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

Good morning, and welcome to the Second Quarter of 2025 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 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, please go ahead.

Thank you very much. Good morning, everyone. It's a pleasure to be here with you talking about our second quarter results. I will start with the quarter highlights in Page 3 of the presentation. Of course, I think that the most important highlight here is the return on equity for the quarter. We reached 27.1% ROE, and this is the result of a great performance by all the different business units. We finished the quarter with BRL 8.3 billion in revenues and net income of BRL 4.2 billion. We had an all-time high result in investment banking, this was led by very strong M&A, where we had the conclusion of various transactions, which we have been working actually on for the last few years and with continued strength in DCM and actually probably the strongest quarter of the last, I would say, 8 or 10 in equity capital markets, too. Talking about the third point of the presentation, we had record results in our corporate lending and business banking business, and this reflects the growth of the portfolio, while we continue to maintain quality risk-adjusted good spreads, continue to grow business banking and continue to benefit from the geographical and sector diversification that we have. In Sales & Trading, we also reached an all-time high result, and this was supported by the continued increase in client activity as we continue to penetrate new segments and gain market shares and others as well as continue to roll out new products. And not only that, but you probably have also noticed we increased the VaR allocation in the quarter, and this also helped the results of the quarter. Wealth Management also had another record quarter. And in this quarter, we basically -- we actually -- we only had organic flows, but we continue to see here the benefit of the different initiatives that we've had over the last few years. And finally, we continue to grow our LatAm presence with the acquisition of HSBC Uruguay. So just in a nutshell here, what I think is important is that we see in this quarter, the continued maturation of the various investments we made in the last few years. We continue to benefit from the full banking digital platform that we have in Brazil, where we basically are covering all products and segments. We continue to benefit from our growth in Latin America, and we're starting to see some revenues come from the growth of our wealth management operations in both Europe and the U.S. Turning to Page 4, we talk a bit about the numbers for the quarter. So total revenues growing 38% year-over-year to BRL 8.3 billion. Net income growing 42% year-over-year to BRL 4.2 billion. So we continue to benefit from operational leverage in our platform, and this results in a 27.1% ROE compared to 23.2% in the first quarter of the year. Turning to Page 5. We talk about net new money, BRL 59 billion for the quarter, roughly half Wealth Management, half Asset Management, once again, 100% organic. So very strong flows from the continuation of business and the past investments we've made in acquisitions in marketing, in platforms and technology. Our Wealth Management AUM grew 32% year-over-year to BRL 1.56 billion. And our asset management AUM growing 19% year-over-year to BRL 1.9 billion. On Page 6, we talk about funding and credit. We continue to grow our unsecured funding 19% year-over-year, reaching BRL 280 billion. We continue to grow our credit portfolio 22% year-over-year, reaching BRL 238 billion, BRL 29 billion of which in the SME. As you all are probably aware, the SME sector, given the whole EOF discussions was a bit volatile in this quarter, but we continue to see good underlying trends in that business. And finally, we continue -- we finished very well capitalized with a Basel ratio increasing to 16.2% in the quarter, finishing with net equity of BRL 64 billion. Turning to Page 7. We show the traditional way we've been showing results. So once again, revenues of BRL 8.3 billion, net income of BRL 4.2 billion, net income per unit of BRL 1.10, revenues growing 38% year-over-year, net income 42% year-over-year. We continue to improve our cost-to-income ratio as we benefit from operational leverage, reaching in the quarter 35.6%. And our shareholder equity grew 20% year-over-year, and we also increased slightly to 22 bps in the quarter. Turning to Page 8, we talk about the first half of the year, the first 6 months of the year, and we finished the first 6 months with revenues of BRL 15.1 billion, net income of BRL 7.5 billion, a return on equity for the first 6 months of 25.1% net income per unit of 1.98 and 6 months versus 6 months growth in revenues of 27% of net income and 29%. So once again, showing the operational leverage. Cost income at 36.2% and a VaR of 19 bps for the first half of the year. Finally, on Page 9, we see the breakdown by different business units. Investment Banking, even though we had a strong quarter, it's still falling last 12 months versus last 12 months, 9%. Very strong performance by corporate lending and Business Banking, reaching 34% growth and becoming our business line with the highest revenues. Sales & Trading back to growth. As you we told you the last few quarters, we have been a bit frustrated with actually what was a fall or a stable sales and trading business, but we saw the trends that would permit us to go back to growth, and we start to see this in this quarter with 11% growth here -- last 12 months versus last 12 months. Very strong growth in asset management of 25% 12 months versus 12 months and 23% in Wealth Management. And actually, our investment management business reaching BRL 6.9 billion, so the second largest contributor after our credit and business banking business. Strong contribution growth from participations, 94% as we start accruing more of the portfolios that we had acquired from Banco Pan. And finally, a 26% growth in interest and other. This, of course, reflects the increase in interest rate, but it also reflects the fact that we have a fortress balance sheet where we have the very significant part of our equity and cash and thus, we're able to benefit from the higher interest rate environment. With that, I'll pass to Renato, who will talk about each of the business units, and then we can open for questions.

