UPDATE 3-Santander Brasil beats profit estimates on steep provision cuts

SAO PAULO, Jan 31 (Reuters) - Banco Santander Brasil SA posted fourth-quarter profit that beat analysts' expectations on Thursday as Brazil's largest foreign lender aggressively cut bad-loan provisions to offset sliding revenue and a spike in delinquencies.

Santander Brasil, a subsidiary of Spain's Banco Santander SA , reported recurring profit, or net income excluding one-time items, of 1.598 billion reais ($803 million), up 6.5 percent from the third quarter, according to a statement. A Thomson Reuters poll of six analysts predicted recurring profit of 1.29 billion reais.

Revenue from lending fell to a one-year low, fee income rose but were short of expectations, and expenses topped predictions in the poll. Santander Brasil's results confirmed the extent to which record-low borrowing costs are hampering its balance sheets and showing management's inability to deal with stubborn defaults as the economy enters a third year of sub-par economic growth.

Management led by Chief Executive Marcial Portela Álvarez cut bad-loan provisions by 4.1 percent from the third quarter, propping up profits. Santander Brasil has cut provisions, the amount set aside to cover credit-related losses, by more than 700 million reais in the past two quarters.

As banks in Brazil have failed to accurately predict default trends over the past two years, they have had to increase provisions to stave off growing losses with bad loans. Unlike peers, Santander Brasil saw delinquencies rise in the fourth quarter and forward-looking indicators signaled the trend would continue.

Loans in arrears for 90 days or more, the benchmark for delinquencies, rose to the equivalent of 5.5 percent of its loan book, compared with 5.1 percent in the prior three months. Analysts in the poll expected the so-called default ratio at 5.2 percent.

LOAN BOOK GROWS

Compared with the same period of 2011, recurring profit dropped 2.7 percent from 1.643 billion reais. Investors in Brazil follow quarter-on-quarter results more closely than annual comparisons.

Despite its earnings beat in the fourth quarter, a jump in bad loans in Latin America's largest economy weighed down the parent company's annual results. The Spanish giant Santander struggled last year as loan delinquencies rose in Latin America and particularly in Brazil, which generates 26 percent of its earnings and where economic growth is faltering.

CEO Portela is scheduled to speak to reporters later in the day.

Net interest income, or proceeds from lending transactions excluding funding costs, fell to 4.717 billion reais from 4.883 billion reais in the third quarter. Fee income, or revenue stemming from insurance, brokerage and investment-banking services, rose 3 percent on a sequential basis, well below expectations in the poll.

Santander's loan book rose 2.2 percent from the third quarter to 211.96 billion reais, but were below estimates of a 3.7 percent gain. Expenses rose 3 percent, below the poll's estimate of a 4.6 percent quarter-on-quarter increase.

The annualized return on average equity at Santander Brasil rose to 12.2 percent from 11.7 percent in the third quarter. ROE, the widely used indicator for profitability in the sector, was 13.5 percent a year earlier. Analysts in the poll expected 9.9 percent.