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

Good morning, and welcome to the Second Quarter of 2022 Results Conference Call of Banco BTG Pactual. With us today, we have Roberto Sallouti, Renato Cohn, Julia Rocha. 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 and the platform. There will be a replay facility for this call from August 9. Before proceeding, let me mention that this call may contain forward-looking statements relating to the prospects of the business, estimates for operating and financial results and those related to the 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 and 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 to Roberto Sallouti, who will begin the presentation. Mr. Sallouti, please go ahead.

Thank you very much. Good morning or good afternoon to all of you. Thank you for joining our call. If we please start on Page 3 of the presentation. We are very, very satisfied with the quarterly results. We had another quarter of record revenues and net income. Our revenues grew 20% year-over-year, reaching BRL 4.5 billion for the quarter. Our net income grew 27% year-over-year, reaching BRL 2.2 billion and we had, in the quarter, an annualized return on equity of 21.6%, slightly above what we had in the first quarter which was 21.5%. Turning to Page 4. This quarter, we continued to have very strong inflows and a continuous increase in our assets under management. And we're very convinced that this demonstrates the success of our long-term strategy of making sure that clients are being served with products that are suitable to them, always having their long-term interest in mind, always having them -- giving them excellent service and a great technological platform. And we see that even in more challenging markets, we continue to attract resources and to be able to increase our assets under management. In the quarter, we had BRL 71 billion of net new money, which took our assets under management to around BRL 1.1 trillion. Our assets in Wealth Management grew 22% to BRL 463 billion, and in our Asset Management unit, assets grew 21% to BRL 605 billion. Turning to Page 5. We talk a bit about our funding, capital and credit portfolio. We continue to expand our funding base in the quarter. We kept very strong and robust capital ratios and were able to continue to expand our credit portfolio with great quality. In the quarter, our unsecured funding grew 29% year-over-year, reaching BRL 165 billion. We ended the quarter with net equity of BRL 41 billion and a Basel ratio of 15.2%, slightly above the 15% that we finished in Q1. And our credit portfolio grew 36% to BRL 118 billion, BRL 20 billion of which in the SME business. Turning to Page 6. We talk a bit about more details of the quarterly results. As I mentioned, BRL 4.5 billion in revenues, BRL 2.2 billion net income, ROE of 21.6%. We've kept, in the quarter, our cost-to-income ratio with a lower bound of our historical range around 39% and our comp ratio at 21.6%. We finished the quarter with total assets of BRL 454 billion. As I mentioned previously, net equity of BRL 41.4 billion, which is an increase of 18% in the last 12 months. So in the last 12 months basically had our net profit, we paid dividends, and that was the amount of equity that we grew. And during the quarter, we had a low VaR compared to our historical base of 34 bps. Turning to Page 7, we talk about the performance in the first half of this year, which we think was extremely strong and robust and leaves us very happy not only with the results but also with the prospectus for the future. We had revenues in the semester of BRL 8.9 billion, which grew 35% compared to the previous year-over-year 6 months ago. Net income grew 45% to BRL 4.2 billion. For the semester, we had a return on equity of 21.5%. In the semester, we continue in the lower bound of our cost-to-income ratio at around 39% and 22% comp ratio and with a VaR of 33 bps, very similar to what we had in the second quarter. Turning to Page 8. We see the revenue breakdown by business units. And here, we continue to see a very balanced distribution between businesses that are more market-related, businesses that are more related to corporate and investment banking and businesses that are related to investment management. But what makes us very satisfied is the very strong growth in our stable client franchises, more specifically, Wealth Management, Asset Management and Credit would have grown, respectively, 78%, 20%, and 38% in the last 12 months compared to the previous 12 months. And as we have been pointing out over the last few years, this is exactly what we wanted to do, a more balanced distribution, a larger contribution from the stable and predictable client franchises which makes the quality of our earnings more robust and more predictable. And this is exactly what we're seeing reflected in our credit spreads and in our -- the price of our equity. In Page 9, we talk about the advancements we had on our ESG agenda. We issued BRL 1.9 billion in sustainable deposits, more than doubling what we had issued in the previous quarter. We continue to have significant issues in ESG label DCM issuances. We issued $1.1 billion. We launched our ESG EM bond fund. We consolidated the group's social, environmental and climate policies under BTG Pactual, so now all of our entities, including the [ company ] comply with our guidelines. And we had important recognitions from Global Finance, especially for our business related to Investment Banking and of Environmental Finance where we were awarded for our Reforestation Fund and as the Sustainable Investment Award. Not only did we have the ESG awards, but on Page 10, this semester, we actually had a record number of awards and some of these were first-timers for us. We have been elected Best Investment Bank in LatAm, emerging markets in Brazil for a few times now. But this is the first time that we were elected the best bank, overall bank in emerging markets in Latin America and in Brazil by Euromoney. So this made us very proud because we see this as the recognition of the expansion of our business lines, where we're seen as a complete bank now, offering different banking and investment services. In Sales & Trading, we basically completed the grand slam in the Institutional Investor Awards. We were #1 in all of LatAm and Brazil related categories and research, sales, trading and corporate access. In Investment Banking, we continue to have recognition of our overall franchise and our advisory and M&A activities. In Wealth Management, we continue to get the best private bank in Latin America and Brazil. But what made us very happy, it's the first time that we were recognized for our digital services, both by Professional Wealth Management and by Euromoney. So this shows the quality of the technological platform that we've been building to serve our customers. And this was also reflected in the Global Finance Award that we got for our SME business, recognizing the strength of the franchise we're building here. With that, I pass on to Renato Cohn, who will talk about each of the business lines before we go to the Q&A session.

