Banco do Brasil Profit Misses Estimates on Higher Provisions

  • Bank set aside 40% more money to cover souring loans
  • One-time tax gain used as extra provision, ROE forecast cut

Banco do Brasil SA, Latin America’s largest lender by assets, reported third-quarter profit that missed analysts’ estimates, hurt by higher provisions for bad loans as a recession shows signs of deepening. Its shares declined as much as 3 percent.

Adjusted net income, which excludes one-time charges, dropped to 2.88 billion reais ($754 million) from 2.89 billion reais a year earlier, the Brasilia-based company said Thursday in a filing. That missed the 3 billion-real estimate of seven analysts surveyed by Bloomberg. Net income climbed 10 percent to 3.06 billion reais.

Banco do Brasil, which is controlled by the government, boosted provisions to cover souring loans as the South American nation faces rising unemployment and a shrinking economy. The bank set aside 6.41 billion reais in the third quarter, up from 4.57 billion reais a year earlier. The bank’s adjusted return on equity, a measure of profitability, dropped to 13.3 percent from 16.1 percent.

ROE Comparison

“The bank reported another result that missed the estimates, with an ROE below Brazil’s benchmark interest rate,” Sao Paulo-based brokerage XP Investimentos wrote in a note to clients, referring to the central bank’s Selic rate of 14.25 percent. “Banco do Brasil will continue delivering an ROE below Selic for a long time.”

The company reduced its forecast for 2015 ROE to between 13 percent and 16 percent from a February estimate of 14 percent to 17 percent. The delinquency rate for debt overdue more than 90 days rose to 2.2 percent from 2.09 percent a year earlier.

The bank’s return on equity was hurt by higher bad-loan provisions, which increased because of the economic deterioration, Chief Financial Officer Jose Mauricio Pereira Coelho told reporters in Sao Paulo Thursday.

The shares dropped 2 percent to 16.92 reais in Sao Paulo at 12:11 p.m., compared to a 0.5 percent decline for the Ibovespa benchmark index. Banco do Brasil’s shares slumped about 27 percent this year through Wednesday.

Banco do Brasil said it’s using part of a 3.41 billion-real one-time tax gain for an additional provision of 1.79 billion reais. Its main non-state-owned competitors, Itau Unibanco Holding SA and Banco Bradesco SA, used similar benefits in the third quarter to boost reserves. Both reported third-quarter profits that beat estimates on higher treasury gains and lending margins.

Last week, Moody’s Investors Service cut Banco do Brasil’s standalone credit rating to junk as the Brazilian recession undermines earnings prospects.

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