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

Good morning, and welcome to the Third Quarter of 2023 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, 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 the market conditions, government regulations, competitive pressures, the performance of the Brazilian economy and the industry, among other factors and risks disclosed in Banco BTG Pactual's filed disclosure documents and are, therefore, subject to change without prior notice. Now I'll turn the floor over to Mr. Roberto Sallouti, who will begin the presentation. Mr. Sallouti, please go ahead.

Thank you very much. Good morning, everyone. Thank you for joining our call. If we could please start on Page 3, where we start with the highlights of the third quarter of '23. We're actually very, very satisfied with the strong profitability presented in the quarter, a result of a continuous growth of our client franchises and even while we kept a very robust balance sheet with robust capital and liquidity ratios. So for us, it was another record quarter. We had revenues -- revenue growth, revenue diversification. We reached a 23.2% return on equity for the quarter. Our assets under management between our asset management and wealth management units reached $1.5 trillion with net new money in the quarter of BRL 59 billion, I'm sorry, BRL 1.5 trillion dollars. We had a very strong performance in the investment banking unit, driven by record debt capital markets. Even though we still have weak equity capital markets, the M&A pipeline is moving along, but it's more lumpy. We had a very strong quarter in IBD driven by DCM. And finally, we continue to increase our funding base, continued with very strong capital and liquidity metrics, reaching at the end of the quarter, 17.4% in the capital ratio. Turning to Page 4. We give a bit more details on the highlights. So we had revenues of BRL 5.7 billion, growing 19% year-over-year, Net income also grew 19% year-over-year, reaching BRL 2.7 billion. As already mentioned, we had a return on equity for the quarter of 23.2%. Moving to Page 5. We had BRL59 billion of net new money, BRL 28 billion in asset management, BRL 31 million in Wealth Management. Our assets in the Wealth Management unit grew 31% year-over-year, reaching BRL 666 billion and assets in the Asset Management unit grew 21% year-over-year, reaching BRL 808 billion. Moving on to Page 6. Our funding base reached BRL 193 billion, growing 14% year-over-year. We finished the quarter with net equity of BRL 48 billion, capital ratio of 17.4% and a corporate credit portfolio of BRL 161 million, a 24% year-over-year growth, and we got back to growing our SME portfolio as we felt we're comfortable with the market conditions with SME portfolio reaching BRL 18 billion. In Page 7, we talk about the traditional way we show the numbers. So in summary, we had revenues of BRL 5.66 billion, adjusted net income of BRL 2.73 billion, net income per unit of $0.72. As we continue to benefit from operational leverage in our platform, we had a cost income below our historical average and adjusted cost income for the quarter of $3.2 million. And we finished the quarter with total assets of BRL 497 billion, even -- and we have a JCP distribution in the quarter of BRL 1.53 billion. In the quarter, we also had a reduction in VAR where we finished on average AR for the quarter of 33 bps compared to 46 bps in the previous quarter. Moving to Page 8 and talking about the performance in the first 9 months of 2023. We had revenues of BRL 15.9 billion, net income of BRL 7.57 billion, return on equity of $22.4 million for the 9-month period, net income per unit of $1.99 for the period. We also had, for the first 9 months, cost income below historical average, 38.9%. And we had an increase in shareholders' equity of 13% in the period, once again, closing at BRL 47.8 billion net equity. And for the first 9 months of the year, we had a VaR of 36 bps of equity, pretty stable compared to the previous 9 months of 2022, which was 35 bps. If you turn to Page 9, you see that our investment management franchises continue to grow at a faster pace than the other business lines. So they continue to gain relevance as a percentage of revenues. And we're quite satisfied to be on track to having a very well balanced, let's say, division among business units, which, over time, we believe we will be 1/3 investment management, 1/3 linked to markets and 1/3 linked to corporate and investment banking. So with that, I'll pass the floor to Renato Cohn, which will talk about the performance of visual business units, and then we can go to the Q&A at the end. Renato.

