Banco BTG Pactual SA

BOVESPA:BPAC5

Earnings Call Transcript

[Operator]

Good morning, and welcome to the Third Quarter of 2018 Results Conference Call of Banco BTG Pactual. With us today, we have Roberto Sallouti, João Dantas, Pedro da Rocha Lima. We'd like to inform you that this event is being recorded.

[Operator Instructions] Today, we have a simultaneous webcast that may be accessed through the website, www.btgpactual.com/ir. There will be a replay of this call from November 6 through November 12.

Before proceeding, we mention that this call may contain forward-looking statements relating to the prospects of business, estimates for operating and financial results and those related to growth prospects of Banco BTG Pactual. These are merely projections, and as such, are based exclusively on the expectations of Banco BTG Pactual's management concerning the future of the business. Such forward-looking statements depend substantially on changes in market conditions, government regulations, competitive pressures, the performance of the Brazilian economy and the industry, among other factors and risks disclosed in Banco BTG Pactual's filed disclosure documents and are therefore subject to change without prior notice. Now I'll turn the floor over to Mr. Roberto Sallouti, who will begin the presentation. Mr. Sallouti, please go ahead.

[Roberto Sallouti, executive]

Thank you very much, good morning to everybody attending. If we could please start on the Page 3 of the presentation. We would like to point out some of the highlights of the quarter. First item to mention is that we continue to deliver a very strong performance on our client franchises. We're specifically very satisfied with the growth of both our Wealth and Asset Management businesses, which are showing a 35% growth in the assets under management year-over-year. Also important to mention that at the end of the third quarter, we concluded the launch of BTG Pactual digital, which is our retail platform. The platform is now 100% complete, with all the products there to be required by clients, and not only is the B2C, the direct platform to clients directly, but also is the B2B platform, which will be servicing independent financial advisers really. So we do expect that growth in this platform will accelerate over the next quarters, and this will be reflected in our Wealth Management numbers.

Third point to mention is the very good performance of our Corporate Lending business, here both of the large corporates and the large special situations or non -- NPL business having very solid performance, where we have a 32% growth in revenues from the previous quarter.

And finally, during Q2 -- the same has happened in Q2. We adopted a very conservative risk allocation policy. This can be seen in the average daily VaR, which decreased 23% from the previous quarter, and probably -- as a percentage of our equity is probably the lowest VaR that we ever reported. And this led to another weak quarter of result in Sales & Trading.

Turning to page 4. We talk a bit about the numbers of Q4 -- Q3. We have total revenues of BRL 1.255 billion and adjusted net income of BRL 685 million. This gave us an adjusted return on equity of 14.3% for the quarter. And as we are showing in the previous quarters, if we only take the amount of capital that is allocated to Banco BTG Pactual, excluding the amount of capital allocated to EFG or Banco Pan, it was an 18.3% return on equity for the quarter. We had a net income per unit of $0.78.

Cost of income and comp ratios have basically stayed a bit above historical average but nothing significant. We have cost income ratio of 47% and comp ratio of 22%. And we finalized the quarter with total assets of BRL 164 billion, a Basel ratio of 17.8% and shareholder's equity of BRL 19.2 billion. We also, during Q3, paid interest on capital, which we distributed to shareholders of BRL 592 million.

Turning to Page 5. We see the results for the first 9 months of 2018, and where we had revenues of BRL 3.8 billion and net income of BRL 2.03 billion.

Similar to Q3, this gave us an annualized ROAE of 14.4% for the 9-month period, and excluding the capital allocated to EFG and Banco Pan, an annualized return of 18.6%. Cost-income ratios were very similar to Q3, cost income 46%, comp ratio 22%, and as stated previously, we finished the quarter with BRL 19.2 billion equity.

If you look at Page 6, we have the breakdown of revenues of the different business units, and what you can see here and what you've seen quarter after quarter, is the growth of our client franchise businesses and of credit in the composition of revenues. We expect this trend to continue throughout the next quarters.

