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, and all participants will be in a listen-only mode during the bank's presentation. After Banco BTG Pactual's remarks, there will be a question and answer session for investors and analysts, when further instructions will be given. Should any participant need assistance during this call, please press star zero to reach the operator. Today, we have a simultaneous webcast that may be accessed through the website www.btgpactual.com/ir in 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 three, where we start with the highlights of the third quarter of 2023. 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 reais, not 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 continued 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 four, we give a bit more details on the highlights. So we had revenues of BRL 5.7 billion, growing 19% year-over-year, and 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 five, we had BRL 59 billion of net new money, BRL 28 billion in asset management, BRL 31 billion 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 six, 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 billion, a 24% year-over-year growth.
We got back to growing our SME portfolio as we felt more comfortable with the market conditions, with SME portfolio reaching BRL 18 billion. In page seven, 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 BRL 0.72. As we continue to benefit from operational leverage in our platform, we had a cost income below our historical average, an adjusted cost income for the quarter of 38.2%, and we finished the quarter with total assets of BRL 497 billion. And we had 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 VaR for the quarter of 33 basis points, compared to 46 basis points in the previous quarter. Moving to page 8 and talking about the performance in the first nine months of 2023. We had revenues of BRL 15.9 billion, net income of BRL 7.57 billion, return on equity of 22.4% for the nine-month period, net income per unit of 1.99, for the period. We also had, for the first nine months, a cost-to-income below historical average, 38.9%. We had an increase in shareholders' equity of 13.7%-13% in the period, once again, closing at BRL 47.8 billion net equity.
For the first nine months of the year, we had a VaR of 36 basis points of equity, pretty stable compared to the previous, the nine months of 2022, which was 35 basis points. If you turn to page nine, 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 will believe 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 each of the 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 2023, and a 12% increase when we compare to the third quarter of 2022. 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 August and September, bringing overall ECM revenues during the quarter to a small decrease when we compare to the second quarter of 2023. 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 reach 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 2022. Our credit portfolio reached BRL 160 billion, which represents a 4.4% increase during the quarter and a 24% increase when we compare to the third quarter of 2022. Important to highlight here that after a reduction of our SME portfolio during the first quarter of 2023 and maintaining it stable throughout the second quarter of 2023, 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.
Also, related to our SME business, we are proud to say that we were 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 VaR allocations. Revenues reached BRL 1.456 billion, which is a decrease from the very strong level of the second quarter, but to the similar level of the first quarter of 2023. 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 managing money inflows. 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 2022. 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 2022.
We see that despite the pressure in the overall asset management industry throughout this year, we continue to grow both our managed funds and also our fund administration business, with strong and consistent annual money inflows, reaching this quarter at BRL 28 billion in new money. 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 very consistent and strong annual money inflows. Revenues reached BRL 792 million, which is a 9% increase when we compare to the second quarter of 2023, and a 21% increase when we compare to the previous year.
Annual money reached BRL 31.3 billion, which is very consistent with the annual money 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 666 billion, which is a 6% increase when we compare to the previous quarter, and a 31% increase when we compare to the third quarter of 2022. And in October, we announced the acquisition of Órama, 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 participations, we recorded total profits 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 participations. First, we had a BRL 52 million profit from Tu Seguros, 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 2023. And finally, we see the components of Banco PAN, with BRL 132 million coming from our stake in Banco PAN, the stake, the quarterly profit of Banco PAN.
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 profits. And in principal investments, we recorded revenues of BRL 48 million, which is a decrease when we compare to the previous quarter, when 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.
As a consequence, our cost income decreased to 38.2%, but we reduced to BRL 203 billion as we completed the amortization of some of our previous investments. Our income tax rate remained stable at 20.3%, and was mostly impacted by interest on equity, the 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 remains stable at 166%, as our unsecured funding base continues to grow in line with our credit portfolio. 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 2022.
The retail component of our funding remains stable at 32%. In August, we successfully issued another series of our BTG Commodity CRA. We issued BRL 3.5 billion for a 10-year maturity at very favorable levels. With this new series that we managed to distribute, we reached BRL 7 billion in distribution of this of this instrument in the last two months. Finally, going to our Basel 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%. This increase came as a consequence of three major components. First is the reduction of risk, as we can see, by the reduction of R.
