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

Good morning, and welcome to the Fourth Quarter of 2022 Results Conference Call of Banco BTG Pactual. With us here today, we have Roberto Sallouti, Renato Cohn and 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 at www.btgpactual.com/ir and the platform. There will be a replay facility for this call from today. 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, 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 to Mr. Roberto Sallouti, who will begin the presentation. Mr. Sallouti.

Thank you very much, and thank you all for joining the call. If we could please start with page 3 of the presentation, I'd like to make some highlights of the year 2022. It was a year of record revenues and net income for BTG as we benefited from the operational leverage in our platform and all-weather business mix. We concluded last year with total revenues growing 24%, reaching BRL 17.2 billion in the year, net income growing 28%, reaching BRL 8.3 billion in the year and having a return on equity of 20.8% in the year. As has been widely reported by the media, our results were impacted by a corporate fraud that occurred in the first quarter of this year at a subsequent event, which we decided to provision for last year, we provisioned BRL 1.2 billion for BRL 1.9 billion credit exposure. So we decided here to report what would have been the results excluding this nonrecurring provision because we believe this is what truly reflects the underlying state of our business. So excluding the provision, our total revenues would have grown 33% to BRL 18.4 billion, our net income of 37% to BRL 8.9 million, and we would have reported a return on equity of 22.1%. If you turn to Page 4, given our policy of always trying to be as transparent as possible, we show the detailed impacts of this fraud and consequence of this nonrecurring provision in the different lines of our net income statement. They are reported in the bullets 1 to 5 on Page 4. So first, you can see on bullet 1, we did a provision to our corporate lending portfolio, more specifically to our supply chain financing portfolio of BRL 1.123 billion. In Sales & Trading, we had provisions related to this case and to other financial instruments such as insurance and derivatives of BRL 77 million. And number 3, given this event, we decided to decrease the bonus to be paid to a part of our team, mainly senior management and people related to credit and BRL 153 million. And point number 4, this eventually had an impact in the tax rate and the tax expense of BRL 467 million, resulting as pointed -- as shown in 0.5 in result of BRL 580 million in our earnings. If you turn to Page 5, we go -- we shift to talk about our performance KPIs for the quarter and for the year. Once again, we had a very strong quarter of net new money, leading us to have in 2022, BRL 254 billion of net new money, reaching BRL 1.3 trillion in assets under management. We grew our net new money in the quarter BRL 68 billion compared to BRL 63 billion last quarter and BRL 64 billion in the fourth quarter of last year and both our assets under management and wealth under management grew 28% year-over-year, reaching BRL 707 billion in asset management and BRL 546 billion in wealth management. As we turn to the next page, Page 6. We continue expanding our funding base and our credit portfolio while keeping a very solid and well-capitalized balance sheet. Our unsecured funding grew 14% year-over-year, reaching BRL 176 billion. Our corporate and SME portfolio grew 35% to BRL 144 billion, BRL 23 billion of which in SME lending. Important to mention, that is a very well diversified portfolio between regions, between strategy, between sector and individual names and will now have even greater diversification as we are now purchasing a share of the portfolio of consumer credit that but sells to the market. We think these are very high-quality assets with very interesting spreads, and this have decided to start acquiring this as a means to diversify even further our portfolio. We're very confident that current provision levels are adequate, and the business is in very good conditions, including even supply chain finance. This fraud was an isolated case and does not mean that the business line or the portfolio should be affected. Actually, we expect, given not only this fraud case, but the credit situation, in general, we expect going forward, markets to have tighter underwriting standards and higher spreads, which will make this business even more profitable. Finally, going to the third point on this chart. We finished last year with a Basel ratio of 15.1% and equity a bit above BRL 42 billion. In Page 7, we talk about 2023 perspectives. Again, we expect solid revenue growth as we continue to benefit from our all-weather business mix and continue to increase in operational leverage despite a more challenging environment, which we all know we're facing. Actually, this more challenging environment is evidenced in the investment banking lines. We expect, given the current expectations of capital markets activity, investment banking revenues will decrease in 2023, a similar percentage that they did in '22 compared to 2021. However, if