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UPDATE 3-Brazil's Banco Bradesco sees lower provisions, slow lending recovery

(Adds bank CEO comments, paragraphs 3-6)

SAO PAULO, July 27 (Reuters) - Banco Bradesco SA, Brazil's No. 3 listed bank, expects to continue cutting loan-loss provisions as credit quality improves in coming quarters, though a slow economic recovery should keep a lid on lending.

The bank on Thursday forecast loan-loss provisions of 18-21 billion reais ($5.7-6.7 billion) in 2017, down from 21-24 billion reais previously.

In a conference call to discuss second-quarter earnings, executives said the revision reflects a faster-than-expected drop in defaults, which is likely to extend throughout 2018.

Defaults over 90 days fell to 4.9 percent in the second quarter, the lowest since the first quarter of 2016. A bad loan growth metric known as non-performing loan creation fell 7.5 percent.

"The peak in defaults is behind us," Chief Executive Officer Luiz Carlos Trabuco told reporters.

His remarks underscore how loan quality woes for domestic banks are taking the backseat after a four-year credit market downturn that drove many to adopt cautious lending practices.

Loan-loss provision expenses rose 2 percent from the prior three months, but slipped as a percentage of total credit transactions. Bradesco's coverage ratio, or how much capital it has to cover bad loans, rose to 167 percent.

A pickup in lending activity will take longer with loan book growth expected only in the fourth quarter, Trabuco said, as a slow economic recovery curbs demand for credit.

Bradesco now expects its loan book to contract 1 percent to 5 percent this year, against a previous forecast of growth of 1 percent to 5 percent. It contracted for the third straight quarter in the last three months.

Net income excluding one-off items, or recurring profit, totaled 4.704 billion reais, up 1.2 percent from the first quarter and surpassing analyst expectations of 4.426 billion reais. The increase in loan-loss provision expenses was offset by a higher insurance revenue and fee income.

Annualized return on equity (ROE) fell 0.1 percentage point to 18.2 percent, beating analyst expectations. Analysts at Itaú BBA estimated the revised guidance implies a 2017 net profit of 20 billion reais, above the Reuters consensus estimate of 18.5 billion reais.

Preferred shares rose 0.3 percent on Thursday to 29.84 reais, extending gains to 14 percent this year.

Bradesco reported earnings on a pro-forma basis to account for its purchase of the Brazilian unit of HSBC Holdings last year. ($1 = 3.1389 reais) (Additional reporting by Aluisio Alves; Editing by Bernadette Baum and Grant McCool)