(Adds comments, share performance, background throughout)
By Guillermo Parra-Bernal
SAO PAULO, July 31 (Reuters) - Banco Santander Brasil SA's strategy of raising fees on banking and financial services has paid off in spite of a severe recession, as Chief Executive Officer Sérgio Rial seeks to build customer loyalty while cutting the profitability gap with larger rivals.
Rial and other executives said on Monday that trends for fee income remain promising, even as room for further increases in the price of financial services has narrowed. Santander Brasil expects fee income growth of at least 10 percent through the end of next year.
In a conference call with analysts to discuss second-quarter results, Chief Financial Officer Ángel Santodomingo said an increasing client base and a shift towards the offering of digital services could help accelerate cross-selling - through which account holders are offered insurance, credit and other services.
On Friday, Santander Brasil, the country's No. 3 private-sector bank, posted record quarterly profit on rising interest and fee income. Both items rose 3 percent and 2 percent, respectively, on greater lending to higher paying, consumer-focused segments.
"It's certainly challenging keeping fee increases at the current pace, but clients perceive the implicit value of our services platform," Rial told reporters in São Paulo.
Santander Brasil had 3.8 million clients at the end of June, 500,000 more than a year earlier but short 800,000 of next year's goal. The bank's base of small and mid-sized corporate clients could grow almost 15 percent through December to 1 million, Rial said.
Santander Brasil accounts for 26 percent of the annual profit of Madrid-based parent Banco Santander SA.
According to analysts such as UBS Securities' Philip Finch, Rial's turnaround efforts have softened the impact of Brazil's recession on Santander Brasil's business.
Efforts to increase operating efficiency also lifted profit, with non-interest expenses dropping for a third straight quarter. Expense growth will remain around the level of annual inflation this year, CFO Santodomingo said.
Return on equity should remain supported by strong operational performance, despite ongoing economic headwinds such as a recession and still-high urban unemployment. The bank is targeting ROE of 15.6 percent by the end of next year, compared with 15.8 percent in June.
Units, a blend of Santander Brasil's common and preferred shares, shed 0.6 percent to 25.46 reais at noon trading in São Paulo. The stock is down 9.6 percent this year. (Additional reporting by Gabriela Mello and Aluísio Alves in São Paulo; Editing by Bernadette Baum and W Simon)