SAO PAULO: Brazilian banks probably entered a cycle of higher defaults and loan loss provisions in the fourth quarter, in a sign profitability will stay pressured this year as loan book growth slows further, a Reuters poll showed on Wednesday.

While loan disbursements gained steam prior to the year-end holiday season, there were no signs an economic stagnation or slumping confidence abated, analysts said. Corporate defaults probably rose in the quarter, forcing Brazil's top three listed banks to set more money aside to cover bad loans.

A weak economy is "taking a toll on banks' loan book growth and default ratio improvements are close to an end," said Flavio Yoshida, an analyst with Votorantim Corretora. "We still expect healthy results but are worried about the upcoming quarters." Unibanco Holding SA underperformed rivals for the first time in seven quarters, despite receiving the poll's highest earnings and profitability readings. Recurring net income at the Sao Paulo-based bank probably fell on a quarterly basis as expenses spiked, analysts in the poll said.

Lower expenses and rising fee income helped private-sector peer Banco Bradesco SA and state-run Banco do Brasil SA offset the grim business climate. Yet, lenders likely raised loan-loss provisions due to exposure to bankrupt firms like Eneva SA or those connected to a graft scandal at state-controlled oil company, the poll said.

"We expect the asset quality outlook to be heavily debated in earnings calls," said Carlos Macedo, an analyst with Goldman Sachs.

While the industry benefited last year from rising borrowing costs, analysts expect fourth-quarter results to show signs of an eroding business climate for banks. As a result, analysts expect Ita, Bradesco and Banco do Brasil to unveil uninspiring outlooks or annual targets for this year.

After two quarters of robust loan repricing due to higher rates, Ita? will probably see average rates charged on loans, known as NIM, declining. For Bradesco, NIMs should remain flat while climbing a little for Banco do Brasil, the poll showed.