And finally, on Page 7. It's what I mentioned previously, here we are showing the regulatory capital allocated to each of the financial institutions that we have under the BTG Pactual and the ROAE to this capital allocated. So for Q3, we had for BTG Pactual core business, 18.3% return, for Banco Pan, 6% return, and EFG was flat basically because EFG reports results once a semester. So in Q4, we will show there the equity pickup of the whole second semester, and this will then give the return on equity for the capital allocated. So with this introduction, I'll pass the floor to João Dantas who will talk about each of business units.

[João Leite, executive]

Thank you, Roberto, and thank you, all on the call. We -- please turn to Page 9, and we start here to do the drill down on the performance of our businesses. As we mentioned and you'll see throughout the presentation the performance has been marked by strong performance in client activities and weak performance regarding markets, and we'll see the details of that. So starting with Investment Banking. Our revenues in the quarter were BRL 58 million, and this is basically activity from DCM. We saw throughout LatAm, especially in Brazil, very weak activity in equity platform markets and M&A in general, but this was an excellent year for us as we franchise. Before the third quarter, the mood for emerging markets in LatAm, as we saw it, had been more volatile, and this has reflected in, as I said the activity in capital markets. In the quarter, we observed very weak flows into equity funds dedicated to emerging markets, some flows still resilient for fixed income funds in different LatAm emerging markets, especially hard-currency funds, and this is reflective of flows for EM in general, and is reflective of the [ risk cost ] environment and more volatile environment that we saw throughout the quarter.

Naturally, as we see elections coming to completion in the region, so we have the Mexican election, we now have the Brazilian election, today we have the mid-term elections in the U.S., all these will -- can certainly impact that trend of more volatile and weak flows in emerging markets. And it will be interesting to observe developments in capital markets until the end of the year.

Finally, our market position remained strong for the 9-month period of 2018, we are #1 in number of transactions in Brazil -- in Latin America in M&A, #2 in Brazil and #1 in Latin America for ECM. So this gives us the ability to maintain constantly our leadership position in Investment Banking throughout quarter.

So moving to Page 10. The Corporate Lending results. So our revenues reached BRL 311 million, and our Corporate Lending portfolio remained flat at BRL 26.1 billion quarter-on-quarter. Basically, this reflects -- for Corporate Lending, it's -- numerically, it's been a quite normal quarter where revenues were benefited from lower new provision expenses, so the new credit that we issued -- that replaced those that matured in the quarter were issued at the marginal need for provisions lower than those that matured. So small part of contribution from these provisions and also strong contribution of reversals of preexisting provisions relating to credits that were being renegotiated. And those negotiations as they were successful through -- during the quarter, we captured also the benefit from reversal of provisions. Also strong provision -- a strong contributor was the NPL portfolio. It comes from our special situations business. Special situations business is more than just nonperforming loan. It encompasses provision of services to counterparties. There are sometimes consultant fees that can be captured as a multiple, basically in business, where we act not only as take cares of NPL portfolios, but we do much more wide activity. And that was a very strong contributor for the quarter.

NPL is not an accrual business, so there are quarters where we don't capture significant revenues from that business, but in the present quarter, we had quite interesting results coming from renegotiation of land lease, renegotiation and down payment from clients. So this has contributed to the strong BRL 311 million of revenues from Corporate Lending.

Finally, the portfolio growth as we saw -- as it has been seen throughout the quarters for the last 12, 18 months has scaled. We saw that some of the -- many of the decisions from our counterparties to take credit will be postponed during the third quarter. And perhaps, as we discussed for Investment Banking, for the fourth quarter, we may see more activity resuming in Corporate Lending as well.

Moving to Page 11. Now we have Sales & Trading. And as you can see, we have BRL 224 million in revenues in the quarter, which was the lowest quarter of the previous -- of the year and lowest as well compared to the third quarter of 2017. Revenues decreased in Sales & Trading in most of our brokerage and flow desks, and not only in Brazil, but across LatAm. The third quarter was marked by the risk-off and volatile attitude of clients in markets across global emerging markets, but in particular for LatAm. And as a result of that market environment, we see lower balance sheet utilization for commission and risk intermediation. So the balance sheet utilization has been reduced significantly. And therefore, our VaR reduced about 25 -- our VaR utilization reduced 25% in the quarter from 0.40% of our average equity to 0.30% of our average equity. And also our BIS ratio increased to 17.8%.