Thank you, Roberto. So moving to our specific business lines. We start with our investment banking where we had very strong performance driven primarily by DCM revenues. Revenues reached BRL 590 million, which represents a 93% increase when we compare to the second quarter of '23 and a 12% increase when we compare to the second the third quarter of '22. As I mentioned, the highlight of the quarter was DCM, where we had record revenues based on the increased number of transactions, almost back to the levels that we were seeing by the end of last year and also very strong volumes as some of these transactions were quite large. In M&A, revenues improved when we compare with previous quarter, although from a lower base level, and we expect revenues to continue to improve as we execute our pipeline of mandates. And in ECM, we had a promising start during the month of July, but after that, the market retraced during the August -- during August and September, bringing overall ECM revenues during the quarter to a small decrease when we compare to the second quarter of '23. So overall, very strong revenues driven by a record quarter in DCM coming from a combination of a good number of transactions and very strong volume of transactions. Moving now to our corporate lending on Page 12. We had another quarter of record revenues as a result of a larger portfolio and stable credit spreads. Revenues reached BRL 1.322 billion, which represents a 3.5% increase when we compare to the previous quarter and a 41% increase when we compare to the third quarter of '22. Our credit portfolio reached BRL 160 billion, which represents a 4.4% increase during the quarter and a 20% -- 24% increase when we compare to the third quarter of '22. Important to highlight here that after a reduction of our SME portfolio during the first quarter of '23 and maintaining it stable throughout the second quarter of '23, we decided to increase our exposure during this third quarter. SME portfolios then reached BRL 17.7 billion, which represents a strong growth of 19% when we compare to the previous quarter. And also related to our SME business, we are proud to say that we are voted for the second year in a row, best SME bank in the world by Global Finance. So moving now to sales and trading on Page 13. We had again a very strong performance driven mostly by client activity also with a significant decrease in our allocations. Revenues reached BRL 1.456 billion, which is a decrease from the very strong level of the second quarter, but to a similar level of the first quarter of '23. Average VAR decreased to 33 basis points, which is closer to our historical low levels that we've seen by the end of last year and beginning of this year as we continue to execute our dynamic risk allocation approach. And we expect our VAR to continue to decrease to historical lows during this fourth quarter. Moving to our Asset Management business on Page 14. We had record revenues with consistent AUM and AUA growth and strong net new money inflows. Our revenues reached BRL 467 million, which is an 8% growth when we compare to the previous quarter and a 15% increase when we compare to the third quarter of '22. Assets under management and administration reached BRL 808 billion, a 5% increase when we compare to last quarter and a 21.5% increase when we compare to the third quarter of '22. And we see that despite the pressure in the overall asset management in the industry throughout this year, we continue to grow both our managed funds and also our fund administration business with strong and consistent new money inflows reaching this quarter at BRL 28 billion in the new money. And during the last 12 months, we brought almost BRL 100 billion to our asset management businesses. Going now to Wealth Management on Page 15. We had another quarter of record revenues, making this the 19th consecutive quarter of revenues growth and always supported by a very consistent and strong net new money inflows. Revenues reached BRL 792 million, which is a 9% increase when we compare to the second quarter of '23 and a 21% increase when we compare to the previous year. [indiscernible] money reached BRL 31.3 billion, which is very consistent with the [indiscernible] generation during the last few quarters. And again, when we look at the last 12 months, we see a very strong inflow of BRL 132 billion. Wealth under management increased to BRL 66 million which is a 6% increase when we compare to the previous quarter and a 31% increase when you compare to the third quarter of '22. And in October, we announced the acquisition of Atama Investimentos, which is a digital investment platform that will further enhance our distribution capabilities as well as increasing our wealth under management by BRL 18 billion once we receive all regulatory approvals. Going now to participations and principal investments on Page 16. In participation, we recorded total profit of BRL 109 million, which can be better explained looking at the chart in the right side of the slide. There, we can see the components of our participation. First, we had a BRL 52 million profit from Tusigurs, which represents a 10% increase when we compare to the previous quarter. Then we see a BRL 91 million profit coming from our investment in EFG as we consider their results from the first half of '23. And finally, we see the components of Banco Pa, with BRL 132 million coming from our stake in Banco Pa at the stake, the quarterly profit of Bancopa, BRL 69 million coming from the accrual of the portfolios that we acquired in previous quarters and a BRL 235 million elimination from additional acquisitions of portfolios that we performed during this third quarter. So overall, BRL 109 million profit. And in principal investments, we recorded revenues of BRL 48 million, which is a decrease when we compare to the previous quarter, and we had a better contribution from our seed investments. Going now to our expenses and main ratios on Page 18. We continue to gain operational leverage as we keep our costs under control. Both salaries and benefits and administrative and others remained flat during the quarter, which is in line with our cost efficiency strategy. And as a consequence, our cost income decreased to 38.2%, which will reduce to BRL 203 billion as we completed the amortization of some of our previous investments and our income tax rate remained stable at 20.3% and was mostly impacted by interest on equity distribution and a favorable revenue mix. Going to our balance sheet on Page 20. We see that total assets reached BRL 496 billion, which represents around 10x our equity, which is a stable level that we've been having in the last few quarters. Cash and cash equivalent increased by 4% during the quarter, reaching BRL 68 billion, and our LCR ended the quarter at 196%, which is a very comfortable level. Our coverage ratio remained stable at 166% as our unsecured funding base continues to grow in line with our credit portfolio and our corporate lending portfolio now represents 3.4x our equity, which is also a stable level when we compare to previous quarters. Looking at our unsecured funding base on Page 21. We continue to grow strongly with good levels of diversification. Our funding grew by almost BRL 12 billion during this quarter, which is a 6% growth when we compare to last quarter and a 14% increase when we compare to the third quarter of '22. And the retail component of our funding remained stable at 32%. And in August, we successfully issued another series of our BTG commodity CRA. We issued at BRL 3.5 billion for a 10-year maturity at very favorable levels. So with this new series that we managed to distribute, we reached BRL 7 billion in distribution of this instrument in the last 2 months. Finally, going to our basal ratio on Page 22. We'd like to highlight that our total capital ratio increased by 200 basis points, ending the quarter at 17.4%. And this increase came as a consequence of 3 major components. So first is the reduction of risk as we can see by the reduction of our. Second is the change in the regulatory calculation of risk-weighted assets that was effective as of July 1 and also the issuance of subordinated debt that I just mentioned. So these are the major components of the basal increase of 200 basis points. And as I mentioned, a VAR decreased to 33 basis points, and we expect another reduction during the fourth quarter. So with that, I think we conclude the presentation, and we can open for questions.