Second is the change in the regulatory calculation of risk-weighted assets that was effective as of July 1st, and also the issuance of subordinated debt that I just mentioned. So these are the major components of the Basel increase of 200 basis points. And as I mentioned, 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.
The floor is now open for questions from investors and analysts. If you have a question, please press star one on your touch tone phone at this time. If at any point your question is answered, you can remove yourself from the queue by pressing the star and then the two button. Questions will be taken in the order that they are received. We would ask that you please pick up your handset when you ask your question in order to ensure optimum sound quality. Please hold while we poll for questions. The first question today comes from Renato Meloni with Autonomous Research. Please go ahead.
Hey, good morning, everyone. Thanks for the time here. So, two quick questions. Can you give us some more color on what's driving the growth in SME lending? Maybe you can mention if it's 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.
Thank you, Renato. So SME lending, we, we went back to increasing both the supply chain financing as well as a bit as the 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 have, has come from the business lines which we 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 or picture. So it's just a consequence of the central bank methodology, but over time, it might take a while, but they will...
We expect them to converge to the, let's say, the historical pattern.
Okay, thanks.
The next question comes from Yuri Fernandes with JP Morgan. Please go ahead.
Hello, everyone. Good morning. I have a question on participation. This quarter, EFG was pretty strong on revenues. I was checking the past quarters, and sometimes it is a little bit volatile. So, I would like to understand how EFG revenues recognition work, just to understand how to expect this for the further quarters. And regarding the portfolio acquisition, it was is likely less than last quarter. So just to understand also the strategy behind PAN. BTG has a lot of capital. You just issue Tier 2 notes recently, the cross. So how to think about should we continue to see, you know, 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.
Thank you, Yuri. So on EFG, they report every semester. So they don't report quarterly. That's why it's that 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 PAN, as we said previously, we think it's a very healthy way to grow and diversify our credit portfolio. We do expect, Banco PAN to reduce the sales, of portfolios that they will do next year. So probably, maybe this quarter, they 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 PAN'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 famous where should we see your ROE is evolving? In the past, you used to have ROE adjusted by Banco PAN on your presentation, and if I'm not mistaken, the last quarter was a 25% ROE adjusted. I don't see, so just checking, what would be your ROEs if they 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 Itaú wholesale with 28. When we look to your leverage, RWAs, loans, and things like that, you are still below.
So what is the path of ROE, your vision for BTG in the coming, not necessarily for the quarters, but like, in the coming years? I believe this level of ROEs should move up and where it should end. Thank you.
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 a portfolio from Banco PAN, where we had to disconsider, let's say, the gains of the portfolio at Banco PAN, we then just demonstrated that effect just to call people's 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, the adjusted ROE we have is only adjusted by goodwill. We just did this one-time demonstration to call people's attention, or one or two times, to call people's attention to this effect.
Regarding long-term ROE, we're going to have basically two things affecting our ROE. The first is, as we continue to gain operational leverage in our platform, this can be a function of, let's say, keeping our costs under control and our businesses 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 consider continue with the historical guidance we have on ROE. We continued last year. At the beginning of this year, we said we expected a growth in the ROE from last year, which is being delivered. We say we expect it to get to... We continue to expect gain on operational leverage, 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, not necessarily an ROE expansion, but ROE less leak, kind of like improving, right? The spread of ROE less leak, improving over time. That's the message, right?
Exactly. That's the message.
Perfect. Thank you.
Thank you.
The next question comes from Daniel Vaz with Safra. Please go ahead.
Hi, Roberto, Renato. Thank you for taking my question, and congrats on the results. On capital, I see you on a very comfortable position of capital, right? So and probably you willing to reduce VaR going forward. So could you remind me your target Tier 1 ratio, and what should be the most appropriate use of the surplus you have built, mostly on two points that you have built on this quarter? So if you could give us an appropriate use of this surplus, could be a good reference. Thank you.
Thank you, Daniel. 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, 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 like 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 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.
Thank you. And if I may, a quick follow-up. You mentioned acquisitions. We saw your acquisition of Órama last quarter. And what could be like, the most ideal profile of M&As that you're seeking actively right now? So anything more close to Órama or anything in any of another profile that we could expect? Thank you.