Thank you, Roberto. So starting in Investment Banking on Page 11. We see that we had record revenues driven by very strong M&A contribution, combined with a strong DCM performance. So revenues came at BRL 782 million during the quarter. That's more than double of what we achieved in the first quarter of '25, and that's a 40% increase when we compare to the second quarter of last year. In DCM, after a weak first quarter, which was affected by year-end very high volatility in financial markets, we saw a normalization of market activity. Both number of transactions and volume of transactions increased and reached similar levels of what we have seen throughout 2024. And DCM continues to be the most important contributor to investment banking revenues, and we continue to see similar levels of activity already during this first part of the third quarter. We also had very strong revenues coming from M&A, and those were driven by a concentration of some large transactions that we concluded during this quarter. We always mentioned that we have a robust pipeline to be executed and the timing of the conclusion of those transactions is very difficult to predict. And this quarter, we concluded some large ones, obviously, some smaller ones as well, but there was a concentration of larger ones, and we still see an important pipeline to be executed in the next few quarters. ECM, despite the challenging environment, continues to contribute to overall results with transactions in Brazil and in Latin America. And when we look at the right side of the slide, for the ranking for M&A during the second quarter of '25, we were ranked #1 in number of transactions in Brazil and in LatAm and #2 in volume of transactions also in Brazil and in Latin America. For ECM, we were ranked #1 in number of transactions in Brazil, #2 in volume of transactions in Brazil and also #2 in number of transactions in Latin America. Going to Page 12, we see our corporate lending and business banking, where we also had record revenues, reflecting ongoing portfolio expansion, stable risk-adjusted returns and business diversification. Revenues came at BRL 2.1 billion during the quarter, and that's a 9% increase when we compare to the first quarter of '25 and a 37% increase when we compare to the second quarter of '24. Total portfolio reached BRL 238 billion, which is an increase of 3% during the quarter and a 22% increase when we compare to the second quarter of last year. And we continue to maintain a well-diversified portfolio focused on high-quality credit exposures and disciplined levels of provision. And we also continue to diversify into new segments, new geographies as we enhance our origination capabilities. For our corporate and SME portfolios, credit spreads over funding remained stable as we continue to work and benefit from the successful reduction of our overall cost of funding. And for the total portfolio, the overall quarterly spreads increased during the quarter as we benefited from stronger results coming from our special situation business. We also are very proud that for the second year in a row, BTG Pactual Impress BTG Pactual business has been recognized as the best digital bank for corporates in Brazil by Euromoney. Moving now to Sales & Trading on Page 13. We also had record revenues driven by increased client activity and effective risk allocation. Revenues came at BRL 1.9 billion. That's 46% higher than the previous quarter and 38% higher than the second quarter of '24. As Roberto mentioned, average VaR increased to 22 basis points while still remaining conservative and below our historical levels. And the market risk component of our risk-weighted assets increased to 25%, but remained within the range of what we've seen in the last few quarters. And we see that in the last 6 months, revenues reached BRL 3.2 billion. That's a 17% increase when you compare to the same period of '24 as we continue to expand our client base. And at the same time, we continue to add new products, new services for this expanded client base. Looking now at our asset management business on Page 14. We saw strong inflows, coupled with consistent growth in management fee revenues. Revenue came at BRL 624 million, and that's a 15% reduction when we compare to the first quarter of '25. But it's important to note here that during the first quarter of '25, we recorded very strong contribution from dividends coming from the minority stakes in independent asset managers that we invest in. And also we recorded some performance revenues. During this quarter, we basically didn't record any dividend and a small amount of performance. So when we look overall, it's important to note that the management and administration fees continue to increase in line with the growth of overall assets under management and administration. When you compare revenues of the second quarter of '25 with the second quarter of last year, we see a 14% increase driven by an 18.5% expansion of our assets under management and