[Operator Instructions]. The first question today comes from Renato Meloni with Autonomous Research.

So 2 quick questions. Can you give us some more color on what's driving the growth in SME lending? Maybe you can mention a specific type of product or sector and how we can think about this growth in the upcoming quarters? And secondly, I'm looking at Slide 13, where you're showing the VAR coming down, but the risk component as a percentage of RWA staying the same. Can you comment a bit more on what generates this discrepancy here?

Thank you, Renato. So SME lending, we went back to increasing both the supply chain financing as well as a bit of a credit card receivables lines. We have also started slowly expanding some other credit lines, but they're not significant at this moment. So the growth has come from the business lines, which we more -- were most active in the past. And regarding your second question of RWA versus VAR, this is just a function of the more conservative methodology of the Central Bank that is more conservative, sometimes in the asset class, sometimes using average for picture. So it's just a consequence of the Central Bank methodology. But over time, it might take a while, but we expect them to converge to the, let's say, the historical pattern.

The next question comes from Yuri Fernandes with JPMorgan.

I have a question on participation. This quarter, EFG was pretty strong on revenues and was checking the past quarters. And sometimes, it is a little bit volatile. So I would like to understand how EFG revenue recognition work, just to understand how to expect this for the further quarters. And regarding the portfolio acquisitions, it was slightly less than past quarter. So just to understand also the strategy behind both, BTG has a lot of capital. You just issued Tier 2 notes recently the cross. So how do you think about that, should we continue to see these levels? Should you accelerate? Should you, I don't know, buy less portfolio? Just some color here on participation overall? And then I can ask my second question.