Moving to Page 12. And here's one of the highlights of the clients -- of our performance within our client franchise, which is Asset Management. AuM reached BRL 184.2 billion coming from a year ago, a level of BRL 136.8 billion, so this is a 34.6% increase year-on-year on assets under management, driven basically by strong net new money, this is truly organic growth. So either clients of our Asset Management are investing more with us or new investors are becoming clients of our Asset Management franchise, which means it's truly organic growth. So the net new money was the main driver, and the net new money is a consequence of: number one, the stable environment for interest rates, stable in Brazil at 6.5% nominal, which has been pushing -- which historically is the low level of interest rates for the country and is driving our growth in terms of market share since the types of managed products that we offer to our clients are differentiated in terms of performance. And also among the asset classes in which we manage assets, we have been -- performing our Asset Management business, and we've been performing very well. So the top-tier performance period. So both phenomenons have helped us grow in market share and attract significant inflows as we've seen in the Page 12.

Moving to Page 13. It's a -- similar phenomenon happens for our Wealth Management business. We grew, from a year ago, BRL 84.4 billion of wealth under management to BRL 115.5 billion wealth under management, which is a 36.8% growth year-on-year. Also driven by strong net new money and very good performance, very good services are driving this growth in market share that we see for our Wealth Management business. And we continued to receive significant inflows of net new money and continue to see our competitive position in Latin American markets to remain strong and in growth mode.

And moving to Page 14. We have -- here, we have Principal Investments, where our revenues reached BRL 211 million, and we've BRL 220 million contribution from Merchant Banking portfolio. This is the third consecutive quarter where we have positive contribution from Merchant Banking portfolio. This is, of course, a function of us having significantly completed our rebalancing, so our Merchant Banking teams have been working a lot for the past couple of years in rebalancing our portfolio. And as we see positive contributions from the assets that we hold, we see that this rebalancing was successfully completed. Now going forward, regardless of having the opportunity to divest further from some of the assets, which we hold, what we expect is that these assets will continue to perform adequately given the market scenarios. In global markets, we had a flat result, negative BRL 5 million in the quarter, which, for a difficult market for trading, is quite adequate results. And in Real Estate, we have nothing to report, the BRL 4 million negative result the cost of funding of the Real Estate portfolio. As we typically see when there is no realization attempts in our Real Estate portfolio, we typically will capture just the cost of funding quarter-on-quarter.

So moving to Page 16. Some of the expenses and efficiency ratios. For the third quarter of 2018, as you can see, our cost-income ratio was 47%. For the 9-month period year-to-date, our cost-income ratio was stable at 46%. If you adjust, however, for nonrecurring expenses and the main nonrecurring expense that we have is goodwill amortization as you know, we typically amortize goodwill in any asset that we acquire until goodwill disappears typically in 5 years' time. And if you adjust for that expense and also some legal fees that are nonrecurring, our cost-income ratio for the quarter would have been 36%. And for the 9-month period, it would have been 38%. These levels of efficiency ratios are even better, lower than the average that we have presented in the past years. And it's important to highlight that we have been gaining efficiency and became an R operated bank, with a more efficiency, IR, regardless of the fact that we've been investing in the build-up of the digital platform that, as Roberto mentioned in the opening remarks, is now completed from an investment perspective.

All these investments we've done, potentially family with our technology support teams, commercial teams, we have applied significant effort and significant costs. All those costs have been flown through P&L, so they've been expensed through P&L. So we don't accumulate CapEx as we build the digital platform. And as you see, we move to a more efficient CAR, which means that the benefit that investments we've been doing to build the digital platform have also already been benefiting our efficiency overall for the other client platforms, I can quote, Wealth Management, Asset Management, credit and others. So this is quite interesting achievement, quite positive achievement that we like to highlight since we look forward to 2019 with the opportunity to gather more assets in the digital business without increasing the costs to run the bank.

