(Adds CEO, analysts comments)
By Aluisio Alves and Carolina Mandl
SAO PAULO, May 9 (Reuters) - State-controlled lender Banco do Brasil SA sees fiercer competition with financial startups as likely to reduce the country's average credit margins in the coming quarters, CEO Rubem Novaes told journalists on Thursday.
He said the bank still is likely to reach the top range of its guidance for net income or 17.5 billion reais, as Banco do Brasil will control operating expenses and speed up loan book growth.
Novaes' statement comes as financial startups and small lenders have cut fees and rates to lure consumers, fighting against mainstream banks.
Banco do Brasil on Thursday posted a higher-than-expected first-quarter profit as loan-loss provisions fell sharply and despite a contraction of its loan book growth.
It reported a recurring net income of 4.247 billion real ($1.08 billion), up 40.3 percent year over year.
The bank's return on equity, a gauge of profitability, also beat analysts' expectations at 18.3 percent and Novaes said there is room for improvement.
Profit was mainly boosted by a 26.3 percent drop in loan-loss expenses year on year to 3.126 billion reais.
A lower tax rate, at 23 percent, also helped results. "If the same tax rate is sustained for coming quarters, BB will very likely reach the upper bound of its 14.5 billion reais and 17.5 billion reais net income guidance for the year," BTG Pactual analysts said in a note to clients.
Total loan book, however, shrank 1.9 percent in the quarter, due to a contraction in corporate loans.
Novaes said the bank is likely to reach the target range set for the growth of its loan book, between 3 percent to 6 percent in 2019. So far, it rose 0.9 percent.
Loans in arrears for more than 90 days stood at 2.59 percent in March, roughly in line with the previous quarter.
Shares in Banco do Brasil were down 0.26 percent in early afternoon trading, while the Ibovespa benchmark index was down 0.5 percent.
Novaes reinforced Banco do Brasil's independence to set its prices for financial products, as a recent comment by far-right President Jair Bolsonaro raised questions on governmental interference.
In an event in April, Bolsonaro begged Novaes to cut interest rates for agribusiness.
"He was just kidding," Novaes said. "Banco do Brasil is free to set its interest rates."
$1 = 3.9273 reais Reporting by Carolina Mandl; additional reporting Paula Laier; editing by Jason Neely