Thank you, Yuri. So on the EFG, they report every semester. So they don't report quarterly. That's why it's -- you see basically the equity pick up there twice a year. And also sometimes we are dependent on the date that they come out with the results. So sometimes, even though it's twice a year, it's not necessarily and it might happen that depending on the date that they report, we might even have them not so far apart. So unfortunately, we're much more really just reporting what is reported by them. We don't have any control on how that is done, given that we have a minority position there. On your second question on Banco Pa, as we said previously, we think it's a very healthy way to grow and diversify our credit portfolio. We do expect Banco Pa to reduce the sales of portfolios that they will do next year. So probably maybe this quarter, it reduces a bit more. And then next year, it reduces a bit more, not a function of our desire to buy, we would be willing to buy more, but more a function of Banco Pa's desire to accumulate the portfolio at their balance sheet.

No. Super clear. And if I may, a second one on ROE, I'm just checking the box here, the same where should we see ROEs evolving. In the past, you used to have ROE adjusted by Banco Pa on your presentation? And if I'm not mistaken, the last quarter was a 25% ROE adjusted. I do see, so just checking what would be your ROE would remain around those 25% adjusted by the portfolio acquisitions? And where do you see in the long run like this ROE because we see some peers like [indiscernible] say was 28. When we look to your leverage, RWA loans and things like that, you are still below, so what is the path of ROE you envision for BTG in the coming, not necessarily for the quarters, but like in the coming years, we believe this level of ROE should move up and where it lay.

So Yuri, if you allow me just to comment on your first point on the adjusted ROE, our adjusted ROE has always been the same, and it's only adjusted by goodwill and the consequences of goodwill. The first time we acquired the portfolio from Banco Pa where we had to disconsider let's say, the gains of the portfolio at Banco Pa, we then just demonstrated that effect just to cause people attention to it, but we have never reported it after that because we think it starts generating too much confusion. So just to make sure that that's clarified to you. So with adjusted ROE we have is only adjusted by goodwill. We just did this onetime demonstration to call people's attention or 1 or 2 times to call people's attention to this effect. Regarding on long-term ROE, we're going to have basically 2 things affecting our ROE. The first is as we continue to gain operational leverage on our platform, this can be a function of, let's say, keeping our costs under control and our business as mature. As you know, we had a lot of new business initiatives, which are along the J curve. So that's a positive contribution to ROE. On the other hand, as we stated, when interest rates started rising in Brazil, we said that we would benefit from that because our capital is basically cash. And now we're seeing the opposite effect. Interest rates in Brazil are decreasing. So the truth is we have to see, we expect our operational leverage to, let's say, compensate hopefully, even compensate a bit more than the fall of interest rates. But we still continue with the historical guidance we have on ROE. We continue -- last year, at the beginning of this year, we signaled we expected a growth in the ROE from last year, which is being delivered. We say we expect to get -- we continue to expect gain on operational average, but we have to make sure that we have enough of this gain to compensate for the decrease in interest rates.

No, super clear. So non-Italian ROE expansion, but are real kind of like improving, right, the spread of our realistic improving over time. That's the message, right?

That's right.

The next question comes from Daniel [indiscernible] was with Safra.

Roberto and Renato, congrats on the results. On capital, I see you on a very comfortable position of capital, right? So -- and probably you're willing to reduce VR going forward. So could you remind your target Tier 1 ratio? And what should be the most appropriate use of the surplus you have built mostly on 2 points that you have built on this quarter? So if you could give us an appropriate use of the surplus could be a good reference.