Also to mention an increase in the tax charges, other than income tax, this is also a nonrecurring increase. So we went from BRL 56 million in second quarter to BRL 88 million in the third quarter. This is just due to the settlement in a process of tax amnesty that was provided by the municipality of Rio, in which all the banks have been adhering to in Brazil, they have adhered before in São Paulo and now with Rio to that same possibility of tax amnesty in Rio, which increased but just on a one-off basis to tax charges in the quarter.

And finally, effective income tax rate of 18.6% for the 9-month period. This is reflective of our -- basically our payment of tax rebate for dividends for JCP, and we've been using that throughout the year.

Moving to Page 18. There's a little bit of balance sheet analysis. Our total assets have reached BRL 163.9 billion, a 4% increase from last quarter, which puts us at 8.5x assets-to-equity leverage ratio. As we have said before, we've always operated the bank between 10 and 12x assets to equity in terms of leverage ratio. So the current level of BRL 163.9 billion of assets still allows us to continue to grow our assets and grow our business throughout 2019 if we see the opportunities to do that in markets.

In Page 19, we have the broader credit portfolio. The behavior here is pretty much in line with the Corporate Lending portfolio, so also Wealth Management credit has not grown, it was stable during the quarter. Credit quality also remained stable and spreads also remain stable.

Moving to Page 20. Unsecured funding base have expanded 10.9% quarter-on-quarter from BRL 40.4 billion to BRL 44.8 billion. This growth was basically driven by time deposits and securities issued. These are the deposits and transactions, funding transactions done, especially in Brazil, but also in Chile, where our Investment Banking franchise is growing. And with that growth, we have, basically renewed and expanded our term for funding by issuing longer maturities in replacement of the credit that matured during the quarter. And we continue to grow our unsecured funding base, regardless of not having grown the credit portfolio, because which keeps us with dry powder to take advantage of the opportunity to grow the credit business during the next year.

And finally, Page 21. As we mentioned, Basel ratio has expanded to 17.8%. And VaR as a percentage of average equity was reduced in the quarter to 0.3%. So these are our remarks. And we'd like to take your questions. Thank you very much.

[Operator]

[Operator Instructions] Today's first question will be from Carlos Macedo with Goldman Sachs.

[Carlos Macedo, analyst]

Couples of questions here. First, you had an opportunity to divest part of the Torácica stake with the recent Petrobras deal. And you just chose to keep the stake you had, and I know that you explained that these are -- you expect the performance to be solid going forward. A more general question on your investments and how you look at them. Is there a timetable specifically for you to sell down from any of these investments? Are you going to be opportunistic, is there some kind of deadline? And I'm not specifically meaning just the principal investments that you have, but also some of the participations that -- the EFG investment, the ECTP investment, ultimately even the Banco Pan investment, if that's the case, is there something that you have -- a plan that you set out? Or is it going to be more opportunistic in nature? Second question, could you give us more color on BTG digital? You mentioned how it's helping your expenses. Could you talk about the revenue side? If there are any contributions, there are contributions to the net new money that you've been adding to you funds -- and -- both in the Wealth Management and Asset Management side and other sectors?

[Roberto Sallouti, executive]

