Oct. 27 (Bloomberg) -- Banco Bradesco SA and Banco Itau Holding Financeira SA, Brazil's two largest non-government banks by assets, reported profit that trailed analyst estimates in the third quarter and forecast a slowdown in lending next year.

Bradesco posted a 5.6 percent increase in third-quarter profit to 1.9 billion reais as corporate clients borrowed more for working capital, the Osasco-based company said in a statement today. That missed the 2.1 billion-reais average estimate of four analysts surveyed by Bloomberg News. Total lending rose 41 percent to 197.3 billion reais, it said.

Itau posted a 26 percent decline in third-quarter profit after one-time gains boosted earnings last year. The lender said net income fell to 1.8 billion reais below a 2.1 billion reais estimate according to three analysts surveyed by Bloomberg. Recurring income, the equivalent of profit from continuing operations and excluding one-time items, rose to 2 billion reais from 1.57 billion reais a year earlier.

Bradesco expects expansion of its lending portfolio to slow to about 20 percent in 2009 after increasing 24 percent to 29 percent this year. Itau cut its forecast for lending expansion next year from 10 percent to 15 percent from a previous forecast of 20 percent, Itau's executive director Silvio Carvalho said. This year Itau's loans may grow 30 percent, he said.

Itau reported results more than a week ahead of schedule, following an early release of results by smaller rival Uniao de Bancos Brasileiros SA. Unibanco published earnings Oct. 24 to assuage investors' concerns the bank may have derivatives losses after the Brazilian real's 18 percent plunge within a month. rose after the firms eased investors' concern on potential losses related to derivative contracts.

Itau gained as much as 6 percent in Sao Paulo trading before closing unchanged at 17.50 reais. Bradesco fell 4.4 percent to 19.14 reais.

Derivatives

Bradesco said it doesn't carry leveraged transactions in derivatives and only has matched positions in currency derivative trades. Itau said the risk from all derivatives contracts its Itau BBA corporate-banking unit has with clients was ``neutralized'' by matching contracts at the futures market in Sao Paulo.

``Any kind of sign that there's low exposure in the derivatives market is welcome and presents an opportunity for the shares to rebound,'' said Monica Araujo, an analyst at Rio de Janeiro-based Ativa Corretora. ``The big banks are showing that they don't have large risks by addressing this factor which, in the short term, is what is really worrying investors.''

`High Instability'

Because of ``high instability in the market we decided to provide more transparency on what the bank's situation is and how we are conducting our business,'' Carvalho said in a telephone interview. The early earnings release ahead of Nov. 4 also gives the bank the ability to buy back shares as repurchases are restricted until the publication of results, Carvalho said.

As of Oct. 23, 206 Bradesco's clients owed the bank 973 million reais ($436.1 million) in derivatives while 110 clients were to receive 655 million reais from the lender. Itau said its clients owed the bank 2.4 billion reais from currency derivatives contracts as of Oct. 24, at an exchange rate of 2.3 reais per dollar. The amount is less than 1.5 percent of Itau's loan portfolio, the bank said.

Bradesco bought 1.6 billion reais in credit portfolios from six smaller lenders after the central bank eased rules on reserve requirements and may buy today or tomorrow another 1.4 billion reais of loans from another nine banks, Chief Executive Officer Marcio Cypriano told reporters in a conference call today.

Itau has also bought loans from other institutions, Carvalho said, declining to say how much the lender planned to spend on such purchases.

To contact the reporter on this story: Telma Marotto in Sao Paulo at Tmarotto1@bloomberg.net

Last Updated: October 27, 2008 17:21 EDT