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Brazil's Caixa sees defaults soar as bet on riskier loans escalates

By Guillermo Parra-Bernal and Aluísio Alves

SAO PAULO, Aug 14 (Reuters) - Loan delinquencies at Brazilian state-run bank Caixa Econômica Federal jumped to the highest in more than five years in the second quarter as Brazil's largest mortgage lender ventured into riskier segments such as overdraft and working capital loans.

The 90-day default ratio, the most widely followed gauge of loan delinquencies, at Brasilia-based Caixa reached 2.8 percent in the second quarter, up from 2.6 percent in the first quarter and 2.3 percent a year ago. As a result, loan-loss provisions jumped almost 60 percent on a quarterly basis.

Unlike state-run peer Banco do Brasil SA and private-sector rivals such as Itaú Unibanco Holding SA , Caixa is disbursing more higher-yielding, riskier loans even as the economy deteriorates and borrowing costs hover near a three-year high. Investors have voiced worries over the sustainability of Caixa's strategy to add more risk to its loan book, currently Brazil's second biggest after Banco do Brasil's.

"As we originate more and more credit in those segments, which bear a higher credit risk, defaults edge higher too," Chief Financial Officer Marcio Percival said in an interview on Thursday, to discuss second-quarter results. "But we are all right with that - defaults are under control. We are not worried."

Recurring net income, or profit excluding one-time items, tumbled 13.8 percent to 1.732 billion reais ($762 million) in the second quarter on a quarter-on-quarter basis. On an annual basis, profit rose 1.6 percent, bolstered by a 47 percent surge in interest income and a 14 percent jump in fee income.

Return on equity, a gauge of how well a bank spends shareholder money, ended the quarter at 22.1 percent, below guidance of 26 percent to 28 percent this year. In the first quarter, ROE, as the gauge is known, had been 23.6 percent.

Percival said the surge in defaults was in line with management expectations for the quarter, a time of the year when borrowers usually step up debt repayments. He dismissed the notion that adding more risky loans to the loan book could erode profitability as revenue from those loans should more than offset any potential loan-loss provisions.

Rating companies and financial industry analysts have long bet that delinquencies at Caixa will rise in coming quarters as it slows the pace of disbursements to protect capital. Percival noted that Caixa's loan book is expected to grow between 20 percent and 22 percent this year.

Caixa's outstanding loans totaled 552.1 billion reais ($242 billion) at the end of June, up 28 percent on a 12-month basis. In the first quarter, the loan book had posted annual growth of about 33 percent.

($1 = 2.27 Brazilian reais) (Reporting by Guillermo Parra-Bernal; Editing by Chizu Nomiyama)