So on your first question about the investments, I think it is very important that we separate what are the legacy principal investments from what are investments in financial companies. So with regards to the legacy principal investments, we basically have 2 assets, it's Petro Africa and Eneva. We basically had the opportunity to divest of both of these assets, and we had decided not to divest, because we think that they will be accretive to our provisions or cycle just our regular trading business. So Petro Africa, the consortium advised though proposed a structure where Petro that becomes a much more stable and financially predictable company, basically using a lot of hedging to reduce the volatility of oil price, improving the capital structure allowing it to pay dividends quicker and also not having any new exploration or development of fields. So basically, it has become a fixed income transformed in many senses of fixed income assets. And so that's assumed with this analysis, we thought it would be best for us to keep. And the same thing with Eneva. We could close Rio block, but we are very optimistic with how the company is performing. And so we think we can be patient about the Rio block eventually whenever we think it is fairly priced, and it is the same thing for Petro Africa. With regard to the participation in financial companies, ECTP, yes, at some point over the next quarters, we expect ECTP to buy back it's -- the share of equity which the bank still holds, which is below 20%. And very small, which has come I believe from 40% if I'm not mistaken. And we expect that to continue. With regards to the EFG, these are financial businesses, and we expect to keep them as long as we can see. If at some point, you have an investor interested or a very attractive offer, we can consider, but I would consider these 2 assets on a very different category than the ones that I mentioned previously. With regard to your second question, on digital, we are intentionally not giving out any details. We are reporting it within our Wealth Management numbers. You have noticed Wealth Management has been very strong, naturally, part of this is because Wealth Management itself has been doing very well, but also because it has been getting increased contribution from the new global business, B2C or the B2B business. We do not plan to report this separately and we think this would be much more market intelligence to our competitors than necessarily very accretive to investors. Naturally, when we meet personally, we can discuss and we are open to be convinced otherwise. But at this point, we're not really inclined to give up what we consider strategic information about the business.

[Carlos Macedo, analyst]

Perfect. And then just color to understand that it's going according to what you've been applying that you laid out when you kicked it off?

[Roberto Sallouti, executive]

It's slightly ahead of the plan when we laid it out.

[Carlos Macedo, analyst]

Okay, great. Just going back to the first question, thank you for separating and showing us the ROE, excluding Banco Pan and EFG. But if I'm -- correct me if I'm wrong, but having these cross-ownerships in financial companies also increases the amount of capital that you have to hold in the bank. And if you were to adjust for that, the ROE that would generate within Banco BTG Pactual would be even higher than the 18% that you reported for the third quarter, is that a correct reading?

[Roberto Sallouti, executive]

No, it would be exactly the 18%.

[Carlos Macedo, analyst]

If you were to adjust the capital, in other words, if you were to be pay a dividend to get to ...

[Roberto Sallouti, executive]

Yes.

[Carlos Macedo, analyst]

A capital that's more adequate to what you do in the bank for the network. You would have like an 18% -- common equity to loan ratio?

[Roberto Sallouti, executive]

No, no, no. We would have an 18% return on equity.

Okay, but just -- so the adjustment that you made here already considers the fact that the excess capital that you hold in order to offset the financial investments would be paid off as dividends, is that correct or is that...

[Roberto Sallouti, executive]

Yes, that is correct. That is the exercise we did. And also very important to mention is that we are very optimistic with both Banco Pan and with EFG. EFG has been going through the integration of the 2 banks, EFI and EFG, and it has been happening in, what we consider, a very satisfactory manner. And we think that integration costs will end, as they have reported, I'm not saying anything that's not public here. It will happen until year-end, and next year, we will get clean results, which they are also reporting clean results, and the clean results will be the final results. So we think that we'll start being accretive to our ROE. And the same thing with Banco Pan. Banco Pan released the results yesterday. It's going through a very significant digital transformation. It has also focused a lot its business, and it's reporting, if you take out the legacy, it's currently at around 15% return on equity taking up the legacy. And we think that this 15% will grow, and that over time, the legacy will end. So we're also optimistic with Banco Pan, which is becoming more and more accretive through the total ROE for the group.

[Operator]

[Operator Instructions] At this time, since there are no other questions, I'd like to conclude today's question-and-answer session. I'll now return the floor to Mr. Roberto Sallouti for any closing remarks.

[Roberto Sallouti, executive]

I would like to thank all of you once again for attending the call. Looking forward to meet all of you in around 3 months, when we can discuss the full year results. So thank you very much, and have a great day.

[Operator]

Thank you. This does conclude today's presentation. At this time, you may disconnect your lines. And have a nice day. Thank you.