April 27, 2017 / 11:25 AM / in a year

UPDATE 2-Bradesco sees Brazil recovery dictating default trends

(Recasts to add comments, share performance)

By Guillermo Parra-Bernal

SAO PAULO, April 27 (Reuters) - The pace and extent of Brazil’s economic recovery will dictate future trends for defaults and loan-loss provisions at Banco Bradesco SA, which saw corporate defaults climbing during the first quarter, Chief Financial Officer Alexandre Glüher said on Thursday.

Defaults may decline little this year but sharply drop in 2018, he said in a conference call to discuss last quarter’s results. Rising demand for consumer loans may allow the country’s No. 3 listed bank to disburse more in some segments while keeping an eye on still-problematic corporate credit, he said.

“If the recovery materializes, we should see large corporate borrowers get better refinancing terms and defaults declining,” Glüher noted, adding that scaling down provisions is “a function” of how quickly Brazil emerges from its steepest recession on record.

His remarks suggest that lingering loan quality woes for domestic banks are taking the backseat after a four-year credit market downturn. While it may take longer for activity and job market indicators to revive, analysts expect business confidence gauges and an ongoing interest-rate cutting cycle to accelerate a recovery.

Earlier on Thursday, Bradesco reported first-quarter profit results that beat estimates after a bigger-than-expected cut in provisions helped offset impairments in the value of financial securities and an unexpected fall in fee income.

Recurring net income, or profit excluding one-off items, totaled 4.648 billion reais ($1.47 billion) last quarter, up 6 percent from the prior three months. The consensus estimate was 4.391 billion reais.

Preferred shares, Bradesco’s most widely traded class of stock, jumped the most in 10 days as investors backed Chief Executive Officer Luiz Carlos Trabuco’s strategy of cutting provisions even if defaults kept rising.

The stock rose as much as 3.5 percent before trimming gains to trade 2.7 percent higher in early afternoon trading.

Trabuco’s credit risk controls allowed Bradesco to cut provisions by 12 percent, more than twice what analysts forecast. A bad loan growth metric, known as non-performing loan creation, remained stable last quarter.

Still, defaults rose for the ninth straight quarter, as Bradesco wrestled with eroding corporate loan book quality.

The so-called default ratio hit 5.6 percent last quarter, above a 5.3 percent estimate. It might have stood unchanged at 5.5 percent had Bradesco not been forced to reclassify an unspecified corporate loan that turned riskier.

Nonetheless, Bradesco’s coverage ratio, or how much capital it has to cover bad loans, rose to 215 percent last quarter.

“Results show asset quality improved and the coverage ratio and non-performing loan buffer remained elevated, providing earnings protection,” said Philip Finch, a strategist with UBS Securities.

Fee income declined for the first time in a year while average interest rates charged on borrowers slipped for a second straight quarter.

$1 = 3.1722 reais Editing by Richard Lough and W Simon

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