Banco BTG Pactual S.A. (BPAC11) Earnings Call Transcript & Summary

Good morning, and welcome to the First Quarter of 2022 Results Conference Call of Banco BTG Pactual. With us here today we have Roberto Sallouti. [Foreign Language]. We would 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 in the platform. There will be a replay facility for this call from May 9. Before proceeding, let me mention that this call may contain forward-looking statements relating to the prospects of business estimated for operating and financial results and those related to the growth prospects of Banco BTG Pactual. Those are merely projections and 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 change 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 disclosed documents and are, therefore, subject to change without prior notice. Now I will turn the floor to Mr. Roberto Sallouti who will begin the presentation. Mr. Sallouti, Please go ahead.

Thank you very much. Good morning to all of you on the call. Before I pass the floor to Renato Cohn, which will talk about each of the business units, I'd like to highlight some of the KPIs and results for the quarter. So starting on Page 3 of the presentation, we think this quarter really evidences our all-weather equity story. As all of you know, we built BTG Pactual to ensure that we could perform with solid results under any macro scenario. I really think we had a very challenging macro scenario in the first quarter and continue having now in the second, but that we were able to in this scenario come with the most profitable quarter ever in our history. In this quarter, our revenues grew 56% growing BRL 4.4 billion. Our net income grew 72%, reaching BRL 2.1 billion. And in the quarter, we had a return on equity of 21.5%. Turning to Page 4, we talk a bit about of our investment management businesses. In this quarter, we reached record revenues in our Wealth Management business, remembering all of you that when we say Wealth Management here, it includes the digital retail unit activities related to individuals and we crossed the unprecedented mark of BRL 1 trillion under AUM. In the quarter, we had net new money of BRL 52 billion. Our assets in our Wealth Management units increased 44% to BRL 458 billion and assets in our asset management unit grew 30% to BRL 586 billion. Turning to Page 5, we show our funding credit and capital numbers. And this quarter, we continued with very strong funding inflows and a consistent growth in credit revenue and portfolio, at the same time while we kept very solid capital ratios. Our unsecured funding, even with the reais appreciating in the quarter grew 28% year-over-year, reaching BRL 155 billion. Our corporate and SME portfolio grew 39%, totaling BRL 111 billion, of which BRL 19 billion in SMEs. And we finalized the quarter with a Basel ratio of 15% and total equity of BRL 39.3 billion. On Page 6, we show the results in the traditional manner that we always do, so just to repeat a few of the highlights and give some additional information here. The first point to mention is, once again, we had revenues of BRL 4.35 billion, net income of BRL 1.94 billion and adjusted net income of BRL 2.06 billion. Our adjusted cost income was in the lower bound of our historical range at 39%. Just reminding all of you that when we say adjusted here, we're only excluding goodwill and also reminding you that we amortize the goodwill of acquisitions and investments between 2 and 5 years in an accelerated manner. And finally, we finished the quarter with total assets of BRL 391 billion, equity of BRL 39.3 billion and Basel ratio of 15%. Turning to Page 7, we show the revenue breakdown by business unit. And here we see a stable revenue distribution between the areas and the 12 months ending in Q1 '22 compared to the 12 months ending in the Q1 of '21. But what we really like about this page is that it highlights the strength of our integrated business model with the expansion into new segments and products, great growth to all areas. So you can see that all of our areas are having double-digit growth and many of them significant double-digit growth in the last 12 months compared to the previous 12 months. Finally on Page 8, we highlight a few of ESG and impact investment competitions for the quarter. So we issued another BRL 780 million in sustainable deposits in the second phase of this initiative. We issued almost BRL 1 billion for our clients and ESG labeled DCM issuances. And we also became a member of the Green and Social Bond Principles of ICMA. We launched our Venture Debt Fund in Chile focused on SMEs. This fund will follow our ESG and Impact Investing framework. And for the third consecutive year, we were listed in the Brazil Climate Resilience index, which is the gold standard of our environmental reporting in Brazil. With that, I turn the floor to Renato Cohn to talk about each of our business units.

