(Reuters) - State-controlled Banco do Brasil SA (BBAS3.SA) plans to boost lending at a faster pace than rivals this year despite signs that asset quality is deteriorating and lending spreads will keep contracting.
Disbursements may rise between 17 and 21 percent this year, up from a prior estimate of 16 to 20 percent, the bank said on Tuesday. The outlook for growth in net interest income, or revenue from loan-related transactions, is now seen between 4 and 7 percent, down from a range of 7 to 10 percent previously.
The so-called loan book growth guidance, which is way above the central bank's 15 percent forecast for the banking system as a whole, underscores Chief Executive Officer Aldemir Bendine's bet that a mending economy and fewer defaults will stoke demand for credit. Banco do Brasil's strategy contrasts with that of private-sector peers, which last month trimmed their own credit growth outlooks due to flagging credit and economic activity.
Rampant growth in loan disbursements, which surged 25 percent in the 12 months through June, and robust revenue from insurance and fees allowed Banco do Brasil to slightly beat second-quarter profit estimates. Recurring profit, a measure that excludes one-time items, totaled 2.634 billion reais ($1.15 billion) in the quarter, compared with an average estimate of 2.630 billion reais in a Thomson Reuters poll of seven analysts.
"We never had in the bank such a strong position in terms of financial health and strength, nor ... such a promising outlook for our businesses," Bendine told reporters at an event in São Paulo.
The bank's loan book, the largest in Brazil, totaled 575.51 billion reais at the end of June. On a quarterly basis, lending growth at Banco do Brasil outpaced that of rivals with an expansion of 7.2 percent.
That compares with loan growth at Itaú Unibanco Holding SA (ITUB4.SA), the nation's largest bank by market value, of 7.7 percent in the 12 months through June.
Compared with the first quarter, recurring profit slipped 1.9 percent and fell a further 11.8 percent from a year earlier.
Banco do Brasil and its biggest shareholder, the federal government, are betting on a recovery across the board in an economy that is underperforming for a third year. President Dilma Rousseff has used the bank as a tool to kick-start the economy in a strategy that has been questioned as too risky by financial industry analysts.
Rapid credit expansion, however, is failing to translate into higher interest income as reduced borrowing costs are outpacing disbursements. Net interest income fell 3.5 percent, running counter to trends among rivals like Itaú Unibanco as the state lender charged less interest for some loans.
The risk-weighted net interest margin, or the interest earned from loans excluding funding costs, dropped to 2.9 percent in the second quarter from 3.1 percent in the previous three months, even after borrowing costs in Latin America's largest economy climbed.
At this point, there is "no room for additional spread compression ... maybe only in the medium term but not now," Bendine said. Itaú and peers also saw NIMs tending to stability in the second quarter.
Loans in arrears for more than 90 days fell to 1.9 percent of the bank's loan book, the lowest default ratio in 11 years, Bendine said. That despite a 34 percent surge in new defaulted loans to almost 4 billion reais on a quarter-on-quarter basis.
Marcelo Telles, an analyst with Credit Suisse Securities, said last quarter was the first to show "meaningful asset quality deterioration" since the start of last year. Total non-performing loans including renegotiated credit soared 51 percent on a quarterly basis, compared with a 12 percent decline for the three largest private-sector banks, he noted.
The data raises "the question of whether we are starting to see the result of adverse selection," Telles wrote in a note.
Asked whether an increase in bad loan provisions took place to counter rising non-performing loans, Bendine responded that it was "a measure of prudence." He rebuffed analysts' views on Banco do Brasil's asset quality trends, saying their ominous projections about defaults and provisions never materialized.
"If we were to base our projections on what analysts say, this bank would have already gone bankrupt a long time ago," Bendine said.
Return on equity, a gauge of bank profitability, fell to 16.4 percent in the second quarter from 17.4 percent in the prior quarter and 21.2 percent a year earlier. The result matched the average estimate in the Reuters poll.
Shares of Banco do Brasil fell 0.2 percent to 22.90 reais in early afternoon trading.
(Reporting by Guillermo Parra-Bernal; Editing by Jeffrey Benkoe and James Dalgleish)