UPDATE 3-Ita+¦ sees margin 'inflection point' as profit tops estimates
* Margin compression seen over, Itaú executive says
* Itaú's default ratio seen down in coming quarters
* Shares climb after profit beats estimates in poll
SAO PAULO, July 30 (Reuters) - Itaú Unibanco Holding SA said margins probably thinned to their narrowest levels in the second quarter, a sign that Brazil's largest bank by market value will be able to bolster revenue without speeding up disbursements significantly.
Net interest margin, or the average interest rate charged on loans, taking into account the risk of assets rose in the second quarter to 6.4 percent, the first increase in eight quarters. The increase helped boost net interest income despite Itaú's cautious approach to loan disbursements.
"In terms of net interest margin trends, we definitely saw second-quarter performance as an inflection point," Rogerio Calderón, senior vice president for risk management and compliance, said on a conference call to discuss second-quarter earnings. "We see that there is margin for spread compression across the system, but only for certain products."
Calderón's remarks underscore Itaú's ability to outperform rivals at a time when a weak economy, feeble demand for credit among indebted consumers and dwindling confidence in Brazil's economy is hampering the banking sector. Itaú beat second-quarter profit estimates as better-than-expected revenue and expense controls offset a slump in trading-related income.
Excluding one-time items, earnings totaled 3.622 billion reais ($1.59 billion), above the 3.616 billion reais estimate in a Thomson Reuters poll of eight analysts. Recurring profit rose 3 percent from the previous quarter and 0.9 percent from a year earlier, the bank said in a securities filing on Tuesday.
Shares of the São Paulo-based lender rose 1.4 percent in early afternoon trading, reflecting the profit numbers, the stabilization in margins and a steeper-than-expected drop in loan delinquency numbers.
"The very positive trends in delinquency and the slight increase in margins indicate the worst is behind, despite a still weak volume growth outlook," said Marcelo Telles, an analyst with Credit Suisse Securities in São Paulo.
Asked whether the bank was preparing to take on more risk now that earnings were showing an improved performance, Calderón said that "our mandate is to continue creating value for the shareholder, not increasing our appetite for risk-taking."
Itaú's results suggested profit was boosted by a year-long policy implemented by Chief Executive Officer Roberto Egydio Setúbal to avoid riskier loans and streamline costs, and not by the effects of an slightly improving economy.
Setúbal has said that making the lender more cost-efficient should partially offset the effects of a dramatic drop in borrowing costs in Brazil that took effect last year and flagging household demand for credit. His focus on caution is beginning to pay off as Itaú is choosing financial health over growth in an environment of extreme uncertainty for banks.
In line with Setubal's policies, Itaú lowered its forecast for loan book growth this year to between 8 percent and 11 percent from a prior range of 11 percent to 14 percent. Itaú's loan book rose 7.7 percent in the 12 months through June.
Net interest income rose for the first quarter in five, led by an unexpected 3.4 percent increase in lending-related revenue. Risk-weighted net interest margin, or the average interest rate charged on loans, rose for the first quarter in eight to 6.4 percent.
But trading-related income, or gains from the purchase and sale of financial securities, fell by 55 percent to 268 million reais, a four-year low. The decline came after a series of central bank interest-rate increases in the quarter weighed down the value of fixed-rate government debt holdings.
Smaller peer Banco Bradesco SA missed profit estimates, because of a hefty decline in the value of bond holdings.
Shareholders' equity at Itaú rose 2 percent despite lower trading income, and unrealized gains, or the impact of marking to market the value of the securities in the balance sheet, led to a charge of 2.4 billion reais, about one-third of Bradesco's.
Return on equity, a gauge of profitability among banks, rose for the third straight quarter to 19.3 percent, while analysts expected 19.4 percent.
Loans in arrears for more than 90 days, a benchmark for delinquencies, fell to 4.2 percent of the total. Analysts looked for the default ratio to reach 4.4 percent.
Provisions for bad loans fell 0.6 percent to 4.91 billion reais, above expectations of 4.77 billion reais.
Fee income rose 5.4 percent from the prior quarter to 5.399 billion reais, above expectations of 5.347 billion reais. Operating expenses rose 4.2 percent on a sequential basis to 8.626 billion reais, still above estimates of 8.5 billion reais.