I think the two, two recent acquisitions we announced, both Magnetis and now Órama, exemplify what this could be. Magnetis was much more a, a functionality or a product, which we, we did not have, robo-advisory. And Órama 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.
Thank you. Super helpful.
The next question comes from Flavio Yoshida with Bank of America. Please go ahead.
Hi, good morning, everyone. 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 deals and transaction size on DCM, mainly, right? It's difficult to maintain the transaction size going forward, but if you could share some color here, I would appreciate. Thanks.
Thank you. Thank you, Flavio. 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 firm commitments that they did at the beginning of the year when market conditions were not so favorable, so they benefited from that. We do not-- 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 DCM. The M&A pipeline is very, very healthy, but these are bulky transactions, so it's very hard to anticipate when they will happen quarter over quarter.
DCM, 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, DCM 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 Q4. That's our, that's our best case for now.
Okay, thanks. 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 this net 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? Thanks.
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 advisors 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 Luxembourg. 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. It's a bit of all of the above as the investments we have in the platform, in products, and in marketing mature.
... Okay, that's great. Thanks.
The next question comes from Thiago Batista with Banco UBS. Please go ahead.
Hi, guys, good morning. I have two questions. The first one, on the lending business. We saw that the level of risk loans or loans rated between E to H went down a bit further in this quarter to something close to 2%. But if we exclude Americanas, this would be much lower, probably close to 1%. So this 1% would be probably the lowest level in the last 10 years of E to H. And clearly, when you look for the situation of companies in Brazil, the situation is not so good to show the lowest level of letters E to H. And because it is clearly posting a much better dynamics than the industry.
So if you can, comment a little bit on the trends, on, of asset quality that you, that you are seeing, on this company segment, and what, the bank did, to have this, good level of, of, loans rated between E to H? And my second question is a follow-up, on capital position. Can I continue, or do you prefer to, to answer and, and ask you, the second question after?
Go, go ahead. Go ahead.
Oh, okay, sorry, sorry for this. 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, since that is in the other way around, if I assume that our ROE of BTG will continue to be 20%+, and you already mentioned that the payout ratio will probably not increase, so assuming a payout ratio between 30%-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 allocate it every year, maintaining this ROE over 10%?
So let me answer the second question, and then I'll pass to Cohn to, 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 you 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 two quarters ago, how do I say?
Sometimes investors were a bit concerned that we did not have capital for the growth, and just two quarters that changed, that investors can be concerned that we have not enough opportunities for the capital. So I don't think it's not even one, not even 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 leverage. 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.
On the first question related to the levels of provisioning from E to H, 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 style 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 zero. While when you have corporate loans, it's 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 Americanas, which was a, I think, a significant case. You see a good recovery value there, that you can compare with other structures. So we need to be very careful when comparing very different types of portfolios. Our portfolio is a majority of large corporate loans with structures and different types of guarantees. That gives us the comfort to have these levels of provision.
Very clear. Thanks.
The next question comes from Tito Labarta with Goldman Sachs. Please go ahead.
Hi, good morning. Thank you for the call, and thank you for my question. Just have a follow-up on asset and wealth management. You know, the net new money there has been very resilient. Just how do you think about that in a lower interest rates environment? Do you think that there could be a significant acceleration from here? Just any color, is most of this net new money going, you know, I assume still to fixed income, and any color on, you know, different types of investments that, you know, 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, you know, 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. Thank you.
Thank you, Tito. So, definitely, if we move to lower interest rates, we think that would, that would benefit our asset and wealth management business. Of course, we saw that when interest rates increased, the pace 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, how do you say, period of our platform, right? We've matured it in terms of technology. We've matured it in terms of products. We've matured it in terms of developing the channels, which kind of answers your second question on the client acquisition cost, which is not... Most of our clients, net new money is organic now.
Of course, we continue investing in leads, we continue investing in 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 when 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 six years.
Okay, great. No, that's helpful. I mean, I think one thing, you know, we're seeing also a lot more competition for higher income clients, you know, from banks, other, you know, disruptive competitors, you know, 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 other? And also, not just thinking about from an investment perspective, but also as you expand sort of your banking offerings to those types of clients. Do you think that there's further room for upside 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 were 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 saw some of the players which were new, 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 irrational 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.
