UPDATE 3-Brazil's Bradesco sees modest growth after profit miss
* Recurring profit at 2.92 bln reais misses poll estimate
* Provisions fall on sequential basis, helping net income
* Loan book expands slightly below guidance for last year
* Bank issues prudent lending expansion, expense estimate
SAO PAULO, Jan 28 (Reuters) - Banco Bradesco SA forecast modest lending growth this year after a timid decline in provisions, stubborn loan delinquencies and a continuing squeeze on margins led Brazil's No. 2 private sector bank to miss fourth-quarter profit estimates.
Bradesco projected credit growth for this year between 13 percent and 17 percent on Monday, compared with an estimated range of 14 percent to 18 percent in 2012. The bank's loan book expanded 11.5 percent last year, below earlier guidance provided to investors.
The forecast underscores growing caution among private-sector lenders as Brazil's economy enters what could be the third consecutive year of below-trend economic growth.
Bradesco is reining in disbursements in riskier segments like auto loans and focusing on mortgages and paycheck-deductible lending -- areas where interest rates tend to be lower but defaults are less likely.
Profit at Bradesco slightly missed analysts' estimates as lower insurance-related income and higher operating expenses offset the positive impact of a decline in bad loan provisions.
Bradesco earned recurring profit, or net income excluding one-time items, of 2.918 billion reais ($1.44 billion) in the quarter, up 0.9 percent from the prior three months. The number was below the average estimate of 2.950 billion reais in a Thomson Reuters poll of six analysts.
Provisions fell a smaller-than-expected 2.8 percent on a sequential basis but remained at still-high levels. Insurance income, or the difference between underwritten premiums and casualties, sank 7.2 percent from the prior quarter and expenses rose -- all of which limited profit gains.
"We expect a slightly negative reaction from markets," UBS Securities analysts led by Philip Finch wrote in a client note. "Elevated loan-loss provisions were the main reason for the profit miss."
Loans in arrears for more than 90 days, a gauge for credit delinquencies, remained unchanged for a second straight quarter. The default ratio was 4 percent of Bradesco's total loans in the fourth quarter, in line with forecasts.
Last year, Bradesco's loan book rose to 385.53 billion reais, slightly below management guidance.
"The resumption of growth in the economy remains modest, but there's a consensus that the second half of last year was better than the first and that the economy reacted to the diverse policy stimuli introduced in the period," the bank said.
Even after recurring profit came in at the highest level since at least the first quarter of 2009, investors will likely question the decline in net financial margin -- or the interest Bradesco earns from loans excluding funding costs -- and tepid expectations for increases in fee and insurance income.
Return on equity, a gauge of industry profitability referred to as ROE, slid to a four-year low of 19.2 percent in the fourth quarter from 19.9 percent in the prior three months. That was above the 18 percent forecast in the poll but still the lowest in almost four years.
Analysts predict Bradesco's data could reinforce the view that profitability in the sector will keep declining as record-low interest rates hamper revenue and force lenders to roll over maturing loans at a discount. In their view, ROE will likely keep sinking throughout this year for Bradesco and its peers.
The net financial margin fell for a third straight quarter to 7.3 percent at the end of December following a "reduction in market interest rates coupled with a change in the loan book mix," Bradesco said in its earnings report. Central bank policymakers trimmed the benchmark overnight Selic rate to a record-low 7.25 percent in the fourth quarter.
Bradesco expects net interest income, or revenue stemming from loan-related transactions, to expand between 7 percent and 11 percent, compared with growth of 8.3 percent in 2012. It forecast fee income growth between 9 percent and 13 percent, following a rise of 14.4 percent last year.
The lender forecast operational expenses to rise between 4 percent and 8 percent this year -- a sign that Bradesco might put more emphasis on operational efficiency.