throughout the year, capital markets reopen, this forecast will prove conservative. And our corporate and SME lending business, we expect revenues to continue growing given our dynamic credit risk management, we take into consideration macro sector and company-specific variables when managing the portfolio, and we do it in a very dynamic way. Of course, this does not prevent you from a fraud cause as was the case, but we think this was a one-off, an exception. And actually, the exposure we had here was something we don't do on our balance sheet. It was an exposure justified not necessarily by the quality of the balance sheet of the company, but that took into consideration the quality of the controlling shareholders. This was a publicly listed company, long history, very reputable share -- controlling shareholders. And it was the only case in our portfolio where we use that judgment, and I think it was not just us, but the whole market. We also expect our corporate SME business to continue benefiting from tighter market underwriting standards, consequently higher credit spreads, and we expect our portfolio to grow in the mid-teens next year. For our wealth management, asset management and sales trading and training franchises, we expect them to continue to grow as we benefit from the hefty investments we've made in the last few years and the increased market share we are gaining in the new client and product segments where we started doing business. Finally, for next 2023, we will keep a stable headcount in the back office, and this will result in additional efficiency gains for our business. Consequently, for 2023, we expect a higher return on equity than in 2022 as revenues will grow faster than the costs. And at the same time, we expect our capital liquidity ratios to remain at current or even more robust [indiscernible]. Going to Page 8, we talk about the fourth quarter performance in the traditional manner we report, so we had total revenues and adjusted net income of BRL 3.6 billion and BRL 1.77 billion for the quarter. We had a return on equity of 16.7%, and excluding the nonrecurring provision, 22% and an adjusted net income per unit of $0.46. We had our cost income impacted by this nonrecurring provision, reaching close to 46%. And if you look at the bottom chart, you will see that year-over-year, our revenues fourth quarter over fourth quarter grew 4%, however, 38%, excluding this one-off provision and relatively stable on the net income side and would have grown 32%, excluding this one-off provision. In Page 9, we talk about full year results. And here, we have total revenues of BRL 17.25 billion and net income of BRL 8.3 billion, a return on equity of 20.8% or 22.1% adjusted for this non-recurring provision. Cost to income within historical levels, despite our continuous investments in the various new businesses we've got into a cost income ratio of around 40%. And in the last 2 years, we see very significant growth in revenues and net income. In the last 2 years, revenues have grown 85% or 98% excluding this one-off provision and net income, 105% and 119%, excluding this one-off provision. Our shareholders' equity grew 13.4% year-over-year, reaching BRL 42.4 billion, and we finished the year with a Basel ratio of 15.1%. In Page 10, you can see the revenue the breakdown of our business units where we continue to see the reflection of our class growing client franchises. Roughly speaking, we have 1/3 of our revenues coming from corporate and investment banking, 1/3 coming from markets and 1/3 from investment management, and we expect investment management to continue to outgrow the other revenue lines in the next few quarters and years, leading to a more predictable, stable business as we continue to develop these business sites. Finally, in Page 11, we talk about our ESG achievements for the year. We were recognized by environmental finance for a few of our initiatives. Our Timberland asset management team received Investment of the Year award an ESG initiative of the Year Award for our reforestation strategy. And we were also awarded ESG initiative of the year for the first issuance of a blue bond in Brazil. We continue with our ESG label DC emissions, totaling BRL 845 million in the quarter and BRL 3.3 billion in 2022. Our impact investing fund completed its third investment in [indiscernible] a company specialized in bioplastics. BTG Soma, which is our Angio acceleration and Membership program reached its fifth addition having impacted over 46 NGOs. Inteli's, which is the technology and leadership college found by BTG partners with BTG's institutional support concluded its first year of teaching with outstanding results in student learning and engagement. And this is only possible because of not only BTG's institutional support, but BTG is also the largest scholarship donor to the school and this also has a mentoring program to its students. Finally, last year, over 30% of our employees participated in at least one of our social corporate responsibility initiatives. And we think that this engagement growing year after year is something that makes us very proud. With that, I pass the floor to Renato Cohn who will talk about each of our business unit performance.

