(Recasts to add executive comments, share performance, data throughout)
By Guillermo Parra-Bernal
SAO PAULO, April 28 (Reuters) - Banco Bradesco SA expects loan-loss provisions to end the year within target even if defaults climbed further, executives said on Thursday, trying to allay concerns that a harsh recession will lead Brazil’s third-largest listed bank to accelerate loan refinancings for troubled individual and corporate borrowers.
Loan renegotiations will only happen when Bradesco can stem losses, Chief Financial Officer Luiz Carlos Angelotti said at a conference call to discuss first-quarter results. Provisions hit 17 billion reais ($4.9 billion) in the 12 months through March, close to the ceiling of Bradesco’s guidance at 18 billion reais.
With bankruptcy filings more than doubling this year and the economy seen contracting by about 4 percent for the second year in a row, Bradesco and rivals are stepping up loan refinancing deals, a tack that Goldman Sachs Group Inc analysts have likened to “kicking the can a short distance down the road.”
While the strategy has helped Bradesco stem the fastest jump in defaults in seven years last quarter, investors are growing concerned over the bank’s ability to prevent a further deterioration in profitability and loan book quality.
“Our strategy is inherently conservative,” Angelotti told reporters at the call. “We believe that the measures needed to help us avoid any unexpected event have been put in place.”
Nonvoting shares, Bradesco’s most widely traded class of stock, posted their steepest intraday decline in six weeks on Thursday as provisions at the Osasco, Brazil-based lender soared and refinancing for large corporate borrowers took place in a greater scale than expected.
Recurring net income came in at 4.113 billion reais ($1.17 billion) last quarter, below an average consensus estimate of 4.292 billion reais compiled by Thomson Reuters. The indicator, which measures profit excluding one-time items, sank 9.8 percent from the prior three months.
Net interest income fell the most for any quarter in seven years, while fee income slipped for the first time in a year. While steps to curb expenses limited profit declines, Bradesco warned that early consumer and corporate defaults jumped last quarter - a sign that provisions may climb further this year.
“From an earnings standpoint, there is little to be optimistic about Bradesco for the next 12 months to 18 months,” said Carlos Macedo, a New York-based analyst with Goldman Sachs.
Shares fell as much as 4.2 percent in mid-morning trading, but recouped part of those losses as Angelotti vowed to implement tougher refinancing deals. The stock shed 2 percent to 26.26 reais at 12:35 p.m. local time (1535 GMT).
Bradesco’s results cast shadows over future profits in an industry already struggling with a high tax burden and the worst credit downturn in about two decades. Brazil’s largest banks are bolstering their balance sheets to mitigate declines in return on equity, which analysts say could a 15-year low within months.
Loan book quality suffered as renegotiated loans jumped 18 percent in the 12 months through March. The move helped limit an increase in the bank’s benchmark 90-day default ratio to 4.2 percent last quarter - the highest in four years.
Consolidated loan-loss provisions totaled 30.5 billion reais at the end of March, up 40 percent in two years. Excess and generic loan reserves rose, and recurring provisions climbed 30 percent to 5.448 billion reais last quarter.
A Reuters poll of seven analysts forecast 4.599 billion reais in first-quarter recurring provisions.
The bank set aside 836 million reais to partially write down a loan to an unidentified, large borrower in the oil industry, a major factor behind the sharp rise in first-quarter provisions.
Bradesco’s loan book reached 463.208 billion reais in March, down 2.3 percent from December. Lending growth stagnated in the past 12 months, down from the bank’s 1 percent to 5 percent growth target for this year.
Return on equity, a gauge of profitability, came in at 17.5 percent last quarter, missing the 18.6 percent consensus and well below 20.5 percent at the end of December.
$1 = 3.4835 Brazilian reais Editing by W Simon