Thank you. Thank you, Roberto, and good afternoon, everyone. Thank you for being here. So speaking specifically about all our business lines, we start at Page 12 with our Investment Banking, where we saw solid revenue generation supported by our leading position in industry rankings. Our revenue reached BRL 485 million, which is a growth of 40% when compared to previous quarters. Specifically in DCM, we continue to deliver solid results with improved market activity. And we also see a strong pipeline for the current quarter with a few deals already forming the pipeline for the fourth quarter. In Financial Advisory recorded good revenues during the quarter. And it's similar to DCM, we also see a strong pipeline to be executed in the next couple of quarters. ECM provided a stronger contribution than in previous quarters despite a slow market activity with very few transactions coming to market. but we managed to participate in the most important of them. So good contribution from our ECM division to the overall Investment Banking revenues. As we mentioned before, we maintain our leading position, as can be seen to the prizes and awards that we got. We got Best Investment Bank in Brazil and LatAm by Global Finance and Latin Finance. So once market activity picks up, especially in ECM, we'll certainly benefit from it. Again, strong results with our Investment Banking with a 40% increase in revenues and a strong pipeline for the next couple of quarters. Moving to Page 13, we go to our corporate and SME lending, where we had the third consecutive quarter of record revenues with high-quality credit portfolio. Revenues grew by almost 8% during the quarter and 34% year-on-year, reaching BRL 878 million. Total portfolio grew by 6% during the quarter and 36% year-on-year, reaching BRL 118 billion, which is still a conservative number as it represents only 2.8x our equity. As in previous quarters, we continued to steadily grow our portfolio while maintaining the same credit quality, similar credit spreads and adequate provisions. Specifically on our SME, our portfolio grew by 3.2% quarter-on-quarter and almost 40% when compared to last year. We continue to operate mostly in supply chain financing products, so ultimately, we are exposed to the same type of large corporate credit risks from companies that we know very well and that we follow closely throughout the years. So again, very good results with steady portfolio growth while maintaining adequate provisions and a conservative approach. Moving to Sales & Trading on Page 14. We saw strong results driven mostly by client activities as we maintain a conservative risk allocation. We produced revenues of BRL 1,310,000,000 during the quarter, which is a very small reduction from the record previous quarter. As we mentioned in the previous quarter, with the growth of our businesses franchise, producing new levels of client activity, we are seeing strong contribution from flow and commission-based revenues. And again, similar to the previous quarter, we maintained a conservative approach, which can be seen in the right chart with our VaR stable at 34 basis points, which is below our historical levels. Finally, I would like to highlight that we are ranked Best Bank in Research, Sales, Trading and Corporate Access, so basically, all main categories of institutional investors. Moving to our Asset Management on Page 15, where we saw strong revenues and consistent net inflows, including in our managed funds. We produced BRL 404 million in revenues, which is a 30% increase in the quarter and 50% increase when compared to the second quarter of last year. And this was achieved via a combination of growing management fees and a strong performance fee that we collected during this quarter. Also, we produced strong net inflows with BRL 41 billion in net new money during the quarter and a total of BRL 138 billion during the last 12 months. Assets under management and administration reached BRL 605 billion, a 20% increase when compared to the second quarter 2021. Most of the flows continue to migrate to fixed income strategies as a consequence of higher interest rates. But within our managed funds, we also managed to have good inflows to new alternative products that were launched during the quarter. And as we have a complete product offer with our Asset Management, we are confident that we can continue to keep and attract new clients during the different economic cycles. Moving to Page 16, our Wealth Management division. Again, we had a record number, which actually is the 14th quarter registered consecutive record