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Rising problem loans to hamper Brazil state banks, Moody's says

SAO PAULO, June 5 (Reuters) - A surge in non-performing loans at Brazil's state-run banks that began in the second half of 2013 is likely to intensify in coming quarters, reinforcing the need to set aside more money to cover potential losses, Moody's Investors Service said on Thursday.

A team of Moody's analysts led by Ceres Lisboa said in a report that rising NPLs are a result of rapid credit growth at state lenders, which expanded their loan books at a compound annual rate of 24 percent over the last decade. Slowing economic activity, coupled with high household debt, are making matters even worse for state banks, the report said.

A move by government policymakers to slow the pace of loan disbursements by state banks to help them protect their capital base could boost delinquencies, the report said. Loans in arrears for 90 days or more, the industry's benchmark gauge for credit delinquencies, remained unchanged for a fourth month at 4.8 percent in April, central bank data showed last week.

"Should this trend persist, they will need to set aside more provisions to cover losses, which will impair their earnings," Lisboa said in the report. Short-term defaults showed a rise in April, signaling a growing inability by households and companies to cope with the highest borrowing costs in over two years.

The report underscores the growing gap between private-sector and state-run lenders, which have stepped up lending and cut borrowing costs more aggressively than the former over the past two years. Due to rather selective credit risk standards, private-sector banks have seen their default indicators fall steadily since mid-2012 as they moved away from riskier lending segments to mortgage, payroll and large corporate credit.

Shares of state-run Banco do Brasil SA, the nation's largest bank, have lagged those of private-sector rival Itaú Unibanco Holding SA, partly because of that perception. Banco do Brasil rose 1.8 percent in the past 12 months, compared with Itaú's 12.2 percent jump.

The level of bad loan provisions reflect the diverging trend in NPLs between state and private banks, according to the report. Based on NPL levels as of April 2014, public banks would have to increase their provisions by 23 percent from a year earlier, while private banks would be able to reduce their provisions by 11 percent, the report showed.

Since late last year, a correlation between provisions trends at state and private banks diverged. According to Lisboa and her team, if such a trend "continue, asset quality deterioration will put negative pressure on profitability at government-owned banks, while private lenders will benefit from decreasing credit costs."

(Editing by Diane Craft)