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

Good morning and welcome to the Second Quarter of 2023 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 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, you may please go ahead.

Thank you very much. Good morning to all of you. If we could please start with Page 3 of the presentation, where we have the highlights of the second quarter. Starting with bullet point number one. This was an all-time high net income for BTG with another quarter of record revenues and increasing operational leverage. We expect this operational leverage to continue over the next few years as we mature the new business lines, the new segments which we entered over the last few years. We had a very strong net new money of BRL 61 billion in the quarter, leading us to a total of assets under management of BRL 1.4 trillion. We had outstanding results in our Sales & Trading units due to the expanding client activity efforts that we've been building over the last few years and the efficient risk allocation in the quarter. And finally, we had an adjusted return on equity in the quarter of 22.7%. And if you don't consider the accounting treatment given to the purchase of the portfolios of credit that we bought from Banco Pan’, which you take into account what was reported by Banco Pan’ as the income there. We would have had a return on equity of 25.2% in the quarter. If you turn to Page 4, we talk a bit more about -- a bit more detail about these highlights. So we had total revenues of BRL 5.4 billion in the quarter, 21% growth year-over-year. Net income of BRL 2.6 billion, 18% growth year-over-year. And as previously stated, 22.7% ROAE. If you turn to Page 5, we give a bit more detail on the very strong inflows we have leading to BRY 1.4 trillion assets under management. So net new money was roughly BRY 35.5 billion from Wealth Management and BRY 25.5 billion from asset management, totaling BRL 61 billion. We finished with assets and our wealth management unit of BRL 633 billion, a growth of 36% year-over-year and the BRL 768 billion in asset management with 27% growth year-over-year. Turning to Page 6. We talk a bit about our expanding funding base, our robust capitalization and the continued growth of our credit portfolio. So our funding base grew 10% year-over-year to BRL 182 billion. We finished the quarter with a Basel ratio of 15.4%. However, it's important to notice that the regulatory changes to the RWA calculations as of July 1, would have made us have an 80 bps increase in this ratio. And also, we are -- in last quarter, we had a market risk of RWA higher than our historical pattern, and we expect over the last few quarters to return to this historical pattern. Finally, our Corporate and SME credit portfolio grew 31% year-over-year to BRL 154 billion, which puts us back on track to meet the guidance of the mid-teens growth we had for our credit portfolio for the year. Turning to Page 7. We have the traditional way in which we show revenues and results. Total revenues of BRL 5.4 billion, net income of BRL 2.6 billion, ROAE 22.7%, and then a net income per unit of BRY 0.68. We had a cost to income in line with the past quarter, but below our historical average of 39.3%, a comp ratio of 22.4%, total assets of BRL 475 billion and shareholders' equity of BRY 46.7 billion. And in the quarter, we had a VaR of 46 bps. If you turn to Page 8, we talk about the numbers for the first half of the year, where we had a return on equity of 21.7%. So we had total revenues of BRL 10.2 billion, net income of BRY 4.8 billion, net income per unit of BRY 1.27, and cost-to-income in line with the second quarter and below our historical average of 39.3% and equity increasing 13% year-over-year to 46.7%. And VaR, if you consider the first half, closer to the recent past at 37 bps, but still a bit above what we've been conducting business. If you turn to Page 9. You have the distribution over the last 12 months versus the previous 12 months. As expected, you see here therefore an investment banking within a guidance of 20%. Corporate & SME lending is greatly affected by the one-off we had in the fourth quarter. Once this rolls off by Q4 this year, we will be seeing a strong growth in the credit business. Sales & Trading growing a robust 18% as it is benefiting from the expansion into new products, new market segments, better fiduciary perception, maturing of these investments. And a very continued strong growth in asset and wealth management between 25% and 35%, and we expect these 2 business lines to continue to outgrow the other ones. And in the end, this gives a very balanced and healthy -- the vision among, let's say, corporate and investment banking, markets and investment management, exactly what we expect and what we want with our business. Finally, on Page 10, we talk a bit about our ESG and impact investing. Highlights for the quarter. So we were recognized by Global Finance for the first blue bond transaction in Brazil in The Innovators Award. We received various leadership awards in the Sustainable Finance Awards. By Institutional Investor, we were elected the best ESG Research Team in Latin America and Brazil, and were elected by World Finance, the most sustainable bank in Brazil. In our business activity, we also acquired a minority stake in Systemica which structures, develops and commercializes carbon projects and other environmental assets. And the idea with this investment is to continue to contribute to the transition economy and promote carbon markets. And finally, this quarter, we issued another $1.1 billion of green and sustainable bonds for our clients. With this, I pass the floor to Renato Cohn, who will talk about each of the business lines in more detail. Thank you very much.

