Earnings Call: Q3 2022

Nov 8, 2022

Good morning, and welcome to the Q3 of 2022 Results Conference Call of Banco BTG Pactual. With us today, we have Roberto Solucci, Renato Cone, 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 Bunco, BTG Pactual's remarks, there will be a question and answer session for investors and analysts, where further instructions will be given. Today, we have a simultaneous webcast that may be accessed through the website, www.btgpaxual.com/irandtheplatform. There will be a replay facility for this call from November 8. Before proceeding, let me mention that this call may contain forward looking statements relating to the prospects of the business, estimates for operating and operating 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 BTG Pactuals and Banco BTG Pactuals filed disclosure documents and are therefore subject to change without prior notice. I will now turn the floor to Mr. Gilberto Salucci, who will begin the presentation. Mr. Salucci, you may go ahead. Thank you very much. Thank you all for joining the call. If you could please turn to Page 3 of the presentation. We're actually very satisfied with the results of this quarter. We had a very profitable quarter that was supported by record revenues and operational leverage of our platform. The investments that we've done in technology over the last 6 years has allowed us to enter new market segments, launch new products and we've been able to move along the J curve of these investments and that's exactly what you're seeing play out in our results as we're able to increase revenues faster than costs. And actually, we expect that over the next few quarters, we will continue we will be able to continue to increase the level of profitability as we continue to explore the synergies or the maturation of these investments that we've done over the last few years. So starting with the highlights of the quarter, our revenues grew 24% year over year, reaching R4.8 $1,000,000,000 Our net income grew a bit faster than revenues at 28% year over year to R2.3 billion dollars and in the quarter, we had a return on equity of 22%. That's a bit above what we reported in the 1st and second quarter as we see this operational leverage lay out. Turning to the next page, our assets under management reached BRL1.2 $1,000,000,000,000 in the quarter and we had another quarter of strong net inflows, achieving once again a record revenue in our Wealth Management business. So in the quarter, we had R63 $1,000,000,000 of net new money. And in the last 12 months, we had R250 $1,000,000,000 of net new money. Our assets and our wealth management business grew 27% year over year, reaching BRL509 $1,000,000,000 and our assets in the asset management and assets under administration business reached R665 $1,000,000,000 in the quarter. If you turn to the next page, we continue to grow our credit portfolio with very high quality and at the same time keeping very solid capital ratios and liquidity ratios, even though we did not grow so much our unsecured funding because we were having actually an inefficiency and having so much cash. So reduced a bit the rates that we were paying. But still, we are the most liquid bank in the S1 segment. So our corporate portfolio grew 33%, reaching R130 $1,000,000,000, dollars 21,000,000 of which in the SME segment. We continued with a Basel capital ratio of 15.2 percent with the total net equity a bit above R42 $1,000,000,000 and our unsecured funding base grew 17% to BRL170 1,000,000,000. On Page 6, we see a little more of details of the results of the 3rd quarter. I mentioned the highlights, but if we go into a bit more detail, we had total revenues of R4.75 billion dollars net income of R2.3 billion dollars return on equity of 22 percent and a net income per unit of $0.60 Our cost to income ratio continues a bit below our historical average at 38.1 percent with our comp ratio at 21.3 and we finalized the quarter with total assets of R440 $1,000,000,000 as mentioned previously, a capital ratio of 15.2 percent, equity of 42.3%, even after we distributed 1,200,000,000 of GCP or basically dividends interest on capital in the quarter. And our average daily VAR was still a bit below our historical average at 38 bps. Turning to Page 7, we talk about the results for the 1st 9 months of the year. We had total revenues of R13.6 billion dollars and net income of R6.54 billion dollars ROE for these 9 months at R21.9 billion dollars net income per unit at R1.71 dollars Once again, cost income ratio is a bit below historical average at 38.6 and comp ratio at 21.8 and our shareholders' equity increased year over year 16.6% and throughout these 9 months, we had an average bar of 35 bps. On Page 8, you can see the breakdown of the last 12 months compared to the previous 12 months of the different business units. You see a faster growth of our more stable, predictable businesses, more specifically, credit and asset and wealth management. And we see a very healthy distribution between what we can say are the corporate and investment banking businesses, the markets business and the investment management business, which gives us a very good combination of more