Thank you, Roberto. Very happy to be here, starting with the right foot in -- with such positive results and looking forward to meet everyone individually and personally in the very near future. Going into more specifically into our businesses, we start with the investment bank, where we maintain a leading position in industry rankings despite retail market activity. We recorded BRL 351 million of revenues during the quarter, and that was comprised of a stronger quarter in M&A, somewhat reduced activity in ECM, similar to the previous quarters, as we saw very little activity in that area in the market and an increasing activity in DCM during the quarter. Obviously, as usually, January was a slower month, especially in the first 2 weeks, and then it picked up to normal levels in February and March. Important to say that we see very strong pipelines in both DCM and M&A for the next quarters and also, as I mentioned in the beginning, we maintain our leadership position in the several rankings that evaluate the market. So once market activity picks up, especially in ECM, we will certainly benefit from it. Moving to corporate and SME lending another quarter of record revenues as we maintain a high-quality credit portfolio. Actually, there were record revenues for the second quarter in a row. Revenues grew by 47% year-over-year and 10% quarter-over-quarter as we continue to consistently grow our lending portfolio, both in corporate and SME businesses while maintaining the same level of quality and similar level of spreads with other contribution. Our total portfolio grew by 4.6% quarter-on-quarter and 38.5% when compared to last year. Our SME initiative, which we launched about 3 years ago continue to grow at a higher pace accounting for 10.4% growth during the quarter and almost 82% growth year-over-year. So excellent results on our lending business, and we continue to see those levels of revenues going forward. Moving to Sales & Trading, we had record contribution from client activities and higher market volatility and with efficient VaR allocation. It was our best quality results with again, record contribution from commission and flow revenues. And as our client franchises grow, we have more clients from different areas of the bank using the services that our Sales & Trading desk provide for their investment or hedging strategies. And that in large client base aligned with somewhat higher volatility that we saw in the market during the quarter resulted in higher volumes of business, which allowed us to achieve such performance. And it's important to know, as you can see in the right-hand chart that we achieved those results with very low or below historical levels, VaR utilization so very good quality in those results in Sales & Trading. Moving to Asset Management, we had solid net inflows and growing management fee revenues. Recorded BRL 313 million in revenues that was a 13% decline when compared to previous quarter, but obviously, as we all know, we usually collect performance fees during the fourth quarter. So when excluding [ DigiFab ], we see a consistent revenue growth trajectory as we have been seeing in the previous quarters. Revenues increased by 18.3% year-over-year and that is consistent with assets under management growing at almost 11% and our assets under administration growing at 30%, reaching a total amount of BRL 586 billion. Net new money was BRL 23.6 billion in the quarter and more than BRL 140 billion during the last 12 months. And we see that the majority of these new flows are going into most of our fixed income strategies and to a lesser extent to some of our alternative strategies. In Wealth Management & Consumer Bank, we had another quarter of record revenues, given changes in client mix and increased product offering. We recorded BRL 570 million in revenues, a 27.6% increase quarter-over-quarter and a remarkable 93% increase year-over-year, and that was achieved through consistent growth of our retail, our investment and our wealth management platforms, including the positive effects of the Empiricus consolidation. Net new money reached BRL 28.3 billion, a very solid number for the quarter and an impressive BRL 161 billion during the last 12 months. Wealth under Management increased to BRL 458 billion, a 45% increase when compared to last year. Also during this quarter, we successfully integrated our digital platforms, improving our client experience and also brand recognition, so very good results here on our wealth management. In Principal Investments and Participations, we had very solid -- performance in both segments specifically on principal investments, we posted BRL 290 million in revenues, driven by higher contribution from our global markets, which are basically CD investments. We also recorded BRL 122 million of net profits through participation, and that is comprised of a net profit of BRL 81.5 million in Banco Pan, and that already considered the goodwill amortization of BRL 57 million that we do. And if we would exclude that only on Banco Pan, we will have recorded BRL 139 million in profit. Additionally to Banco Pan, we recorded BRL 20 million profits on to Seguros and an additional BRL 20 million profits for our participation in EFG. Moving to expenses, we kept our expenses under control and our cost income remained at the lower bound of our historical range. Salaries and benefits grew by 24% during the quarter, and that was due mostly organic and inorganic personnel increases, but also through the normal process of year-end salary adjustments and promotions. Goodwill amortization increased as we started to amortize the acquisition of Empiricus. And finally, our effective income tax rate was 20.4%, and that was positively impacted by higher interest on equity, our JCP. On our balance sheet, our total assets increased by 13%. We continue to post solid liquidity levels with 55 -- approximately BRL 55 billion of cash and cash equivalents, resulting in an LCR of 166%, way above the regulatory minimums of 100%. Our balance sheet credit portfolio growing line with our, unsecured funding base, which provides a very profitable level of 169%. And also, it's important to note that our corporate lending portfolio represents only 2.8x our net equity so way below most of our peers where we see numbers like 5, 6 or 7 so obviously, with a significant room to expand. Our unsecured funding increased to BRL 155 billion, an increase compared to last quarter, even considering as Roberto mentioned, a strong U.S. dollar depreciation against the Brazilian real. The U.S. dollar depreciated about 16% during the quarter that obviously affects our stock of funding that are -- that is U.S. dollar based, that even considering that effect, our unsecured funding increased. Demand deposits remained strong and also important to note that our share of retail funding continues to expand, reaching 23% of our total base or 28% if we would consider Banco Pan's funding base. In our Basel ratio, we continue to show very strong capital ratios with our Basel ratio at 15%, and our core equity Tier 1 above 13%, which both numbers above most of our peers. And as I mentioned before, our VaR remains at historical low levels and similar to the average of last year. So again, remarkable results in terms of revenues, profitability across almost all of our business franchise and all of that supported by an efficient VaR allocation and a strong balance sheet. I think that the quality of these results make us confident that our growth trajectory remains strong as we have more clients to our base and make additional products available to them right. Roberto, I don't know if you have any additional comment?

No, thank you. I think we can open up for questions. Thank you.