Thank you, Roberto, and good afternoon, everyone. So going to our specific business lines. We start with our Investment Banking on Page 2 -- sorry, Page 12, where we see that we had better performance during this quarter when we compare to previous quarter, recording BRL 306 million in revenues, which is an 18% increase when we compare to the first quarter of '23. Market activity improved during the quarter with a higher number of transactions in both DCM and in ECM markets. As we mentioned during our last quarterly call, we already anticipated a better market activity, especially for DCM, although not yet at the same levels of what we experienced throughout 2022. But the good news here is that we had our best quarter in DCM since fourth quarter 2021, with many follow-ons and also block trades, representing a total volume of close to BRL 10 billion in executed transactions. And we are seeing a similar pattern during the third quarter of '23. And as we start a new easing cycle in our domestic interest rates, we expect market activity to continue to improve during the second half. Going on to our corporate and lending business on Page 13, we would like to highlight here that differently from the previous quarter when we took a more conservative approach as a consequence of the macroeconomic scenario and some specific events that impacted the credit markets. We resumed the process of credit portfolio expansion. Total portfolio grew by 7% during the quarter, which is a similar base we have been experiencing in previous quarters throughout 2022. And most of the expansion occurred in our large corporate portfolio as we focus new disbursements to more premium counterparties at attractive spreads. We also continued to acquire payroll loan portfolios from Banco Pan at similar spreads of transactions that we did in previous quarters. And our revenues also grew by 7% when we compare to the first quarter of 23%, and 46% when you compare to the second quarter of last year. And in July, we announced a joint venture with Senior Sistemas, creating a platform that will offer and connect BTG Pactual financial products and services to Senior's exclusive client base. Going now to our sales and trading on Page 14. We had once again record revenues in a single quarter, reaching BRL 1.887 billion, which is a 27% increase when we compare to the first quarter of '23 as we continue to expand our client base and also the wide range of products available to them, and at the same time, benefiting from our efficient market risk allocation process. And on this process, our average mark, as Roberto mentioned, increased 46 basis points, which is still below our historical levels. And for the third consecutive year, we were voted best Research, Sales, Trading and Corporate Access teams in both Latin America and Brazil by Institutional Investors. It obviously makes us very proud that our research team was ranked 1st in 18 out of 25 categories in II. Going now to our Asset Management business on Page 15. We see that we produced revenues of BRL 431 million which is a marginal reduction when we compare to previous quarter, but it's a 7% increase when we compare to the second quarter of '22. The main reason here was somewhat lower performance fees, which are usually recognized during the second and the fourth quarters, while we recognize dividends from third-party independent asset management firms that we partner with, we recognize them during the first and the third quarters. Assets under management and administrations reached BRL 768 billion, which is a 7% increase during the quarter and a 27% increase when we compare to last year. And we recorded strong net inflows of more than BRL 25 billion despite general industry outflows of BRL 131 billion during the quarter, which proves the robustness of our business. And if you look at the consolidated numbers during the first half, we had BRL 38 billion of net new money inflows, while the industry suffered more than BRL 200 billion of outflows. And again, as we enter in this new easing cycle in our domestic interest rates, we foresee a better environment for the asset management industry. Going now to our wealth management business. We see that we had another quarter of record revenues. And actually, this is the 18th consecutive quarter of revenues growth. And during this period, we multiplied our revenues by 5.5x. So revenues reached BRL 727 million, which is a 4.8% increase when we compare to the first quarter of '23 and a 17% increase when we compare to the previous year. But