* Banco do Brasil may buy out Votorantim, source says
* Bought 49.9 pct stake in Votorantim in January 2009
* Votorantim has posted losses in past three quarters
By Aluisio Alves
SAO PAULO, May 13 (Reuters) - State-controlled Banco do Brasil is in talks to buy the remaining stake it still does not own of Banco Votorantim, a source with knowledge of the situation told Reuters on Sunday, in a move that could help Brazil's largest lender expand in the local auto loan market.
Banco do Brasil, which bought 49.99 percent of Votorantim in January 2009, is currently assessing a potential bid, said the source, who declined to be quoted because the deal is in the works. The Ermirio de Moraes family controls Votorantim through investment holding company Votorantim Financas.
The source declined to give further details.
A deal may take place at a moment of rampant losses for Banco Votorantim, whose focus on vehicle loans is failing amid a surge in defaults. Votorantim has posted net losses over the past three quarters, with credit default reaching 7.1 percent of its loan book at end of March -- more than three times Banco do Brasil's loan default ratio.
Banco do Brasil posted a lower-than-expected profit in the first quarter and said it will set aside about 25 percent more money to cover bad loan-related losses this year, partly to deal with swelling losses at Votorantim.
The state lender, whose credit risk controls have helped it bring down defaults to half the market's average levels, includes Banco Votorantim's quarterly results on its earnings. Banco do Brasil paid 4.2 billion reais ($2.2 billion) for the stake in Votorantim in January 2009.
Banco do Brasil declined to comment while a spokesman for Votorantim told Reuters by phone that the bank is not for sale and that the Ermirio de Moraes family "are committed to staying with the bank."