So as we told you historically, what is the efficient frontier of capital ratio if that would be possible, right? It would be 12% core equity Tier 1, 3% Tier 2, 15% capital ratio. Always, we need to operate with a buffer because you always want to have some flexibility to explore the opportunities. As you said, we're now a bit above that, both in core equity Tier 1 and in Tier 2. In Tier 2, it's highly probable that in February, we will call the Tier 2 bonds we issued internationally. So that would have a reduction in the Tier 2. And over time, we expect to continue growing the business as long as the same way we have done in the recent past. So a bit of growth across the different business lines, opportunistic acquisitions, nothing transformational on the horizon. But we don't expect to change the dividend policy in the short term. But we do expect, we always told you guys that we also always liked having a fortress balance sheet being on the more conservative side of the S1 banks because we think that benefits tremendously our wealth management and fiduciary businesses. And this has proven itself with the numbers. So over -- in the short term, yes, we are a bit above what we consider optimal level, even probably a bit above what is the buffer. But we expect that over the next few quarters, we will be allocating this capital with a lot of discipline, discipline on risk, discipline on costs, discipline on capital, discipline on strategy. It's not just because we have capital available is that we have to use it. We have to make sure that we use it in the appropriate, let's say, opportunities that have the appropriate risk return profiles.

And if I may, a quick follow-up. You mentioned acquisitions. We saw your acquisition of Orama last quarter. And what could be like the most ideal profile of M&A that you're seeking actively right now. So anything more close to Orama or anything in any another profile that we could expect.

I think the 2 recent acquisitions we announced to market axis and Navara exemplify what this could be. [indiscernible] was much more a functionality or a product, which we did not have for advisory. And Orama was much more an acquisition that brings scale and efficiency to the investment, to the platform we built. So you should consider acquisitions along these lines.

The next question comes from Flavio Yoshida with Bank of America.

Congratulations on the results. So I was wondering if you guys could share an outlook for investment banking in the coming quarters. We all know that it's difficult to have a precise view here. But how has been the pipeline recently? I mean you mentioned the increase on the number of years and transaction size on PCM, mainly right. It is difficult to maintain the transaction size going forward. But if you could share some color here, I would appreciate.

Thank you, Fabio. So I think here on DCM specifically, we see still a healthy pipeline, not as healthy as Q3. Q3, the whole market benefited from some FERC commitments that they did at the beginning of the year when market conditions were not so favorable. So they benefit from that. We don't see these transactions of this sort in the pipeline of Q4. So probably, we don't expect the levels of DCM to maintain. Having said that, we're coming from very low levels of both M&A and ECM. The M&A pipeline is very, very healthy. But these are multi transactions, so it's very hard to anticipate when they will happen quarter-over-quarter. And PCM, as interest rates decrease, hopefully, as the macro uncertainties decrease over the next few weeks, we can maybe start getting a pickup in the pipeline. But just given the global and the local market conditions, PCM pipeline is still not very robust. So we can expect, I would say, probably somewhere between, let's say, Q2 and Q3 for Investment Banking in Q4, that's our best case for now.

Okay. And my next question, if I may, is on asset management. You guys posted a very good net new money. So if you guys could share where is that new money came from? Is it like you're gaining clients from competition? Is it related to the already existing client base? And how do you guys see competition in this business.

I would say a bit of all of the above. It's coming from all segments, and we have various distribution channels, right? We have our B2C platform. We have our advisers platform. We have our high ultra-high wealth management platform. We have our B2B platform. We are expanding now our wealth management presence in Europe with the acquisition of Labs. So it's a bit of all of the above. You don't see -- it's -- of course, we are gaining market share. Unfortunately, you're not seeing the market grow significantly. So we are gaining market share, but it's not concentrated on any of these segments. So it's a bit of all of the above as the investments we have in the platform and products and in marketing mature.

The next question comes from Thiago Batista with Banco UBS.

I have 2 questions. The first one on the lending business. We saw that the level of risk loans or loans rated between E2H went down a bit further in the Q to something close to 2%. But if we exclude the Medicareness, this would be much lower, probably close to 1%. So this 1% would be probably the lowest level in the last 10 years of E2H and clearly, when you look for the situation of companies in Brazil, especially not so good to show the lowest level of later E2H. And [indiscernible] is clearly posting a much better dynamics than the industry. So if you can comment a little bit on the trends of asset quality that you are seeing on this company segment? And what the bank did to have this good level of loans rated between E2H? And my second question is a follow-up on capital position. Can I continue? Or do you or to answer and ask the second question after?

