(Adds data from earnings statement, background)
By Bruno Federowski and Aluisio Alves
SAO PAULO, July 28 (Reuters) - Banco Santander Brasil SA on Friday posted a record quarterly net profit, beating expectations, as rising interest and fee income offset higher loan-loss provisions.
Second-quarter profit at Brazil's No. 4 listed bank rose 2 percent from the prior three months to 2.34 billion reais ($742 million) when adjusted for one-off items, above a consensus estimate of 2.15 billion reais compiled by Thomson Reuters.
Interest and fee income rose 3 percent and 2 percent, respectively, on greater lending to higher paying, consumer-focused segments, such as payroll loans and credit cards.
The earnings reflect how the bank's turnaround efforts have softened the impact of Brazil's slower-than-expected economic recovery, which has curbed lending activity in Latin America's largest economy. Santander's loan book was flat in the quarter as the bank avoided the reductions seen at many of its rivals.
Efforts to increase operating efficiency also helped to increase profits, with non-interest expenses dropping for a third straight quarter.
Still, fragile economic activity meant the bank recovered less money from bad loans, driving a 4.3 percent increase in loan-loss provision expenses despite defaults remaining at their lowest in at least seven years.
Recurring return on equity (ROE), a gauge of profitability, slipped 0.1 percentage point to 15.8 percent, below a consensus estimate of 16.3 percent. Santander Brasil, which is controlled by Spain's Banco Santander, has a target for ROE of 15.6 percent by year-end 2018.
Management will discuss second-quarter earnings on a Monday conference call.
$1 = 3.15 reais Reporting by Bruno Federowski and Aluisio Alves; Editing by Jason Neely and W Simon