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Bradesco says state bank competition will limit options

By Guillermo Parra-Bernal and Natalia Gómez

SAO PAULO, Oct 22 (Reuters) - Brazil's Banco Bradesco SA , grappling with hefty bond losses and weak credit demand, expects intense competition from state-run banks to limit any attempt to raise borrowing costs and offset slower growth in interest income.

Executives at the Osasco, Brazil-based bank said on Tuesday that recent increases in the benchmark Selic overnight lending rate are more likely to raise fundraising costs in the short term than lending spreads. Spreads are the difference between the interest rate a bank charges on a loan and the lender's cost of funding.

Despite higher domestic interest rates, a mix that favors disbursements of less risky types of credit such as mortgages and paycheck-deductible loans should continue driving down the bank's net interest margins going forward, Chief Financial Officer Luiz Carlos Angelotti said in a conference call with investors to discuss third-quarter earnings.

"The reality we are faced with is one of intense competition and our commitment to a plan to focus on less riskier segments in the credit markets," he said.

Slow loan book growth, coupled with a drop in shareholder equity after the value of Bradesco's government bond holdings slumped, is fueling concerns over revenue trends at Bradesco for coming years. On Monday the bank trimmed its estimate for growth this year in net interest income, revenue exclusively from lending activities, for the second time in three months.

The estimate reduction came even as the bank's third-quarter profit beat expectations, partly because of a healthier top line. Earnings before one-time items, or recurring profit, totaled 3.082 billion reais ($1.42 billion), above the 3.066 billion reais estimate from a Thomson Reuters poll of seven analysts.

According to Morgan Stanley & Co analyst Jorge Kury, despite the profit beat, Bradesco posted weak results, hurt by margin pressure and no growth in fee income and in so-called interest-earning assets. Bradesco shares were up 0.9 percent on Tuesday, practically reversing most of Monday's losses.

Angelotti, who declined to provide estimates for lending growth next year, said he expects "the credit market in 2014 to be very similar to this year." Bradesco's loan book should expand close to 11 percent next year because "asset quality remains a key priority at this point," he added.


To prevent problems in the bank's bond holdings from hurting future earnings, management is considering transferring some bonds from the "available for sale" line to the "hold to maturity" line, Angelotti said. That would help reduce the risk that further accruals of losses in the value of those securities would hamper the bank's bottom line.

Bradesco's position on government debt, known in Brazil as NTNs and booked as "available for sale" securities, kept having a negative impact on shareholder equity. For the third straight quarter, the bank booked an equity writedown related to the market value of "available for sale" securities, leading to an accumulated unrealized loss of 2.3 billion reais.

"The unrealized losses ... means a reduced likelihood of higher net interest income growth in coming years, given that the 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 200 million reais in coming quarters, above results in the second and third quarters. Three months ago, he expected an average between 200 million reais and 300 million reais going forward.

With loan disbursements expected to grow at the bottom of the bank's 11 percent to 15 percent estimate range for this year, Bradesco is focusing on banking services such as credit cards, investment-banking activities and insurance to offset weak trends in interest- and securities trading-related top line.

Angelotti expects provisions on bad loans in the fourth quarter to stay around levels seen in the third quarter. The bank, which set aside about 2.88 billion reais from earnings in the July-to-September quarter to cover overdue credit, is likely to "see the indicator fluctuating around this number," he said on the call.

Management cut provisions on bad loans for the fifth straight quarter as loan delinquencies fell, especially in consumer lending. The reduction in provisions, which directly boosts earnings by freeing up capital, was 7 percent from the second quarter and 13 percent from a year earlier.

According to Morgan Stanley's Kury, further declines in provisions - the main item behind Monday's profit beat - may not be sustainable. He said the third-quarter's annualized provision charge of 4.2 percent represented a six-year low for Bradesco.