Go ahead.

Okay. Sorry. But my second question is a follow-up on the capital position. Some quarters ago, we were complaining that the capital position of the bank would be a bottleneck, now see that is in the other way around. If I assume that ROE of BTG will continue to be 20-plus. And you mentioned that payout ratio will probably not increase. So assuming a payout ratio between 30% to 35%, basically, the bank needs to increase their risk-weighted assets over BRL 50 billion per year to maintain the capital position pretty much flattish. And again, this level is already above your limits. Do you believe it's possible to find BRL 50 billion of risk to located every year, maintaining these ROE over 10%.

So let me answer the second question, and then I'll pass to Cohn to answer the first question. So the first part is you have to -- what's very important for us and why are we benefiting from the ROE? It's not because we're leveraging more our balance sheet. It's because the fee-based revenue from the growth of the client franchises compared to the equity of the bank is becoming more and more relevant. So the expansion in ROE is not coming from adding let's say, leverage or risk to the balance sheet. That is the first thing that's important to point out. The second thing is, well, so what you're saying is you should at least try to keep the same level of leverage on the balance sheet so that you can continue to benefit from this operational leverage that we've been talking about. Yes, that is true. But we -- the fact that we have capital does not mean that we're forced to put it to work. We have to put it to work. If it makes sense from a strategic, from a risk point of view. So as of now, yes, we are comfortable that we will be able to find the necessary opportunities to allocate this capital as well as keeping the diversification. And I think the same way that 2 quarters ago, how they say sometimes investors were a bit concerned that we did not have capital for the growth. And just 2 quarters change that investors can be concerned that we have not enough opportunities for the capital. So I don't think it's not even one way or the other, right? We're always conservative in our dividend payout. We are conservative in our risk allocation. We have been able to grow our client franchises faster than the other businesses. So this brings operational average. So we expect this to continue with a lot of discipline. If at some point, we reach the conclusion that we don't have good opportunities to allocate the capital, we can revisit the strategy. But this is not the case at the moment. And on the first question.

And so on the first question related to the levels of provisioning from E2H, I think it's very important that you bear in mind that the vast majority of our loan book is made of large corporations, right? And even with different types of structures in credits and different types of guarantees. So this is very different. We have to be very careful when we compare to other financial institutions because when you have delinquencies in consumer loans and unsecured consumer loans or credit card loans, after 60 days or 90 days, the recovery value of those loans goes close to 0 while when you have corporate loans is completely different. The recovery value, it's way higher because of the types of structures that we have and because of the types of guarantees that we have on these structures. And maybe you mentioned the Americanas there. Maybe this is a good example, even after this large case, you see that the recovery value of Americans which was I think, a significant case, you see a good recovery value there that you can compare with outstation, we need to be very careful when comparing different types of portfolios, our portfolio. It's a majority of large corporate loans with structures and different types of guarantees that gives us the comfort to have these levels of provision.

The next question comes from Tito Labarta with Goldman Sachs.

I just have a follow-up on Asset & Wealth Management period. Money there has been very resilient. Just how do you think about that in a lower interest rate environment, do you think that there could be a significant acceleration from here? Just any color? Is most of this net new money going, I assume 0 to fixed income? Any color on different types of investments that people are seeking today. And finally, also, any color that you can provide, like what is the cost that you have to acquire this net new money? Just is it -- I mean I know you've done some acquisitions, but aside from that, more like organically, is it just marketing? Or I assume it should be relatively low given the scale and base you have, but just any color you have on that would be helpful as well.