Thank you, Roberto and good morning or good afternoon to everyone. So moving to our specific business lines. We move to Page 13 with our investment banking, where we see that we reported during the quarter, revenues of BRL 485 million, and those were supported by a strong activity in our ECM business, somewhat lower revenues from our M&A activities, especially when we compare to the third quarter of '22 and in a similar trend from previous quarters and throughout 2022, very little activity in ECM with basically no IPOs and a small number of block trades. ECM produced record revenues for the second quarter in a row as we concluded 32 transactions. And we believe that the structural change that transformed the ECM market in recent 2 years will remain in 2023 despite some short-term impacts related to recent corporate events. Also, we keep a robust pipeline in M&A to be executed throughout 2023. Looking at the right side of the chart, we can see that for the full year of 2022, we recorded BRL 1,846 billion, which is a decrease when we compare to last year. But as we all know, last year, we had a lot of ECM activity generating very strong revenues, which was partly compensated this year with higher revenues from both ECM and M&A. Also, as we can see in the bottom part of the chart, we maintain our leading position in all industry rankings, both in Brazil and in LatAm. Moving to corporate lending. As mentioned before, we recorded provisions of BRL 1,123 billion, which represents 94% of the BRL 1.2 billion provided revenues after this one-off extraordinary provision related to the large fraud case were BRL 105 million. If you would just consider this one-off provision, which is what better reflect the strength of our business, our revenues would be BRL 1,228 million, which represents a 31% growth quarter-on-quarter, supported this quarter by stronger revenues from our special situations business. Portfolio grew to BRL 144 billion, which is an 11% growth quarter-on-quarter and similar growth levels that we saw in previous quarters throughout 2022. And when we compare to the portfolio of 2021 is a 35% growth. Looking at the 2 charts in the bottom of the page, we can see yearly results and our portfolio evolution. We recorded revenues of BRL 2,736 million in total revenues, which is a 5% increase when we compare to previous year, but obviously, this was impacted by the one-off extraordinary provision. If you would exclude the provision, we would have recorded BRL 3,859 million, which would represent a 49% growth. And again, this is what we believe that better represents the state and the strength of our business. We maintain a well-diversified portfolio within different sectors. Our largest exposure are to utilities and then to the financial sector and specifically in retail, our exposure is also well diversified among different companies operating in different subsectors, mostly more resilient business, like food distribution, cash & carry and cosmetic distribution. And as Roberto mentioned, we expect to continue to grow both our portfolio and corporate lending revenues as we diversify into new business lines. Moving to Page 15. We go to our sales and trading where we had record revenues in 2022, driven by strong client activity and an efficient for allocation. During the quarter, we recorded BRL 1,134 million in revenues, and this is after the impact of BRL 77 million one-off provision related to the same fraud case. As explained before, 6% of the BRL 1.2 billion provision was proportionately allocated to sales and trading as we had exposure to other financial instruments such as debentures, insurance and derivatives. Client activity was somewhat lower, especially during the last part of the quarter as clients saw some sort of definition from the new government during this transition period. Average VaR was 27 basis points, which was the lowest level in 2022 and the market risk component of our risk-weighted assets closed the year at 15.7%. And looking at the right side of the chart, we can see the evolution of our yearly results. We recorded revenues of BRL 5.3 billion, which is a 24% increase when compared to previous year even as we maintain our average VaR at basically the same level as last year. So as we've been calling the attention of our investor sales and trading revenues have been growing alongside the growth of our client businesses franchise, especially wealth and asset management. Moving to our asset management on Page 16. We had record revenues for the third consecutive quarter and also record revenues for the full year. We registered revenues of BRL 429 million during the quarter, which is a 5% increase when compared to previous quarter and a 19% increase when we compare to the fourth quarter '21. This was achieved through higher management fees and by some performance fees, which are customary recorded during the second and the fourth quarters. The new money inflow was BRL 33 billion during the quarter, which is a strong number and a similar level of inflow from previous quarters despite a more challenging macroeconomic environment. Most of our flows continue to be directed to fixed income strategies, but also we continue to attract some flows to alternative strategies with higher fee generation. Looking at the 2 charts in the bottom of the page, we see the evolution of the business where we recorded BRL 1.55 billion in revenues during '22, which represents a 31% increase when compared to last year. And we attracted a total of BRL 134 billion of inflows during the year, which is a very strong number, which led us to achieve assets under management and administration of BRL 