the highlight here during this quarter, I think was the strong net new money of more than BRL 35 billion. And this is -- this was our best quarter since 2021 and improves the quality of our network and our distribution capabilities. Even in this macroeconomic challenging scenario, our client base continues to grow consistently. Wealth under management increased 11% during the quarter. This was supported by the combination of the strong net new money inflows that I just mentioned and also positive market performance. And when we compare this number to last year, the second quarter of last year, our wealth under management increased by 36%. Going now to Page 17. Our participation and principal investments. We'll start with participations. Where we recorded a loss of BRL 54 million, which can be better understood looking at the top, at the right side, top part of the page. There we see -- and similar to previous quarters, we are showing in detail the impacts of our decision to continue to acquire payroll loan portfolios from Banco Pan. So during this quarter, we see that the elimination effect related to those acquisitions was BRL 285 million. Therefore, participations result is the sum of a BRY 47 million of profit coming from Too Seguros, a BRY 126 million profit from our stake at Banco Pan, a BRL 58 million accrual from the portfolios that we acquired during the fourth quarter of '22 and first quarter of '23 and the elimination effect of BRL 285 million related to the acquisition of portfolios during this second quarter. Important to know that during the third quarter, we expect this accrual to increase by approximately BRL 25 million as a consequence of the portfolios that we acquired now during the second quarter. And increase on Investments, we posted a BRL 72 million in revenues, which is a 34% increase when we compare to the previous quarter, and this came as a result of better contributions from our seed investments. Going now to our expenses on Page 19. We see that total operating expenses increased by 12.4% during the quarter, and this came mostly as a consequence of higher bonds, which is obviously derived from higher revenues. Salaries and benefits slightly increased by 1% during the quarter as we keep stable levels of headcount; and administrative and others increased by 4.1%; and our effective tax rate remained stable at 20.1% and was mostly impacted by our interest on equity provision and a favorable revenue mix. Going now to our balance sheet on Page 21. We see that total assets reached BRL 475 billion, which is a slight increase of less than 1% and our total assets now represents 9.6x our equity, which is a reduction when we compare to the 10.1x it was during the last quarter. We increased our liquidity levels to BRL 66 billion, which means that our cash and cash equivalents now represents 1.4x our net equity. And our LCR rating stayed at 157% (sic) [ 166% ] during the quarter. And now our Corporate & SME Lending portfolio represents 3.3x our net equity, which is a slight increase from the previous quarter when it was at 3.2x our equity despite the strong portfolio growth of 7%. And this is still a very conservative level, especially when we compare to our peers. Going now to our unsecured funding base. We continue to expand our funding base reaching now BRL 182 billion. And at the same time, we continue to increase the market share of the retail funding, which now represents 32.1% of our total funding. Important to note that the total funding base increased by 1.8% during the quarter despite the U.S. dollar depreciation against the Brazilian real of around 5%. And in June, we successfully issued a 10-year subordinated CRA totaling BRL 3.5 billion at very favorable conditions. Finally, going to our Basel ratio. We see, as Roberto mentioned, that we finished the quarter with a Basel ratio of 15.4%, with a core equity Tier 1 at 12.2%. And also, as he mentioned, this came before the changes in risk-weighted assets calculation determined by the Brazilian Central Bank that as of July 1, changed and increased our Basel ratio by 79 basis points. And finally, as we mentioned before, our VaR increased 46 basis points, which is still below historical lens. So with that, we conclude our presentations highlighting again the very strong net new money inflows in both our wealth and our asset management, increasing revenues in almost all our business lines and record consolidated revenues for the bank and overall profits. So again, thank you very much, and we can open for questions.