Tito, so definitely, if we move to lower interest rates, we think that would benefit our Asset & Wealth Management business. Of course, we saw that when interest rates increased, the base of net new money decreased. So it is reasonable to expect that if we have the continuous reduction that they would benefit, especially now that we are in a more mature period of our platform, right? We've matured it in terms of technology. We've matured it in terms of products. We matured it in terms of developing the channels, which kind of answers your second question on the client acquisition cost, which is it's not -- most of our client [indiscernible]money is organic now. Of course, we continue investing in leads. We continue investing and acquiring clients. We continue investing in activating clients. But the bigger client base you have, the more over time these clients get more comfortable with the service, with the platform, with the products or the other investments they have in other places mature and we're able to bring them. So we're not making any insignificant increase or investments in client acquisition. We continue now benefiting from, I think, everything that we've done over the last 6 years.

Okay. Great. No, that's helpful. I mean I think one thing we're seeing also a lot more competition for higher income clients from banks, other disruptive competitors trying to get more access to that. How do you see, I guess, the competitive environment for these high income clients, how do you see your positioning relative to others? And also, not just thinking about from an investment perspective, but also as you expand sort of your banking offerings for those types of clients, do you think this further [indiscernible] for you or...

I think actually, if you ask me, I think the competitive environment is healthier. You have to remember that a few years ago, we had players with very low cost of capital that had the right to lose money for many years, and we're aggressively investing in marketing, client acquisition and platforms. And you're seeing that many of these players did not reach scale and many of the acquisitions that we did are a function exactly of that. At the same time, you've seen some of the incumbents, let's say, react and position themselves better. You see -- you saw some of the players which renew mature and do better. But overall, I think we're very satisfied that the market is imposing capital discipline on all players. And when capital discipline is imposed, you don't see a rational competition. So even though, yes, you have some of the dynamics that you mentioned. Personally, we prefer the current market conditions than what we had a few years ago when the cost of capital to all players was very low.

The next question comes from Gustavo Schroden with Bradesco BBI.

Roberto and Renato, congrats on the results. I want to do a follow-up question about the ROE, especially because the first answer, Roberto, you said that maybe more relevant for we would be the spread between ROE and the semi rate, right? And rather than as we think about the ROE expansion. And just to call you already here because in my view, low interest rates would maybe improve your fee income business like investment base activities, asset and wealth management in these lines as it requires -- as they require less capital, maybe it is where there would be more ROEs, or higher profitability. So what am I missing here to think that there would be room for ROE extension considering that the base case for everybody's debt interest rates will be lower in the coming quarters and the next year. So if you could elaborate here about it, I think that would be great.

Gustavo. In a nutshell, yes, you're right. A more let's say, interest rates closer to what can be considered neutral, let's say, Central Bank talked about 4.5%. So let's say, an interest rate in Brazil of around 8% to 9% that would probably be -- we would be able to go back to growing our credit portfolio that would probably mean more flows to asset management and wealth management. That would probably mean be a more active investment banking and consequently, maybe even sales and trading businesses as clients would increase their activity. So that's why I said that we have to observe how we are able to benefit from both operational leverage and the benefits and the businesses that benefit from lower interest rates. At the same time, as the interest rates decrease, we are not ready to give any guidance of what this would imply or at which speed we think that was priced in the curve and how we will benefit on that. We don't want to create any false expectations. But of course, I have to agree with all the qualitative points that you mentioned.

Okay. Great. So maybe we can work to that. I mean, the current level of would be the base case, for example, of course, all else equal, right, consider everything, all the information that we have so far, the current level of ROE would be the worst-case scenario.

As I said, I'm not ready to give up guidance, but if that's the conclusion you come from the analysis, it is what it is.

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

Most of my questions have already been answered, but I want to ask just one question. So Roberto, you mentioned before, we also saw in the press release that you guys raised BRL 3.5 billion of Tier 2 capital in the second quarter, another BRL 3.5 billion of Tier 2 notes in the local market in the third quarter. And I see also in the financial statements that you raised another BRL 2 billion in the fourth quarter. With that, I think that you said Roberto, that most likely you're going to be calling your 2029 Tier 2 notes in the international market in February. I also see that you have a very senior bond maturity for $1 billion very early in 2025, January 2025. So given that you have already prefunded the call for the '29, but we've got senior or maturity early in 2025. At this point, what would be your plan in terms of accessing the international market next year?