[Operator Instructions] And our first question comes from Tito Labarta, Goldman Sachs.

A couple of questions if I can, first on your asset and wealth management and your net new money. Curious, can you provide any color in terms of the breakdown between different types of assets where equity, fixed income, alternative investments on the existing asset or wealth under management and also under net new money? Is there -- you mentioned net new money I think coming from fixed income and alternative investments. But how does that compare to sort of the total asset and wealth under management, and just kind of thinking about how that's shifting perhaps more to the fixed income today, but how it compares to the levels. And then I have a second question, aside of that.

So regarding the first question, I mean, it's -- what we see also in wealth management is that most of the flows are, in fact, going to fixed income. It's very difficult to segregate exactly where the net new money goes because obviously you have also the natural reallocation of portfolios during the quarter, right? But certainly, we see the participation of all the fixed income instruments, not just the funds, but also the securities issued and traders in the market. We see fixed income as a percentage of the total portfolio of wealth management increasing when compared especially to equities and in lesser than to other instruments.

And I think it's also fair to say that we see the same phenomenon in our asset lining business, be it in our asset management or our administration business, where you see investors shifting many times from equity and even from hedge funds into more fixed income funds. Naturally, this is just a picture of the short-term. But I would actually say that given our experience recent past performance is a good indicator of future net new money. And I have seen hedge funds, especially -- the administration business performed very well. So at some point, we think that outflow would stop and either turn positive. Equities, I think we have to see at least the market stabilize before we start seeing redemption then. But we are seeing in our administration business this flow and in our asset management business. Also, we've been seeing this flow into fixed income products. A lot of flow into credit products and especially because of some specific transactions, we are seeing a lot of flows to our alternative asset management business, and we expect these to continue, for example, with the closing of the [ Vital ] transaction where we have a club deal there.

Great. That's helpful. And any color you can provide on just the underlying asset and wealth management in terms of the asset split like in fixed income 1/3 equity 25%. Any just for general sense doesn't mean exact numbers, but to help us think about how the portfolio is positioning with investors?

Look, I mean this is -- naturally it changes to other time through flows, right, or the net new money that we are discussing and also obviously by market value, right, the effects of the market. But I would say that today, fixed income and access are pretty similar with funds a little bit lower and these are the -- obviously the 3 main components.

Okay. Great, that's helpful. And then my second question is more on the Sales & Trading, a very strong quarter there. Just was there anything nonrecurring in net Sales & Trading? What sort of the VaR increased a little bit in the quarter, but as you mentioned the low historical levels. You previously guided for about BRL 1 billion plus and minus 20%, yes, you're well above that. Do you still -- is that still the right guidance to think about for Sales & Trading, particularly for the rest of this year?

There was no specific one-off in Sales & Trading. It was a good quarter I would say because of the level of activity and I think efficient allocation of VaR. But clearly, we see Sales & Trading benefiting from the integrated sales model. If you look at the line quarter-over-quarter, you're able to see a bit of a trend line growth. So I think that's probably something along those levels is probably more accurate than keeping the same, let's say, levels that we talked about in the past.

Our next question comes from Thiago Batista, Banco UBS.

Congratulations for the results, very strong numbers. I have 2 questions. The first one, about the capital position of the bank, we are seeing that last quarter's [ capital ] consumption of about 50 bps per quarter and it had already achieved 13.2%, if not wrong. Is this level of capital an issue or do you believe that with an ROE of 20%-plus will it be possible to let's say to review this capital with -- in a kind of organic way? And by the way, what is the minimum level of capital that which is comfortable? And my second question is about the impact of the consolidation of Empiricus. Do you know more or less how much was the net new money without the principal investments in the Wealth Management business? So what was the organic net inflow in the Wealth Management?

So first on capital, we are very comfortable with the levels of capitalization. If you look either at core equity Tier 1 or total capital, we are well above our peers. And I would say that a good measure for us is that we want to continue to be more capitalized than our peers. So I think if we go a bit below here, but still well above our peers, we would be fine. But I don't think that will happen in any significant manner because as we only pay 25% of our net income and dividends, we accumulate capital in organic manner. Not only that, but we have been seeing a lot of Tier 2 capital of bonds that we had issued a while ago. And if anything, I would say probably the best way to access capital would be to issue Tier 2 at some point in time. But it's not just the ordinary course and growth of our business. We are quite comfortable with our core equity Tier 1 and with the total capital ratio, but we will be paying attention to the market whenever there's an opportunity to issue Tier 2, we will be able to do that, but in no hurry. On the net new money, basically almost all of the flow is organic. We had a very small amount coming from basically 1/3 of the [indiscernible] acquisition which we were able to bring in during the last days of March. But basically, the flow was almost all of it organic and net new money.

That brings us to the end of the question-and-answer session. I will now return the floor to Mr. Roberto Sallouti for his closing remarks. Please go ahead.

Thank you very much once again for joining our call. We really look forward to seeing you in our quarterly call at end of the second quarter. Have a great week. Thank you.

This does conclude today's presentation. You may now disconnect your lines at this point, and have a nice day.