UPDATE 2-Profit at Santander Brasil slumps on higher provisions

SAO PAULO, Oct 25 (Reuters) - Banco Santander Brasil SA posted an 8.5 percent decline in third-quarter profit on Thursday, as rising delinquencies forced the nation's largest lender to boost bad loan provisions.

Recurring net income, or profit excluding one-off items, fell to 1.501 billion reais ($743 million) from 1.643 billion reais in the third quarter of 2011, Santander Brasil said on its website. Compared with the prior three months, recurring profit rose 2.5 percent.

Management led by Chief Executive Marcial Portela Álvarez will discuss results at a news conference later Thursday.

Interest income, or revenue from lending and trading operations before provisions to cover non-performing loans, rose 13.5 percent on an annual basis after Santander Brasil boosted its loan book by 10 percent in the period. Fee income, or proceeds from financial services other than loans, fell 13 percent over the past year.

Expenses rose sharply in the period, driving profits lower. General, payroll and administrative expenses jumped 12 percent on a year-on-year basis, driving the efficiency ratio to 45 percent. The lower the ratio, the more efficient cost controls are at a bank.


Return on equity, a measure of profitability for the banking industry, rose to 11.7 percent from 11.5 percent in the second quarter, bucking a trend of steep declines among larger rivals.

Results at Itaú Unibanco Holding SA and Banco Bradesco SA this week confirmed a trajectory of lower profitability in the long run as Brazil's government pressed lenders to cut borrowing costs.

Provisions, which rose 30 percent from the same period a year earlier, dragged down recurring profit at Santander Brasil. The lender set aside 3.228 billion reais to cover bad loans in the quarter, compared with 2.489 billion reais a year earlier.

Unlike its counterparts in Brazil, Santander Brazil suffered a deterioration in asset quality in the quarter as more consumers and companies fell behind on their loan installments.

Loans in arrears for 90 days or more, the benchmark for delinquencies, rose to the equivalent of 5.1 percent of its loan book, compared with 4.3 percent a year earlier and 4.9 percent in the second quarter.

Defaults in consumer loans for more than 60 days, a forward-looking indicator for asset quality, edged up to the equivalent of 9.4 percent of total loans, compared with 8.0 percent a year earlier and 9.0 percent in the second quarter.

Recurring profit rose 2.5 percent from the second quarter as a jump in fee income helped offset the impact of higher administrative expenses and a 3.2 percent drop in interest income triggered by record-low interest rates in Brazil.