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By Guillermo Parra-Bernal and Aluísio Alves
SAO PAULO, May 11 (Reuters) - Efforts to tighten credit risk standards for corporate borrowers should help stabilize delinquencies at Banco do Brasil SA, executives said after the state-controlled bank reported a lower-than-expected quarterly profit in the wake of soaring write-offs for bad loans.
Tackling loan quality problems more effectively is crucial to help the lender reap the benefits of an expected economic recovery, Chief Executive Officer Paulo Rogêrio Caffarelli said on Thursday at an event to discuss first-quarter results. He expects defaults, which rose in the quarter, to stabilize by year-end.
Moves to "significantly de-risk our corporate loan book" will help stem the impact of Brazil's harshest recession ever and surging bankruptcies in coming months, he said. A jump in defaults among strained corporate borrowers has forced banks to book record loan-loss provisions over the past year.
Extending credit for shorter periods is another step toward reducing loan-related losses, he said. Write-offs of soured loans almost tripled last quarter, while non-performing loan creation, a gauge of future defaults, hit its highest level in at least two years.
Caffarelli's confidence that default rates will stabilize prompted Banco do Brasil to cut renegotiated loans by 2 percent and provisions by a bigger-than-expected 10 percent on a quarterly basis. Shares rose 3.3 percent, signaling optimism that loan quality problems are close to an inflection point.
Since Caffarelli took office a year ago, Banco do Brasil's stock has roughly doubled on hopes that he would reverse years of state involvement that forced the bank to expand borrowing well above market peers and take on too much risky lending.
Excluding special items, profit came in at 2.515 billion reais ($794 million) last quarter, below the consensus estimate of 2.928 billion reais but up 44 percent from the fourth quarter and 96 percent higher than a year earlier.
"Asset quality, however, was mixed and remains a yellow flag for future results," said Eduardo Rosman, a senior banking analyst with Banco BTG Pactual in São Paulo.
Defaults over 90 days ended the quarter above estimates as the bank reclassified loans to an unspecified corporate client into riskier categories.
Banco do Brasil's default ratio rose to 3.9 percent because of the surprising corporate borrower case and a 2.2 percent decline in outstanding loans. Excluding that case, the ratio would have been 3.5 percent.
Return on equity of 10.4 percent missed a 12.1 percent estimate but crossed the double-digit threshold for the first quarter in five.
Caffarelli has set a goal of cutting a profitability gap with private-sector rivals, and Banco do Brasil's return on equity was half Itaú Unibanco Holding SA's in the first quarter, narrower than the two-thirds gap in the prior three months.
This stemmed in part from Caffarelli's decision to revise supply contracts and operational processes to cut costs. Non-interest expenses fell almost 10 percent as the bank continued to cut branches and speed up the implementation of digital tools.
$1 = 3.1663 reais Editing by Bernadette Baum and Lisa Von Ahn