[Operator Instructions] Our first question comes from Tito Labarta with Goldman Sachs.

Congratulations on the strong results. A couple of questions, I guess. First, how do you think about the sustainable ROAE of the bank? I mean you're doing much better than expected on 23%. And if you strip out the Banco Pan impacts, as you mentioned, 25%. So -- and particularly, as rates come down, there should be some tailwinds for the business. So how do you think about the long-term sustainability of the ROAE? And just to clarify, when should the negative impact from the Banco Pan portfolio acquisitions go away so that you get to, I guess, a more normalized level? And then the second question, you mentioned the market risk went up in the quarter, which impacted your capital a bit despite the strong level of profitability. You said that should normalize, I think, would it normalize already next quarter? Given the strength in sales and trading, I mean, do you expect any other headwinds to your capital base or any adjustments from that perspective?

Thank you, Tito. So on your first point of ROAE, just remember, we've always said that we are going to have an above 20% ROAE. This year, we came with a guidance of above 20.9%, which was the return on equity that we had last year. As you said, this quarter, we had strong results, so 22.7%. I think we're not ready to give any sustainable guidance. But I would say that for the next few quarters, we expect there's a big chance that we have something along the lines, plus/minus, let's say, 0.5% of where we were this quarter, we think is reasonable for the short term. As you said, the sales and trades will come down. We expect, as you know, our capital is basically cash. So we benefit from that. And we expect to hopefully more than compensate that as our business lines pick up with increased market activity. On your second point on Banco Pan, basically, always part of its business is selling portfolio with originates. It has been -- we have been competing with the market. We think that at the current spreads, we've been buying, it's a good allocation of capital. So it really depends on what the competition is going to be. If the market space, it's important that must sell some to the market. We agree with that, especially to make sure that everybody sees that these transactions happen at the arm lengths and at market prices. So assuming Banco Pan goes to selling 100% of its portfolio to the market, then we get rid of this neutralization that we're happening and we go back to historical, let's say, standards. But at the same time, we're quite comfortable and quite happy to buy these portfolios. So I think it's going to be -- it's hard to anticipate what will happen. But the truth is, in both scenarios, we are creating value. One is recognized, let's say, in 1 quarter, while on the other, this is spread out over 10 quarters. But when we look at the economic value being created, we're talking more or less about the same thing. And finally, on RWA, it's too early to say if we anticipate that it will be in this quarter, next quarter or the following. But clearly, we -- I mean, it's pretty clear. We thought there was a good opportunity to allocate risk to interest rates in Brazil as we thought they would reprice. This repricing is happening. But as we always told you, we're very transparent on this. Different to what happened with the regional banks in the U.S. where you had a lot of market risk on the balance sheet was not reported and not transparent and not mark-to-market when we decide to run market risk and is very transparent. It's reported in VaR, in RWA and it's mark-to-market. So that leaves all of you very comfortable that we have no structural market risk in our balance sheet. Everything is liquid, mark-to-market and reported. So as I said, it's -- it's probably in the next 2, 3 quarters, we returned back to normality. So we don't expect any headwinds for capital usage and sales increase.

Okay. Great. That's very helpful. Maybe a couple of follow-ups, if I can. Just to clarify on the ROAE, the plus or minus 50 bps that you mentioned, that assumes that the Banco Pan continues to negatively impact. Just want to clarify that, because I think for that to go away, it seems it will take longer. And then just one other follow-up on the RWA. More just from a capital perspective. I mean, just given the strong growth that you're seeing, and we've got some questions. Under what scenario, if any, would you consider raising capital? Is that something -- I know you're going to get a boost from the RWA adjustment you mentioned in July. But just curious if there's any scenario where you see you could need capital at some point.

So on the ROAE, sincerely, I'm not ready to give any guidance there because we end up, let's say, putting ourselves to commitments that not really to give at this point. But it's hard to say what will happen with Banco Pan. That's why I don't want to permit and I want to stick to the original guidance of about 20.9%, just try to give you a feeling of where we see the business now. And on capital raise, I think, we would have to see a scenario of opportunities to allocate capital similar to what we saw in the previous 3 capital raises, where we were gaining market share and opportunities were very robust for both organic and inorganic growth that we thought it would be willing. At the current scenario, we're not seeing that. But again, markets are dynamic and that can change. But it would have to be a very compelling opportunity to allocate capital organically and inorganically at a faster pace on which we are accruing profits, which, as you stated previously are quite robust at the moment.

Okay. No, that's very clear and absolutely. And congrats again on a good -- on the strong results.

Our next question comes from Nicolas Riva with Bank of America.

We have 3 questions. The first one on the local debt market in Brazil following the Americanas default earlier this year, I understand there hadn't been much issuance, that issuance domestically. If you can share some insights given your DCM business, if you can share some insights into the current state of the local market in Brazil. Second question, we saw that the Tier 2 capital increased by about BRL 3.5 billion in the quarter. You mentioned in the earnings release a local subordinated issuance. And I wanted to ask you if we should read this issuance, this BRL 3.5 billion raised domestic [indiscernible] there as a way of prefunding the call of the 2029 Tier 2 next year, which you can call in next February. And then third and last question on Americanas, given that you had built a substantial amount of loan loss reserves in the fourth quarter last year. If you can, to an extent possible, provide an update regarding the discussions with the company, the likelihood of getting some kind of debt repayment and also if you would consider a reversing some of those loan loss reserves?

Thank you, Nicolas, for the question. So I think for the first one related to the credit and DCM markets, I think, obviously, during the first quarter, as DCM transactions mostly dried up, there was a higher search for credit transactions directly by the banks. And what we are seeing now, especially in the last part of the second quarter was, as I mentioned, a number -- a higher number of transactions of DCM coming to market, which obviously alleviates also the pressure in the balance sheet of the banks. And what we are seeing is a very strong pipeline also to be executed during the third quarter with some transactions already being executed. But still, we also see that with the easing cycle of interest rates, you'll see companies also looking to refinance their liabilities, not just through the DCM markets but also looking into the balance sheet of the banks. And that's why we saw an increase in our credit exposure. Specifically, on your second question on the CRA, the subordinated CRA, yes, obviously, it will help in case of the perpetual in case we execute the call. Obviously, we haven't taken the decision we have our subordinated loan expiring in '20 or maturing in 2029 with a call in February 2024, and we'll take the decision at the appropriate time. But obviously, this issuance helps a lot in this aspect. And finally, related to Americanas event, obviously, negotiations continue to happen with the companies and within the banks -- at the present time, we think we are properly provided for that. We don't see any reason to either reverse or increase our provisions. We think the provisions are well established there.

