(Recasts with details on trends on interest margins, executive comments, share performance throughout)
By Guillermo Parra-Bernal
SAO PAULO, July 31 (Reuters) - The stronger return on some Banco Bradesco SA assets in the second quarter will weaken before year-end, executives said on Thursday, reflecting Brazil's sluggish economy.
Net interest margin (NIM), or the return on interest-bearing assets, widened more than expected to 7.7 percent as returns on government debt rose, funding costs stabilized and new loans were priced at higher levels.
Yet, some of the spread will ease through year-end, Chief Financial Officer Luiz Carlos Angelotti said on an earnings conference call. He expects NIM at about 7.3 percent by December.
The ease in margins "has to do with our loan mix and finding a balance between borrowing and funding costs," he noted. NIM was 7.1 percent in the first quarter.
Bradesco reported second-quarter profit that beat estimates, helped by more aggressive loan pricing coupled with growth in low-risk credit segments.
Saúl Martínez, an analyst with JPMorgan Securities, questioned whether second-quarter margins would be sustainable in the current economic environment.
Economists say Brazil's economy is flirting with recession as demand for goods and services falters.
Osasco, Brazil-based Bradesco reported quarterly recurring net income, or profit after one-time items, of 3.804 billion reais ($1.69 billion), up 9.7 percent from the prior quarter. The average estimate was for profit of 3.590 billion reais, according to a Reuters poll of eight analysts.
Higher margins helped Bradesco boost net interest income by 10 percent, topping expectations, despite loan book growth of only 0.7 percent.
"On the lending business, the surprise was the strong margin expansion, the disappointment was the loan growth," said Cristina Marzea, an analyst with Barclays Capital Inc in London.
STABILITY IN LOAN DEFAULTS
Preferred shares of Bradesco, the bank's most widely traded class of stock, shed 0.8 percent in mid-afternoon trading, compared with a 2.1 percent drop in the São Paulo Stock Exchange's financial index.
Chief Executive Officer Luiz Carlos Trabuco said on the call that management expected loan default ratios, profitability indicators and loan-loss provisions to remain stable for the rest of the year.
Bradesco did not change its forecasts for growth in lending, fee income, expenses and other items from February, when it first unveiled its operational outlook for this year.
Recurring return on equity (ROE), a gauge of profitability, hit 20.7 percent, the highest in almost two years. The poll of analysts forecast 19.1 percent.
Loans in arrears for more than 90 days, a gauge of loan delinquencies, rose to 3.5 percent of Bradesco's loan book, from 3.4 percent in the prior quarter. Loan-loss provisions rose to 3.141 billion reais, the highest since the last quarter of 2012.
($1 = 2.247 Brazilian reais) (Additional reporting by Aluísio Alves in São Paulo; Editing by W Simon and J Benkoe)