stable, predictable businesses, businesses that use capital and businesses that don't use capital, which is why we're very confident that we can continue to present the same kinds of growth and profitability over the next few quarters years. Finally, on Page 9, we talk a bit about our ESG and impact investing achievements in the quarter. So we're very proud to have helped a client of ours, BRK, issue the 1st blue bond in Brazil, a R1.9 billion bond linked to sanitation. We increased our sustainable deposits by R1.2 $1,000,000,000 in the quarter, and we structured and distributed 2 green bonds, totaling 495,000,000 during the quarter, leading to a $2,500,000,000 issuance in 2022. So with that, I'll pass the floor to Renato Koln, who will talk a bit in detail about the performance of each of the business units, and then we can open up for questions. Thank you, Roberto, and good afternoon, everyone. So moving to our specific business lines, we start with our investment banking, where we had record revenues for both DCM and M and A. And as we've been calling the market attention, specifically in DCM, what we are seeing is a structural change. As we see a large number of companies that can now fund themselves accessing the domestic capital markets at a cheaper cost than international markets and having similar terms and maturity. So we see companies funding themselves for 5, 10 or even 15 years in the domestic markets. And we are obviously helping them to structure and also distribute those instruments, which is something that impacts not only in our Investment Banking business, but also in our Wealth Management and our sales and trading. So during the quarter, we recorded revenues of BRL525 1,000,000, which represents an 8% growth when we compare to previous quarters. It was also our best quarter for M and A revenues as we maintain a leading position in number of transactions with 18 transactions. There's also a leading position in the volume of transactions. And we continue to see also good pipeline to be executed in the next couple of quarters. In ECM, despite low market activity with only a few follow on transactions coming to market, we also kept our leadership position in both Brazil and in LATAM. And we believe that if equity markets continue to improve a bit, we can expect some IPO transactions in the Q1 2023. So in summary, very strong results for our Investment Banking with record revenues in TCM and in M and A and good pipelines as we maintain our leading position in the industry. Moving to Page 12 on Corporate and SME Lending. We had another quarter with record revenues as our portfolio continues to grow with the same quality. We recorded revenues of BRL937 million and our total portfolio grew to almost BRL130 1,000,000,000. Revenues grew by 46% year over year and 7% when we compare to previous quarter. Actually, that's we are registering the 4th consecutive quarter of record revenues in this line. So total portfolio grew by 33% when we compare it to last year and 10% during the quarter with most of the disbursements occurring during the last month of the quarter. So revenues will only fully kick in during the Q4 of 2022. Our SME initiatives continue to grow consistently with portfolio increasing by 8% during the quarter and 48% when we compare to previous years. And we are very proud to be named the best global SME bank by Global Finance, which is a recognition of what we build, the quality of our service and the exceptional work of all teams involved in the creation of our SMB business. Moving now to sales and trading on Page 13. We are also showing consistently strong results with higher contribution from our clients' activities. Our revenues reached BRL1.384 billion, which is higher than the previous quarter and also supported by the contribution from flow and commission based revenues as we continue to add more products and innovative solutions to our expanded client base. And similar to previous quarters, as Roberto mentioned, we achieved these results while we maintained our average bar below historical levels with 0.38% during the quarter. Turning to our asset management on Page 14. We had again strong revenue generation with consistent high inflows. So revenues reached BRL407 1,000,000,000, which is a similar amount to the previous quarter when we usually record performance fees. This represents a 40% increase when we compare to the Q3 last year and was impacted by higher management fees and administration fees as well as revenues from our investments in 3rd party asset managers. Assets under management and administration grew by 10% during the quarter, reaching a total of BRL665 1,000,000,000 supported by strong net inflows of BRL36 1,000,000,000 during the quarter and a total of BRL124 1,000,000,000 in in the last 12 months as well as some positive market performance. And we continue to see strong inflows for our managed funds, especially for our fixed income strategies and also some for our private pension strategies. And this is a consequence of the high interest rates currently. Moving to Wealth Management and Consumer Bank on Page 15. We had another quarter of all time high revenues and wealth under