revenues. Revenues reached BRL 621 million, which is almost a 10% growth quarter-on-quarter and a 65% growth when compared to the second quarter last year. And net new money, almost BRL 30 billion, similar to the number we reached during previous quarter and a stronger number, considering the challenging macro scenario and recent market volatility. And despite negative performance of markets, especially in equity markets, our AUM grew to BRL 463 billion as our clients maintain a higher share of their portfolios allocated in fixed income strategies. We were also ranked Best Private Bank in LatAm by Global Finance and Best Private Bank in Brazil by World Finance and also Best Digital Bank in LatAm by Euromoney, among other recognitions. Moving to Principal Investments and Participations on Page 17. We had Banco Pan and Too Seguros that continue to deliver solid results. In Principal Investments, we posted revenues of BRL 46 million, and this came as a result of lower contribution from our global market strategy, combined with higher internal cost of funds as a consequence of higher interest rates. Obviously, this is compensated by higher revenues recorded as interest and others, which grew during the quarter. And specifically in participation, Banco Pan produced BRL 77 million profit, which is already net of BRL 39 million goodwill amortization. And Too Seguros contributed with a BRL 21 million profit. Moving to expenses and main ratios on Page 19. We maintained our cost-to-income ratio below historical levels at 38.7%, even as we continue to grow our client business. We recorded stable operating expenses with a small 2% increase. And as our revenues grow at a higher pace, we keep improving our operational leverage and obviously, our profitability. Total compensation costs were stable with similar amounts for salaries and bonus provisions when we compare to the previous quarters. And administrative and other costs had a higher increase as a combination of some one-offs and some recurrent increases mostly in technology as we continue to invest in developing our businesses. We don't expect similar increase for the next quarter but rather a stable or low single-digit growth. And our effective income tax rate was at 19.6%, similar to previous quarter. Moving to our balance sheet. Our total assets reached BRL 455 billion, which is a little over 10x our equity. We maintain a very high liquidity level with almost BRL 60 billion in cash and cash equivalents, resulting in an LCR of 228%, which is higher than the previous quarter and way above the regulatory minimum of 100%. And in line with our liquidity, our unsecured funding continues to grow at a higher pace than our credit portfolio, bringing our coverage ratio to a comfortable 182%. And as I mentioned before, our corporate lending portfolio stands at 2.8x our net equity, so way below our peers, which are at 5, 6 or 7x their equity, so with a lot of room to grow. Moving specifically to our unsecured funding on Page 22. We'd like to highlight that we reached BRL 165 billion in unsecured funding, which is a BRL 10 billion growth over the quarter and a 30% growth during the last 12 months. Also important to mention that we already have 23% of our funding coming from our retail clients. And if we consider Banco Pan's funding base, almost 30% of our funding comes from retail clients. And just reminding that these numbers last year for BTG Pactual stand-alone was only 13%. And if we included Banco Pan, we'll be at 19% so we continue to growth at a fast pace, improving and diversifying our funding base, which obviously means that now we have a much more stable, cheaper and again, diversified fund. Finally, we also saw an increase in our demand deposit base, reaching BRL 12.2 billion, which is a 13% increase during the quarter and 65% increase when we compare to last year. Moving to Slide 23. We can see our base ratio increase to 15.2% and our core equity Tier 1 increase to 13.2% as our profits continued to add to our equity and we maintain a conservative approach and efficient our allocation. Our average VaR, as we mentioned before, slightly increased to 34 basis points but was kept at below historical levels. As we've been highlighting during the quarter, we can keep our growth momentum in all our businesses franchise as most of them do not consume capital, so we can maintain a high level of profitability and still keep comfortable levels of capital and a strong balance sheet. So once again, we're very happy with those results. And unless Roberto, you have any additional comments, we can move to questions.