administration, which by the end of the quarter reached BRL 1.090 billion. We recorded strong net new money inflows of BRL 28 billion during the quarter despite the asset management industry outflows of BRL 39 billion, which once again proves the robustness of our business. Looking now to our Wealth Management and Personal Banking business on Page 15. We also had record revenues and very strong growth anchored by consistent and robust net new money inflows. Revenues came at BRL 1.239 billion, which is an increase of 18% during the quarter and a 33.5% increase when we compare to the second quarter of '24. Wealth under management reached BRL 1.056 billion, which is a 6% increase when we compare to the previous quarter, and it's 32% higher than the second quarter of last year. Net new money was 100% organic and came at BRL 30.6 billion during the quarter, once again, highlighting the consistency in net new money generation that we have been showing for many previous quarters despite the different and challenging market environment. Stronger revenue growth came as a consequence of increased client activity and also the consolidation of Julius Baer revenues that now entered for the full quarter. And we successfully completed the acquisition of JGP, [indiscernible] in July, adding BRL 18 billion in wealth under management, and this number will be reflected during the third quarter results. Here, we are also very proud that we were voted Best Private Bank in Latin America by Euromoney Private Banking Award. Going now to participations on Page 16, we see that we had an overall contribution of BRL 279 million in profits. Seguros contributed with BRL 64 million in profits. Equity pickup from Banco Pan came in at BRL 133 million and the accrual of Banco Pan credit portfolios that were acquired in previous quarters came at BRL 82 million. Important here to note that in line with Banco Pan's strategy to retain a larger credit portfolio, we didn't execute any acquisition of payroll loan portfolios from Banco Pan during this quarter. Going now on to Page 18, we look into our expenses and main ratios. And here, we see that we continue to see operating leverage kicking in with cost-income ratio improving to 36% as our new business initiatives continue to gain traction. Total operating expenses grew 16% in the quarter, but most of the growth came as a consequence of higher bonus provision and in line with the strong revenue generation expansion that we saw during this quarter. When we look at salaries and benefits, we see that they grew 3.6% during the quarter and administrative and other grew 7% during this quarter as both reflected now the impact of Julius Baer acquisition. Goodwill amortization increased 10% during the quarter, also reflecting Julius Baer acquisition. And our effective tax rate came at 20.3% during this quarter. Going now to our balance sheet on Page 20. We see that total assets reached BRL 656 billion, which represents 8.9x our equity. Our coverage ratio increased during the quarter to 155% as our unsecured funding grew more than our on-balance credit portfolio. And our corporate lending and business banking credit portfolio now represents 3.7x our equity. Last quarter was 3.9%. So because of the strong equity growth, it reduced to 3.7%. Moving now to our unsecured funding base on Page 21. Our total funding base reached BRL 280 billion. That's a 7% increase when we compare to the previous quarter and a 19% increase when you compare to the second quarter of '24. And that came despite the 5% depreciation of the U.S. dollar against the Brazilian real. The share of retail funding remained stable at 30% despite the strong total funding expansion and demand deposits remained stable at BRL 19.6 billion, representing 7% of our total funding base. And as I mentioned during the corporate lending and business banking slide, we continue to expand our funding base. And at the same time, we continue to reduce our overall cost of funding. Finally, looking at our Basel ratio on Page 22. We see that our total Basel ratio increased 80 basis points during the quarter, reaching 16.2% and that came as a consequence of the strong results that we presented and also the successful issuance of AT1 notes, which contributed with approximately 30 basis points in additional Tier 1 capital. So we see that AT1 capital increased from 12.2% to 13% during this quarter and total Basel ratio increased from 15.4% to 16.2%. And as I mentioned before, our average daily VaR reached 22 basis points an increase when we compare to previous quarters, but still below our historical levels as we deployed a little bit more risk, and we benefited from the increased levels of client activity. So I think to conclude, we are extremely satisfied with these results, reaching record revenues in almost all our business lines, which shows the potential of our business when we have slightly better market conditions and increased levels of client activities. So I think with that, we can open for questions.