Our next question Pedro Leduc with Itaú BBA.

It would be on Corporate & SME lending, okay? It's great to see the portfolio growing again, 7% Q-on-Q. The first part of the question here, revenues grew at a similar pace, right? 7%. If you can elaborate a little bit on the drivers for it to have not grown maybe faster, just a visual effect or a mix had something to do with it? And then second part, more importantly, how should we think about this portfolio in the second half and also in 2024? It seems like you are more comfortable with credit risk and the cycle. So trying to gauge here if you're ready to accelerate growth here, if we could see SMEs contributing again, essentially, if you're more comfortable in leveraging up on to 3.23x that you mentioned in the call?

So on the spreads, as we stated, we think we took a good advantage of this location in Q4 and Q1 and Q2 to actually to be able to have credit transactions with attractive spreads for very solid names. So that's in part what you are seeing in the results, which is the similar growth in both portfolio and with the revenues. For '23, our guidance still is valid, growing the portfolio in the mid-teens. We're not ready yet to give any guidance for '24, but I think it should be something another growth similar to '23, maybe a bit more, a bit less, but we're still not ready to give that guidance. But definitely, we're more comfortable to continue to grow our portfolio and especially to -- not especially, but also including growing the SME side.

[Operator Instructions] Our next question is a follow-up from Tito Labarta.

Maybe just one follow-up on the Sales & Trading. Very strong results there, well above what you've done in the past. Just given the increased client flows that you've been getting, how do you think about the sustainability of that Sales & Trading number? Should we expect the normalization back to what we've seen in prior quarters, just given the difficulty in forecasting that, any color you can give would be helpful.

The structural trend is very strong of being, let's say, more predictable, more robust, more replicable. So we're comfortable with that. And we're still comfortable with the guidance of the moving average of the last 4 quarters is a very good predictor plus or minus some volatility of what that business plan looks like.

Our next question is a follow-up from Pedro Leduc with Itaú BBA. Please go ahead.

A little bit now on the asset and wealth management returns on robust, but there's a small decline on the yields Q-on-Q as expected, no. And you mentioned there are some effects about it. Also on the net new money pace, very solid on the wealth of both fronts. Can you elaborate a little bit on the underlying drivers for them, especially on the net new money front? And if we could see it keeping up or maybe even growing more in the second half as the markets improve. So a little bit more on wealth and asset take rates, pace of growth? What should we see going forward?

Clearly, I think we were able to continue to deliver strong net new money in both businesses and a very challenging environment, which is of high interest rates and of the, let's say, the big retail banks being quite aggressive at the rates they were paying for deposits with overnight liquidity. And of course, when interest rates go back to, let's say, normalized levels or neutral rates in Brazil, we expect that to benefit both the pace of net new money and the pace of ROAE expansion in both of these businesses. We're still in the early stages of this interest rate cycle. The market is pricing in, let's say, terminal rates closer to neutral. It can be a bit lower, most likely. And with that, we're quite confident that we have probably seen the most difficult, say, macro environment for these 2 businesses. And hopefully, we can benefit in both flows and in revenues as interest rates decrease.

Now taking advantage that we have some time here on the line. I'm going to change subjects a bit on the SME banking front. You just signed an agreement with the Senior Sistemas, a local software provider there. If you can maybe touch a little bit on what the plans are, type of -- what kind of size and KPIs you guys are going to be looking for on this front?

So here, what we're planning as a product offering is we're still in the early stages of our banking offerings for SMEs. Every week, every month, we are rolling out new features and also every week, every month, competition is also rolling out new features, which makes our task a never-ending moving target. But our idea is, hopefully, by year-end, we'll have a very complete product offering there. We're not really planning to come out with any KPIs here, but we expect for you to see this and the revenues of the different business units as we continue to grow this business line.

Thank you. 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.

Once again, thank you very much for participating on the call, especially for your partnership and trust. And we look forward to see you in our next quarterly call. Thank you very much, and have a great week.

Thank you. This concludes today's presentation. You may now disconnect your line at this time, and have a nice day.