No, thank you. Let's open the Q&A session. Thank you.

[Operator Instructions] Our first question comes from Thiago Batista with Banco USB (sic) [UBS].

It's UBS. I have 2 questions. The first 1 about the -- well, first of all, congratulations for the results, very strong figures again. My first question is about the ROE of BTG Pactual. The ROE is right above the guidance around 20%. And when you guys look for the medium-term ROE of the bank, what's the level we can expect? Or in another way, what are the main forces that you see impacting the profitability trend of BTG Pactual in the medium term? And my second question is about Braskem. We saw recently in the press some articles saying that BTG was looking to buy Braskem. So if you can comment about it. Not sure if you can. And if it's possible to do an acquisition of this magnitude, considering the current capital position of the bank, I'm not sure if this deal would be done in the bank or in a special fund. But if you can comment about this potential deal.

Thank you, Thiago. So on the ROE, we have not changed the guidance as we always say that we always manage the bank seeking above 20% return on equity. But the truth is, we have invested a lot over the last few years. These investments are only now starting to mature. They continue to bring consistent growth in the more stable business lines, more specifically, Asset Management, Wealth Management and Credit, which we expect to continue. This gives us, let's say, 3 lines which will depend more on the markets or level of interest. Of course, interest and other, that depends directly on the level of interest rates. Investment Bank, which I think we have shown that the combination of strong franchises in the sub-markets allows us to have a robust performance in different macro scenarios. Of course, when markets become favorable, we expect to benefit from that. And we also think that Sales & Trading has proven that it's growing with the client franchises as we develop new market segments or expand into new products. So having said this, it's a combination of these different factors, but we continue to expect that all the investments that we have done will continue to gain operational leverage and continue to contribute significantly to the bottom line. Of course, we have to see that given that our capital is basically cash, how this will happen at the same time that interest rates, at some point in the near future, we expect them to fall. So then one will probably compensate the other or one will be stronger than the other, and that will determine the final ROE. But we have to kind of analyze the timing of these different movements over time. But independent of timing, we still continue to expect to produce a higher than 20% ROE in all the different scenarios, right? We've done that in a moment that markets were on fire but interest rates were, too. We've done this in a moment that markets were more challenging and interest rates were increasing gradually to the level that they are now. So that is what we like about the business. But we are not -- we prefer not to give anything more specific that we have been giving in the past, even though I think that we are very, very optimistic with the development of our franchises, with the stability and the robustness of our business. On the second point, as you probably know, you have to be very careful with what you read in the media. As we have told you, we -- Principal Investments has basically become a ceding business for our Asset Management business. Of course, when there are exceptional circumstances like there was the capital increase, so we are very bullish with the prospects there. We did not want to be diluted. So there, we basically did -- we kept our participation but we did not do anything additional. Additional equity was done at the partnership holding company but not at the bank. So if there's anything related to Braskem, you should probably expect it to be something related to Credit, maybe something special situations. But we do not expect to be increasing the Principal Investments other than the seed capital that we have for our funds.

Very clear.

Our next question comes from Tito Labarta with Goldman Sachs.

Congratulations on the strong results. A couple of questions also. The Asset and Wealth Management business continues to be very strong. That new money remains very resilient. You mentioned benefiting for increased flows to fixed income. But if you can maybe help us give some more color on how this can continue to evolve from here. I mean, you seem to be taking market share. Maybe can you give some color in terms of the split between fixed income and equity? How much more is going into fixed income now because of higher rates? And in terms of your ability to continue to gain market shares. Just given all the investments you've made in that business, is there anything specific with how people are investing and managing that? Just to think about sort of the sustainability of that net new money and how it goes from here and if the rates eventually come down that could impact it. And then second question on the Sales & Trading. Continues to be very strong. Can you give some color, like how much of this is becoming more and more recurring? I mean, you mentioned some of the growth in the client activity. Any color on the split between how much Sales & Trading is like institutional versus retail? And you're running well above the guidance you've given in the past. So if you can help us understand a little bit how much of the Sales & Trading that we're seeing today is recurring and what to expect going forward.