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

Congratulations on the very strong results. I guess the main question here, I mean, given you're achieving record revenues in almost every single line, was there a step change here? Just to try to think about how sustainable this is going forward? Or anything that you think benefited from seasonality, anything extraordinary in the quarter to highlight? But how do we think about the forward from here in terms of the sustainability? I won't go line by line, but pretty much almost every single line, a record quarter. So just to think of the forward on that. And then I guess also along those lines with ROE, as you mentioned, very strong 27%. How do we -- you've guided for higher ROE. It seems very easy to deliver on that for this year. But how do you think about the ROE from here? Is this 27% a new level that can be sustainable? Should that come back a little bit going forward? Just help us think about the overall profitability of the business.

Thank you, Tito. So -- as you mentioned, I think there are 2 things happening this quarter. I think, one, yes, there is a step change in some of the business lines. And I think this is clearly reflected in Wealth Management, in corporate lending. So we -- and it's also very not usual that you have a quarter where all the business lines have very strong performances, right? What you've seen over -- since you've been following us, every quarter, let's say you have a strong 2 or 3 business lines, others perform in line, maybe you have one that's weaker. But this quarter, I think we had the combination where all the business lines were stronger. Not necessarily that there was something out of the ordinary, but all of them were strong. Having said that, as you know, we're quite conservative in offering guidance and we -- what we stated at the end of last year was that we expected to continue gaining operating leverage in our business and that we thought that the return on equity would be above 23.1%, which was what we delivered last year. So right now, I think we're comfortable to say that even using the math and what we're seeing from the structural levels of the business, we're quite comfortable in signaling that we expect to deliver for this year, let's say, for the full year, 24% or above. And naturally, if we continue to have strong performance in the different business lines, the good fundamentals that we saw this quarter, we will probably overperform that. But we're going to continue with our conservative guidance, increasing it a bit, but we don't want to commit to any different levels than this 24% for this year for now.

Very helpful, Sallouti. Maybe just one follow-up, maybe digging on the wealth management, also very strong inflows. I mean that's been an area of growth for you. And just to think about the competitive environment there, are you maybe gaining more market share than before? Are you just benefiting -- is the general market doing better than expected? Just to think about the level of inflows that we saw in Wealth Management and how much of it was BTG specific and how much maybe the industry doing better?

No, I think it's fair to say that we are gaining market share. And this, as I mentioned, is a consequence of our expansion of products. So in our wealth management line, we also have personal banking. So we're seeing net inflows from the high-income retail segment. We're seeing good inflows in wealth management. We're seeing clients using more products. So the market, as you know, had a small blip in the second quarter, but nothing great. So I think it is fair to assume that we've been gaining market share.

The next question comes from Renato Meloni as an Autonomous Research.

On the results here. So I wanted to just focus a bit on the corporate lending side. I know you mentioned during the presentation that you had some extraordinary results from special situations. So first, I wanted to understand if you carry that over or if those were one-offs and then by how much you should adjust the revenues? And then like still within corporate lending, if core spreads were similar to last quarter, if you adjust for these events? And then how should we think about it for the rest of the year?

Renato, again, I think we had strong revenues throughout the corporate lending business. And I mentioned that we had stronger results coming from special situations. I wouldn't call it a one-off or anything that they came stronger. They always contribute with our overall corporate lending results. And this quarter, specifically, they contributed a little bit more than the, let's say, the average contribution. As I mentioned, the credit spreads over our cost of funding for the corporate credit and for the SMEs remained stable, right? So there was not much of a change when you consider the credit spreads of the portfolio. and the cost of funding. And again, I mentioned that we continue to manage and to be able to reduce our overall cost of funding. So we are benefiting from that. And that has allowed us to maintain a stable level of spreads. And when you see the overall when you include the special situation, you see that the overall credit spread increased a little bit because of this higher contribution of special situation. So that's basically what happened during this quarter.

Perfect. That's understood. If you just allow me for a follow-up here, if we want to be more specific, if I'm estimating your net financial margin based on revenues divided by the average balances, right? So that was 3.4% in the first Q and then that increased to 3.6%. Should I carry this over this 3.6% for the next quarters? Or do you think we might have a small decline because of the special situations?

Look, sorry, we don't want to provide future guidance. But as I said, we've been seeing this 3.4% that you mentioned as somewhat stable, right, for a few quarters. And depending on the contribution of special situations, it can vary a little bit. So but that's the idea. And also, I think it's important to note that we are seeing a higher contribution quarter-over-quarter as we continue to develop our business banking business, right? So this is something that one of our business initiatives that we've been developing for the last few years. And as time goes by, right, we increased the number of clients, the products that we offer to that, and this contributes more to the overall corporate lending business.

