By Guillermo Parra-Bernal and Natalia Gómez
SAO PAULO, Oct 22 (Reuters) - Brazil's Banco Bradesco SA, grappling with hefty bond losses and weak creditdemand, expects intense competition from state-run banks tolimit any attempt to raise borrowing costs and offset slowergrowth in interest income.
Executives at the Osasco, Brazil-based bank said on Tuesdaythat recent increases in the benchmark Selic overnight lendingrate are more likely to raise fundraising costs in the shortterm than lending spreads. Spreads are the difference betweenthe interest rate a bank charges on a loan and the lender's costof funding.
Despite higher domestic interest rates, a mix that favorsdisbursements of less risky types of credit such as mortgagesand paycheck-deductible loans should continue driving down thebank's net interest margins going forward, Chief FinancialOfficer Luiz Carlos Angelotti said in a conference call withinvestors to discuss third-quarter earnings.
"The reality we are faced with is one of intense competitionand our commitment to a plan to focus on less riskier segmentsin the credit markets," he said.
Slow loan book growth, coupled with a drop in shareholderequity after the value of Bradesco's government bond holdingsslumped, is fueling concerns over revenue trends at Bradesco forcoming years. On Monday the bank trimmed its estimate for growththis year in net interest income, revenue exclusively fromlending activities, for the second time in three months.
The estimate reduction came even as the bank's third-quarterprofit beat expectations, partly because of a healthier topline. Earnings before one-time items, or recurring profit,totaled 3.082 billion reais ($1.42 billion), above the 3.066billion reais estimate from a Thomson Reuters poll of sevenanalysts.
According to Morgan Stanley & Co analyst Jorge Kury, despitethe profit beat, Bradesco posted weak results, hurt by marginpressure and no growth in fee income and in so-calledinterest-earning assets. Bradesco shares were up 0.9 percent onTuesday, practically reversing most of Monday's losses.
Angelotti, who declined to provide estimates for lendinggrowth next year, said he expects "the credit market in 2014 tobe very similar to this year." Bradesco's loan book shouldexpand close to 11 percent next year because "asset qualityremains a key priority at this point," he added.
'AVAILABLE FOR SALE' SECURITIES
To prevent problems in the bank's bond holdings from hurtingfuture earnings, management is considering transferring somebonds from the "available for sale" line to the "hold tomaturity" line, Angelotti said. That would help reduce the riskthat further accruals of losses in the value of those securitieswould hamper the bank's bottom line.
Bradesco's position on government debt, known in Brazil asNTNs and booked as "available for sale" securities, kept havinga negative impact on shareholder equity. For the third straightquarter, the bank booked an equity writedown related to themarket value of "available for sale" securities, leading to anaccumulated unrealized loss of 2.3 billion reais.
"The unrealized losses ... means a reduced likelihood ofhigher net interest income growth in coming years, given thatthe bank has locked in a yield below the current market price,"said Regina Longo Sánchez, an analyst with Itaú BBA.
Angelotti expects trading-related income to average 200million reais in coming quarters, above results in the secondand third quarters. Three months ago, he expected an averagebetween 200 million reais and 300 million reais going forward.
With loan disbursements expected to grow at the bottom ofthe bank's 11 percent to 15 percent estimate range for thisyear, Bradesco is focusing on banking services such as creditcards, investment-banking activities and insurance to offsetweak trends in interest- and securities trading-related topline.
Angelotti expects provisions on bad loans in the fourthquarter to stay around levels seen in the third quarter. Thebank, which set aside about 2.88 billion reais from earnings inthe July-to-September quarter to cover overdue credit, is likelyto "see the indicator fluctuating around this number," he saidon the call.
Management cut provisions on bad loans for the fifthstraight quarter as loan delinquencies fell, especially inconsumer lending. The reduction in provisions, which directlyboosts earnings by freeing up capital, was 7 percent from thesecond quarter and 13 percent from a year earlier.
According to Morgan Stanley's Kury, further declines inprovisions - the main item behind Monday's profit beat - may notbe sustainable. He said the third-quarter's annualized provisioncharge of 4.2 percent represented a six-year low for Bradesco.
- Financials Industry
- Banco Bradesco