Thank you, Nicolas. Sincerely, it's a function of the funding cost compared to the internal funding cost in local markets. It has been, especially given the distribution network that we built over the last few years. It has been more effective to raise funding locally than to access capital markets, especially at this level of spreads. So of course, we -- our desire is to have a curve to be present, to be always on the, let's say, on the mindset of investors, but we cannot do this at a cost that does not make any sense. So we're constantly monitoring. We would really like to have a senior curve, but this has to make sense from a cost basis for us, given the opportunities we have for funding locally.

I see. If you had to make a decision, for example, today, to raise senior funding in the local versus international market, what would be your preference?

Local market, for sure, given where the spreads are.

The next question comes from Pedro Leduc with Itaú.

A question on operating expenses. This one very contained this quarter. Is the similar salary adjustments. There is hires. Admin was flat, very good. Can you talk a little bit more about your admin or operating expenses going forward? I mean is efficiency, something else to expect your more mature investment cycle?

Leduc, of course, we will -- we expect them to grow both because unfortunately, in Brazil, you have a lot of how they say, normal growth just given inflation adjustments, given the normal promotion cycle. Of course, we're also continue to expand, especially some business units. So for example, we're going to have additional costs from the bank in Luxembourg, both operating as well as set up costs. So we -- as I told you, we're very disciplined on capital, on strategy, on risk and on cost. But of course, we will continue to grow. Ideally, we will see costs growing with revenues or below, but we -- thus, we continue to expect having operational leverage. But it will only be normal that you expect that to look everything quarter-over-quarter is probably not ideal. But if you look everything on a yearly basis, they will continue growing, but we do expect to continue gaining operational leverage in our business.

Okay. Good. And a bit of a broader question now, obviously ending the year on a strong tone. And as we look into the next one, where do you think you'll see most of the growth between each of the business lines and whether you'll be investing the most? What are the priorities for next year? Just a glance.

We still think the investment management franchises, Asset & Wealth Management will be the business science with the stronger growth. For the corporate credit line, we expect probably to grow with the portfolio. We expect maybe a similar growth to what we have this year, maybe a bit above that if we're able to find the opportunities. I think investment banking will be much more a function of the market than of us, but I think we're coming from a base this year.

The next question comes from Rafael Frade with Citi.

2 questions here. One is related to DCM. You mentioned that DCM was a record level for this quarter. I would like just to understand if all the revenues related to the DCM book at only investment banking or are also booking other lines just to remember here because, again, this is a strong activity. Would like to understand it only impacted the investment make or other lines. The second question would be related to payroll. You mentioned in the beginning that you have been -- that you expect Banco Pa to sell less portfolio for the next year. But I would like to understand how do you see payroll as a whole, right? It makes sense to buy other payroll portfolios in the market? Or it's really something much more related to Banco Pa than other things.

So on your second question, I'll answer that and I'll pass the first one to Cohn to explain the details of how revenues are recognized. Yes, we are open to buying other favorable loans in the market. Actually, we have done that. You can see it in the consolidated, say, credit exposure report. The difference is that since it's -- you don't have any extraordinary, let's say, effects like the fact that we have to deconsolidate the acquisition of Banco Pa. So yes, we like the asset. We think it brings a good risk return and diversification to our credit portfolio. And on this DCM, Cohn.

On DCM, all the structuring fees from a DCM transaction are recorded within the investment banking. And when you have distribution fees, and the distribution is done by our wealth management distribution force and capabilities, then the distribution fees of this transaction is recorded within wealth management. So it's very specific. So the structuring part is with the investment banking and the distribution with the wealth management and the different channels.

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.

So thank you all once again for joining our call. We look forward to seeing you at our next quarterly call for the year-end results. And we want to wish you all a great day and a great week. Thank you very much.

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