The next question comes from Marcelo Mizrahi with Bradesco.

Congratulations for the results, fantastic results. So looking forward, my question is about the corporate lending and the IB. So talking about IB, first, I just want to understand how you guys are seeing the perspective to this business. We saw a fantastic results in the last quarter. Just want to understand a little bit more if the revenues comes more from M&A or if it comes from DCM and looking forward the perspective of those business, if we can have something close to these levels or even higher than the level of the first quarter. And if you -- and my second question is regarding corporate lending and if the impact of the noise about the new measure about EOF so the impact of [indiscernible] funds and if it -- if it hurts the growth of SME, so the perspective to grow this line in the next quarters?

Thank you, Marcelo. Yes. So clearly, we do believe that SME was impacted in the quarter by the whole EOF novel, first use a friendly term. So we expect to hopefully go back to growth. But again, here, as you know, we're always very disciplined. We have to make sure that the return you're getting for unit of risk makes sense. And we keep this discipline. I think what we love about our franchise is that it's very diversified geographically sector segment. So we can make sure that we're always allocating risk where we think we are being rewarded for each unit of risk allocated. On the Investment Banking segment, yes, I would say that probably M&A was very special this quarter, probably will not repeat in the next. We see DCM and ECM at similar levels, maybe even possibly stronger. So with that, I think if you look at third and fourth quarters, maybe they will not be as strong as the second quarter, but we see them stronger than the first quarter. You have to remember that in the first quarter, people had -- we were getting questions of very significant drops in investment banking. We were a bit more constructive. And I think now that's proven to be the right scenario.

The next question comes from Gustavo Schroden with Citi.

Congratulations on the strong results. So my question is specifically on your sales and trading gains. It was a record, so BRL 1.9 billion. So I just wanted to understand if there is any specific trading or trading desk that was different in this quarter. We saw that although the AR is still below the historical level, it was -- that was a small increase versus previous quarters. So I just wanted to understand what has been driving this line in the quarter?

Gustavo, no, there was not a specific trading desk, any trading desk that contributed more significantly to the results. As we always mentioned, we have quite a large range of different trading desks, and they all -- sometimes one performs better than the other. This quarter was not different. I think that what we have seen here and throughout the overall results is that the client activity, right, we saw much stronger client activity this quarter when we compare to the previous quarter, right? And this stronger level of client activity impacted not just sales and trading, it impacted investment banking revenues. It impacted also wealth management revenues. And we see this in these 3 business lines. But we obviously see this in our Sales and Trading business lines. And obviously, this is a consequence of the combination of higher client activity, but also of our expanded client base. We continue through time to expand our overall client base in many different businesses that obviously relates to sales and trading, right? And also new products, new business lines within the Sales and Trading overall, all contributed to these high results that we saw during this quarter.

Okay. But just a follow-up on this. So you remain with that, let's say, soft guidance that the last 4 quarters moving averages is the best to use as a forecast, right?

Yes, we continue with that guidance.

The next question comes from Daniel Vaz with Safra.

On a very positive quarter, stellar results here. I want to touch base again on the portfolios from the corporate side, right? So we already know the EOL news flow that affected your growth. But looking at a system level, we note some deterioration of the asset quality on SMEs, right? I'm looking at Central Bank. I'm looking at the incumbents that already reported results. And I want to hear from you, Sal or Julia, if this is influencing somehow your going forward level of originations and especially the SME business, right? So I want to hear from you to get a point of this.

Thanks, Daniel. As I think we mentioned in the last few calls, we still continue with a very conservative approach on the SME credit lines focused on the collaterals. The most part of our portfolio is supply chain finance and credit card receivables. We still maintain the strategy. As our business banking activity grows with that, we have been getting more significant data -- we are building out our models for, let's say, riskier lines of credit or more clean credit, but we have not grown them significantly. So we have not seen this deterioration basically because of the segment that we're in or the products we are in. But we still continue with the plan that over time, we will continue to grow the business in these product lines, which, as you mentioned, are more volatile, a bit more risk, but also have higher spreads. But we are not there yet. But we are confident that it's a matter of time, but we are in no hurry, especially in a more difficult environment, as you mentioned, which we can see from the macro numbers.