707 billion by year-end. On Page 17, we go to our wealth management that despite a very challenging scenario, we had our highest quarterly inflow for the year, bringing BRL 35 billion of net new money and strong revenue generation. It was our 16th consecutive quarter with growth in revenues, reaching BRL 686 billion, which is a 5% increase when we compare to previous quarter as we continue to provide quality advice and innovative products to our clients during this more uncertain period. When we look at the 2 charts in the bottom of the page, we see that we recorded BRL 2.5 billion in revenues during 2022, which is a 66% growth when you compare to previous year. Also, in a more longer-term analysis, we can clearly see the strong evolution of our wealth management franchise. Since 2018, revenues multiplied by more than fivefold, representing a yearly average compounded growth of 52% in the last 4 years. And during 2022, even in a high interest rate scenario, we attracted BRL 120 billion of net new money inflows, reaching a total wealth under management of BRL 546 billion. If you go to Page 18, we look at our principal investments and participations. So we start with Brinson Investments, where we posted BRL 53 million in revenues, which is a slight increase from previous quarter with a contribution from our global markets investments but still impacted by higher cost of funds. In participation, we recorded BRL 7 million in revenues. As announced in December, we decided to acquire a payroll credit portfolio from Banco Pan. Banco Pan usually originate more loans than it retains in its portfolio. This excess origination is usually sold to third-party financial institutions with the spread. This spread is recorded as a profit in Banco Pan quarterly results and BTG Pactual recognizes a share of these profits equivalent to BTG Pactual participation in Banco Pan. Now according to Brazilian accounting rules, as we consolidate Banco Pan, the premium for a portfolio sold to BTG Pactual cannot be recognized as a profit during the quarter and needs to be accrued alongside the maturity of this portfolio. So the portfolio that Banco Pan sold to BTG during the fourth quarter would have generated BRL 117 million profit, which would be accrued until the maturity of this portfolio. Duration of this portfolio at the moment of sale was 2.5 years. So we expect to accrue this BRL 117 million profit with the same duration of 2.5 years. With this agreement to acquire this portfolio and additional payroll loan portfolios, BTG Pactual will further diversify its overall loan portfolio, entering into a new market segment. And apart from Banco Pan, TuSeguros contributed with BRL 55 million profit, which is a 50% increase from previous quarters. Now for a proper comparison, if you look at the chart on the right side, if you would include the BRL 170 million profit from Banco Pan and the contribution from TuSeguros would have recorded BRL 123 million in profits already deducting the goodwill expense of BRL 38 billion. Going to our expenses on Page 20, we had a stable cost-to-income ratio in 2022 even in a more challenging scenario, which reflects the efficiency of our business model. Total operating expenses reduced by 7% during the quarter, mostly as a result of smaller bonds. As mentioned before, as a consequence of the extraordinary one-off provision, we reduced our bonus pool by BRL 153 million. Salaries and benefits increased by 4% due to a small increase in head count, which was mostly inorganic. Administrative and other expenses increased by 7.7%, mainly due to some seasonal year-end costs. Our effective rates came at -- our effective tax rate came at 5.8% and was impacted by the JCP distribution, our interest in equity distribution and also by the one-off extraordinary provision during the quarter. And important to highlight also that during 2023, we expect no growth in terms of headcount in our back-office areas. So headcount of IT operations and finance will be stable throughout 2023. Now moving to our balance sheet on Page 23 -- sorry, 22. Total assets reached BRL 450 billion, which was approximately 10x our equity. We ended the quarter with a comfortable position of BRL 55 billion in cash and cash equivalents, resulting also in an LCR of 233%. And our coverage ratio remained stable at 168% as our funding grows in line with the expansion of our credit portfolio. And our credit portfolio reached 3.4x our net equity, which is still conservative, especially when we compare to our peers. Moving to our unsecured funding on Page 23. We can see that we reached BRL 175.6 billion, which is a 3% increase when we compare to last quarter. Demand deposits slightly reduced to BRL 12.9 billion and now represents 7.4% of our funding base. And the share of our retail funding reached 26.3% when we consider BTG Pactual stand-alone or 30.5% if you include Banco Pan funding base. And finally, on Page 24, we can see that our basel ratio was stable at 15.1% even after the JCP distribution and the one-off extraordinary provision impact and despite an 11% growth in our credit portfolio during the quarter. As we've been mentioning, our profitability allows us to continue to deliver the same level of growth, while we still maintain stable basel ratios. Also important to mention that new Central Bank rules for risk-weighted assets will come into effect next July, which according to our estimates, we'll improve our basel ratio by around 80 basis points. And as we mentioned before, we recorded the lowest average VaR of the year at 27 basis points as we maintain a conservative risk allocation. And with that, we can open for questions.

