May 3, 2017 / 11:30 AM / a year ago

UPDATE 3-Itaú to monitor complex Brazil loan cases as risk lingers

(Rewrites with comment on strategy, share performance)

By Guillermo Parra-Bernal

SAO PAULO, May 3 (Reuters) - Brazil’s No. 1 bank Itaú Unibanco Holding SA will monitor problematic loans among large corporate borrowers, a sign of caution as an unprecedented credit downturn magnifies a deep recession and the impact of a broad corruption scandal.

To protect Itaú’s 34 billion reais ($10.8 billion) in outstanding real estate and infrastructure loans, the bank will negotiate longer repayment terms with borrowers on a case-to-case basis, investor relations head Marcelo Kopel said on Wednesday.

For borrowers facing a rising debt burden and depleting cash, Itaú could demand they accelerate asset divestitures, Kopel said. Credit risk for infrastructure firms rose last quarter, driving Itaú’s 15 day-to-90 day default ratio to a nine-month high.

“It’s about gauging operational and financial feasibility of companies in sectors facing a rough ride,” Kopel said during a call to discuss first-quarter results.

Itaú’s strategy coincides with Brazilian banks trying to curb the heavy loan-loss provisioning that caused their profits to fall last year for the first time since 2009. Problems among homebuilders and engineering firms are gaining steam as the recession and a corruption scandal in construction company Odebrecht cut off access to fresh capital.

Rising defaults among Itaú’s biggest borrowers prevented it from cutting loan-loan provisions as much as analysts expected last quarter. Preferred shares fell the most in two weeks as the pace of reduction in the indicator disappointed investors.

Still, lower provisions allowed Itaú to exceed first-quarter profit estimates. Recurring net income, a measure of profit excluding one-time items, hit a record 6.176 billion reais, above an average consensus estimate of 6.010 billion reais.

“Given the environment, Itaú’s results were definitely good,” said Eduardo Rosman, an analyst with Banco BTG Pactual.

Return on equity reached 22 percent, the highest level in five quarters and beating a 20.7 percent estimate. Expense controls bolstered profitability, even as management raised the ratio of available capital reserves for bad loans to 231 percent and provisions fell less than expectations.

The 90-day default ratio was flat at 3.4 percent. Provisions fell 7 percent to 5.392 billion reais, the lowest in almost three years. Analysts expected 4.543 billion reais in provisions.

Non-interest expenses fell the most in a year and above estimates. The decline underscored the success of a four-year efficiency drive led by former bank president Roberto Setubal, who retired this week after 23 years at the helm.

Both Setubal and his successor Candido Bracher stuck with this year’s operational targets.

Interest and fee income surprisingly fell in the wake of fewer calendar days, declining borrowing costs and tepid demand for loans and financial services in Brazil.

$1 = 3.1448 reais Reporting by Guillermo Parra-Bernal; Editing by W Simon, Bernard Orr, Grant McCool

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