July 31, 2017 / 11:53 PM / 8 months ago

UPDATE 1-Itaú could book higher provisions despite lower defaults

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By Guillermo Parra-Bernal

SAO PAULO, July 31 (Reuters) - Itaú Unibanco Holding SA could book slightly higher loan-loss provisions this year despite declining corporate and consumer defaults, in the wake of a decision by Brazil’s biggest bank to broaden the way it classifies credit impairments.

São Paulo-based Itaú is targeting combined provisions, loan discounts and impairments between 15.5 billion reais and 18 billion reais ($4.97 billion and $5.8 billion) this year. The indicator previously accounted just for provisions and was projected between 14.5 billion reais and 17 billion reais.

Itaú also lowered interest income growth estimates to minus 4.2 percent to minus 0.8 percent this year, from a goal of minus 4 percent to minus 0.5 percent, previously. Interest income is revenue from lending-related transactions.

The revised guidance comes as Chief Executive officer Cândido Botelho Bracher had his first full quarter in charge of Latin America’s most profitable lender. During the second quarter, defaults fell to the lowest level in 1 1/2 years and provisions were cut by 8 percent.

Profit beat expectations in the quarter, with interest income and return on equity staying near all-time highs, and fee income hitting a fresh record.

Recurring net income, or profit before one-time items, was 6.169 billion reais last quarter, yet slightly down from 6.176 billion reais in the prior three months. The number surpassed average consensus estimate of 6.053 billion reais for the indicator.

Recurring return on equity (ROE) came in at bigger-than-expected 21.5 percent, down from 22 percent in the first quarter but above 20.6 percent a year earlier. Itaú’s ROE has stayed above 20 percent for the past three quarters.

Rival lenders have pointed to recovery signs in credit markets over the past week, prompting analysts to foresee declining provisions through the next year.

Itaú’s 90-day default ratio - a benchmark for delinquencies - slipped to 3.2 percent of outstanding loans from 3.4 percent in the prior three months. Bracher had predicted in May that corporate loan book quality would improve gradually.

Still, as Brazil’s recovery from a three-year recession lost some steam last quarter, Itaú hiked coverage ratios to 243 percent to cushion balance sheet risks. The indicator is gauge of a bank’s ability to absorb potential loan-losses.

Bracher and other senior executives plan to discuss Itaú’s results early on Tuesday.

$1 = 3.1268 reais Reporting by Guillermo Parra-Bernal; Editing by Chris Reese, Bernard Orr

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