[Operator Instructions] The first question comes from Daer Labarta of Goldman Sachs.

A couple of questions. I guess, first on the -- your expectations for 2023 for ROAE improving relative to '22. So I guess just to clarify, should we consider the 22% recurring ROAE or the 21% reported ROAE, just to clarify on that. And I guess should we also assume a similar payout ratio as you did in 2022? And maybe thinking a little bit longer term, given investment banking is still a little bit cyclically challenged. Do you think there's even longer-term upside from here, just given all the growth that we're seeing in pretty much most of your revenue lines over time. So is there going to be some upside to that ROAE longer term? And then my second question is related to the additional provisions you booked in the quarter. I guess more specifically, I know you addressed some of it on the Portuguese call, but there's about BRL 1.2 billion, I think, that's being discussed in the court systems right now and just reading the press get sort of conflicting views on the process of that. So any color you can give on where that stands and potential recoveries that you may get from this?

Thank you, Tito. So starting with your 2023 perspective questions, we are referring to the 20.8% return on equity when we suggest a growing number. And yes, we're considering a similar payout. We're going to continue using the 25% GCP, JCP, 25% of profits for JCP as a dividend payout. And rent upside for the next few years, definitely, especially as we continue growing businesses that don't use capital, more specifically investment management, asset and wealth management at a faster pace than businesses that use capital such as corporate amenity and sales and trading. So yes, we do expect us to have a few years ahead of us where we will benefit from not only the growth of these businesses, but the full operational leverage of the platform as we benefit from all the investments we've done. And as we mature the new market segments for penetrating the new products we're going into, all this takes a while, all of them have a J curve, and we're just chugging along that J curve of the various initiatives we did over the last few years. Finally, on the fraud cost, we are quite comfortable with the 60% provision. We definitely think that given the nature of the situation, we will recover more than this. However, time, it might take longer than we expect or longer than this provision hold. So there is a chance that we have eventually because of timing issues have to make a higher provision, but these potential higher provisions are already incorporated into our guidance. And as you mentioned, we have a 3.1% gross provision. We have this 1.2 netting, which everything signals that Brazil, common sense will prevail, contracts will be respected and judicial decisions will not refer to past actions. So just using common sense, we think this has been -- will hold as has been holding, and we just had a victory last year. So we have a net exposure of BRL 1.9 million now with a provision of BRL 1.2 billion.

Great. That's very clear. One follow-up, if I may, I guess, a little bit more just macro on sort of the long-term ROAE target. Just thinking about potential downside risk, I mean just given the rhetoric we've heard from the government using public sector banks, this increased fiscal spending. Any risks you see to your business. And I know it's a little bit early to know exactly what the government will end up doing. But just given that also you talked about inflation target and whether it will change the investors. Is there any concerns about the macro environment and any potential downside risk that you think would come to your business because of this?

So we always assume that we are in a cyclical tightening cycle, which affects business activity and that once inflation expectations are in them, you can go back to lower interest rate levels, and this will take us back to, let's say, neutral levels in Brazil, and this will allow us to have even faster growth in investment banking and asset management, in wealth management because, of course, the current level of interest rates are a headwind to our scenario. If we have let's say, macro changes. And that's why we always talk about being an all-weather stock, right? Because throughout the different cycles, we can adjust. So we have a cycle that is less friendly to investment banking because interest rates are high. Since our capital is basically cash we compensate that at higher interest rates than in versabank we have asset management, we have credit funds, money market funds, which do well when interest rates are high, but we also have alternative investments, which do well when interest rates are low. So a normal macro cycle does not work us. And if we get into what I think is a very minimal possibility of a structural macro environment, where the equilibrium real interest rates are much higher than the let's say, around 4%, which we consider neutral interest in Brazil today. Then we can discuss that eventually what can happen, but this is definitely something that we see as a tailored and not something that we are expecting. We still think that we are in the cyclical even given all the political noise that the high level of interest rates is creating the high level the interest rates is something global. It's happening in Chile. It's happening in Colombia. It's happening in Mexico, it's happening in the U.S. So as soon as inflation expectations are in then the slower level of activity triples through ex inflation, we were able to go back to the neutral interest rates in Brazil. But again, not that I think this will really change the profitability we have, but it will change a lot the geography where we report the different lines of revenue.

The next question comes from Nicolas Riva of Bank of America.