Dec. 19 (Bloomberg) -- Brazilian banks had their 2009 and 2010 earnings forecasts cut by Goldman Sachs Group Inc., which said a drop in lending rates will lower profits while an economic slowdown curbs loan growth.

“Goldman Sachs’s expectation that interest rates will now be cut rather than increase in 2009 hurts bank earnings,” wrote analyst Jason Mollin in a note today. “Lower activity should also lead to rising unemployment and weaker asset quality.”

The analyst lowered his rating on Brazilian banks to “neutral” from “attractive” and cut his profit forecast for the industry by 10 percent for next year and 7 percent for 2010. He also reduced his average share-price estimate for the biggest lenders by 6 percent for local shares and by 21 percent for American depositary receipts.

Goldman Sachs economists predict the central bank will cut Brazil’s benchmark interest rate next month and ease rates six times in 2009 by a total of 150 basis points. They previously estimated a rate increase of 150 basis points in the year.

Brazil’s central bank on Dec. 10 discussed “the possibility of lowering” the benchmark interest rate before leaving it unchanged at a two-year high of 13.75 percent. The country’s economists predict policy makers will slash the rate to 13 percent by the end of 2009, a weekly central bank survey showed Dec. 15.

Lower Interest Margins

“The lower interest rates reduce net interest margins for asset sensitive banks, like those in Brazil, where assets reprice faster than liabilities, assuming all else equal,” Sao Paulo- based Mollin wrote.

Mollin now estimates bank loans will grow 13 percent in 2009 versus a previous projection of 15 percent expansion, with the bulk of lending coming from companies rather than individuals. The lower loan growth outlook reflects estimates for slower economic growth, he said.

Latin America’s largest economy will expand 2.5 percent in 2009 after estimated 5.6 percent growth this year, according to the central bank weekly survey. Goldman Sachs expects the economy to grow 1.5 percent next year.

“We now favor non-banks financials over banks in Brazil,” Mollin wrote.

He cut his rating on Uniao de Bancos Brasileiros SA to “netural” from “buy,” saying the stock performance reflects “the current outlook for synergies” from the merger with Banco Itau Holding Financeira SA.

Unibanco fell 3 percent to 16.30 reais in Sao Paulo trading. Itau retreated 3.7 percent to 28.80 reais.

Banco Bradesco SA, which lost its position as the county’s biggest non-government bank after Itau and Unibanco merged, fell 4.5 percent to 24.55 reais.

A measure of financial companies’ shares in the MSCI Brazil index fell for a second day, losing 3.6 percent.

To contact the reporter on this story: Fabio Alves in New York at falves3@bloomberg.net;

Last Updated: December 19, 2008 15:47 EST