Brazil banks Q4 seen firm, provisions may surprise

www.forbes.com Reuters, 01.31.03, 3:43 PM ET By Nicholas Winning

SAO PAULO, Brazil, Jan 31 (Reuters) - Brazil's top private banks are likely to post firm fourth quarter profits as high interest rates and trading gains help offset sluggish credit growth, although provisions could throw up some surprises. Analysts say the recovery in confidence in Brazilian assets since the election of leftist Luiz Inacio Lula da Silva in October should help the balance sheets, while a 7 percentage point hike in the Central Bank's main interest rates over the period would support margins. "While loan growth should remain stagnant and provisioning levels high, the Brazilian banks should nonetheless post strong profitability in 4Q 02 given high net interest margins resulting from high interest rates and solid trading gains," Jason Mollin, a banking analyst at Bear Stearns said in a note. Itau <ITAU4.SA>(nyse: ITU - news - people), Brazil's second-largest private bank, is likely to post the highest profit again, beating market leader Bradesco <BBDC4.SA>(nyse: ITU - news - people) and smaller Unibanco <UBBR4.SA> (nyse: ITU - news - people). Itau usually accounts for acquisitions on its balance sheet in one go, but analysts feel it may want to try to split up the $922 million acquisition of private banking specialist BBA-Creditanstalt SA in November because of its size. There may also be a surprise one-time gain from cash it had stashed away over time to buy Banque Sudameris' Brazilian unit from Italy's IntesaBci <BIN.MI> before the deal fell through. "Itau said the provision it made for Sudameris may be reversed in the fourth quarter -- about 500 million reais ($141 million)," said Rafael Quintanilha, a banking analyst at BES Securities. Itau should post net profit in the region of 591 million reais, according to an average of 5 analyst forecasts. That is below the 639 million reais it made in the previous quarter, but higher than the 234 it made in the fourth quarter of 2001 when it bought a state bank. The results are due on March 11. PROVISION COULD HOLD SURPRISES Brazilian banks stashed away huge trading gains from the sharp depreciation of Brazil's currency, the real , in previous quarters and put them aside to shield against any sudden future currency losses or debt nonpayment. Brazil's currency firmed slightly in the fourth quarter, but still lost 35 percent of its dollar value over 2002 thanks to a slowing economy at home and abroad and investors' worries about the economic policies of the new left-wing government. But the millions of reais the banks have put aside, or provisioned, in the past make forecasting results difficult. "The banks have so many reserves on the balance sheet that they can unwind into profits as they see fit," said one banking specialist who preferred not to be named. But some said the banks erred on the side of caution and will not ease out provisions until this year. "In the third quarter the banks made very big provisions ... and that should be repeated in December," said Erivelto Rogrigues, a director of Austin Assis consultants. "This year I believe that the banks should reduce the provisions because I don't think the economy will be as volatile and turbulent as it was in 2002." Bradesco, which posts results first thing on Monday, is seen posting a net fourth quarter profit of 511 million reais, based on an average of five analyst predictions. That beats the 420 million reais it made in the third quarter but loses out to the 610 million reais it made in 2001. "Bradesco has built up reserves through foreign exchange gains in the third quarter and could reverse part of those to boost earnings," Bruno Pereira, a banking analyst at UBS Warburg said in a note. "Movements in excess reserves could be an important driver." Brazil's No.3 private, Uniao de Bancos Brasileiros (Unibanco), is expected to post a fourth quarter net profit of 255 million reais on February 13, just short of the 269 million it posted in the previous quarter but above the 241 million reais it made in the year-earlier period. ($1 = 3.52 reais)