. Under the revised guidance, fourth-quarter net income could slump about 20 percent from the same period in 2015.
The move highlights the challenge facing Chief Executive Officer Paulo Caffarelli in bringing profitability and operational performance closer to that of the Brasilia-based bank's private-sector peers. Banco do Brasil's cost of capital is currently outpacing ROE, which investors blame on years of heavy state meddling in the bank's strategy.
Banco do Brasil's stock fell as much as 4.3 percent to 27.63 reais in early morning trading before paring some of the losses. It was the biggest loser on Brazil's benchmark Bovespa stock index.
Analysts surveyed by Thomson Reuters currently expect Banco do Brasil's fourth-quarter net income to be around 2.408 billion reais ($750 million). Ten analysts rate the stock a "buy," six a "hold" and only three rate it a "sell," according to Thomson Reuters data.
"After big improvements in the third quarter, these revisions are definitively disappointing, heading into a weak fourth quarter," said Rafael Frade, an analyst with Bradesco BBI.
Caffarelli has tried to downsize a lender that grew too much and too fast since the end of the last decade. He pushed forward with voluntary worker retirement programs and branch closures last year to cut costs, while raising borrowing costs on certain types of loans.
Apart from the revisions in provisioning metrics and return on equity, a key gauge of profitability for banks, Banco do Brasil also cut the target for growth in fee income, or revenues from services outside lending, to 6 percent to 7 percent for 2016. The previous guidance was for fee income growth of 7 percent to 11 percent.
$1 = 3.2097 reais Additional reporting by Bruno Federowski in São Paulo; Editing by Paul Simao