Okay, makes sense. Great. Thank you.
The next question comes from Gustavo Schroden with Bradesco BBI. Please go ahead.
Hi, good morning, everybody, and good morning, Roberto, Renato, and Julia. Thanks for, for taking my question. Congrats on the results. I wanna do a follow-up question about the ROE, especially because in the first answer, Roberto, you said that maybe the more relevant for ROE would be the spread between ROE and the Fed rate, right? And rather than we think about the ROE expansion. And just a curiosity here, because in my view, low interest rates would maybe improve your fee income business, like investment banking activities, also in wealth management.
In these lines, as it require, as they require less capital, maybe it is aware, that there would be more ROEs or high profitability. So, what am I missing here, to think that there would be room for ROE expansion, considering that the base case for everybody is that 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. Thank you.
Thank you, Gustavo. And in a nutshell, yes, you're right. 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%-9%, that would probably mean we would be able to, to, to go back to growing our, credit portfolio. That would probably mean more flows to asset management and wealth management. That would probably mean a more active investment banking and consequently, maybe even sales and trading businesses as clients would increase their activity. So the... That's why I said that we have to observe, how we are able to benefit from both operational leverage and the benefits that, that, and the businesses that benefit from lower interest rates at the same time as interest rates decrease.
We're not ready to give any guidance of what this would imply or at which speed we think that what's priced in the curve and how we will benefit on that. We don't want to create any, any false expectations. But of course, I have to agree with all of the qualitative points that you, you mentioned.
Okay, great. So maybe we can work up, I mean, the current level of ROEs 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, I'm not ready to give that guidance, but, if that's, that's the conclusion you come from the analysis, it's, it's, it is what it is.
Okay. No, thank you. Great. Thanks, and congrats on the results again.
Thank you.
The next question comes from Nicholas Riva with Bank of America. Please go ahead.
Thanks for the chance to ask questions. Most of my, my questions have already been answered, but I'm gonna 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 three and a half billion reais 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, you said, Roberto, that most likely you are gonna 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 pre-funded the call for the 2029s, but with that senior bond maturity early in 2025, at this point, what will be your plan in terms of accessing the international bond market next year? Thanks.
Thank you, Nicholas. 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, more effective to raise funding locally than to access capital markets, especially at these level of spreads. So of course, our desire is to have a curve, to be present, to be always on the, let's say, in 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 that 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.
Thanks very much.
Thank you.
The next question comes from Pedro Leduc, with Itaú. Please go ahead.
Thank you, guys, so much. Question on operating expenses. This one very contained this quarter, but we see more salary in adjustments. There was 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 as you're more mature in the investment cycle? Thank you.
... Thank you, Leduc. Of course, they 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 continuing 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 thus, we continue to expect having operational leverage.
But, and it's, 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. Thank you. And a bit of a broader question now, and you're obviously strengthening the year on a strong tone. And as we look into the next one, where do you think we'll see most of the growth between each of the business lines, and where you'll be investing the most? What are the priorities for next year? Just a glance. Thank you.
We still think the investment management franchises, asset and wealth management, will be the business sides 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 low base this year.
Very useful. Thank you.
The next question comes from Rafael Frade with Citi. Please go ahead.
Hi, guys. Good morning. Two questions here. One is related to DCM. You mentioned that DCM was record level for this quarter. I would like just to understand if all the revenues related to DCM are booked only investment banking or are also booking in other lines, just to remember here, because again, there's strong activity. Would like to understand it only impacted the investment bank or other lines. The second question would be related to payroll. You mentioned in the beginning that you expect Banco PAN to sell less portfolio for the next year, but I would like to understand, how do you see payroll as a whole, right?
If it makes sense to buy other payroll portfolios in the market, or it's really something much more related to Banco PAN than other thing. Thank you.
On your second question, I'll answer that, and I'll pass the first one to Paul to explain the details of how revenues are recognized. Yes, we are open to buying other payroll loans on the market. Actually, we have done that. You can see it in the consolidated 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 acquisitions from Banco PAN. So yes, we like the asset. We think it brings a good risk return and diversification to our credit portfolio. And on DCM, Cohn?
No, 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.
Okay, that's perfect. Thank you.
Thank you.
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 concluding 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.