management, which actually is the 15th quarter of record revenues and also of wealth under management. So revenues reached BRL655 1,000,000, which is an increase of 60% year over year and almost 6% when compared to previous quarter. We recorded annual money of BRL 27,000,000,000, which is pretty consistent with the inflows recorded in the previous 2 quarters of 2022 and is a proof of our capacity to continue growing at the same pace despite a more challenging macroeconomic scenario. Wealth under management reached BRL509 billion, a 27% increase when compared to last year and a 10% increase when we compared to previous quarter. And over the past 12 months, we attracted a total of BRL126 1,000,000,000 as all our channels continue to perform and provide quality products and services to our clients. Going to Principal Investments and participations, we move to Page 16 and we can see that we had good performance in both lines. In principal investments, we had stable performances, which was partly offset by higher internal cost of funding as a consequence of higher interest rates. And in participations, we recorded profits of BRL 60,000,000 for Bancooper, and that is already net of a goodwill amortization of BRL37.5 million. Also 2 Seguros contributed with BRL36 million profit, while our participation in EFG added an additional €4,500,000 profit. Going to our expenses and main ratios on Page 18. We are showing improved efficiency as our top line grew at a faster pace than our cost base. As Alberto mentioned, we can see that our top line grew by 5.5%, while our expense rate grew by 4% comparing to the previous quarter. So total operating expenses reached BRL2 1,000,000,000, as I mentioned, 4% increase. And when we see that, we see that the largest impact came through higher bonus provisions, is a consequence of higher revenues from our business lines. When you look at salaries and benefits, we see a stable number. And when we look at administrative and other expenses, we see that they increased by 2.5%, while we continue to invest in our technology platform, launching new products, launching new features and improving the quality of service to our clients. Cost income ratio decreased to 38%, which is 1 percentage point below the previous quarters as we continue to gain efficiency here. And our effective income tax rate was 20.1%, impacted by the distribution of JCP, which is the interest on capital and a favorable revenue mix. Moving to our balance sheet. Our total assets on Page 20. Our total assets reached BRL440,000,000,000, which is a slight decrease from previous quarters and represents almost 10x our equity. Our liquidity coverage reached 3 73%, which seems to us an excessive number as we continue to expand our unsecured funding base and also its average term. We kept our comfortable coverage ratio at 174% as we continue to grow our unsecured funding base to support the expansion of our credit portfolio. And our corporate and SME credit portfolio now represents 3.1x our equity, so still very conservative, especially when we compare to years with 5, 6, 7 and sometimes 8x their equity. Going to our unsecured funding base on Page 21. We would like to highlight that we continue to expand the share of our retail funding base, which now corresponds to 26% for BTG Pactual standalone and to almost 30% when we consider Bancooper funding base. As we all know, this the retail funding is cheaper, is more stable and more diversified and will allow us to continue to expand our credit portfolio. Also, demand deposits continue to increase despite higher interest rates as retail becomes a larger part of our total funding base. And demand deposits grew by more than 60% during the last 12 months. And during this quarter, we issued BRL1.4 billion in subordinated notes, increasing our Tier 2 capital to 2 point 2 percentage points. And as we've been mentioning, we wanted to keep our base of ratios close to the level of 15% with a little more of Tier 2 capital, and that is what we achieved during this quarter. So speaking of our Basel ratios, if we move to Page 22, we can see that we capped it at 15.2% despite the strong growth in our credit portfolio during this quarter and the payment of interest on capital. Our VAR, as mentioned before, slightly increased to 38 basis points, which is still below historical levels and despite some increased market volatility. So once again, as we have been highlighting before, we can show that we can keep our growth momentum while we still maintain a strong balance sheet as most of our business lines do not consume capital, and we improved our profitability, and we continue to add to our capital base. So in summary, once again, we are very happy with this set of results. With all our business lines growing, we are still maintaining a strong and conservative balance sheet with improved profitability and operational leverage. So I'll ask, congratulation, if you have any additional remarks or we can go to questions. Thank you, Con. Let's open up for questions, please. Thank you. Today's first question comes from Gustavo Schroden with Bradesco BBI. Please go ahead. Hi, good morning everybody. Congrats on your results and thanks for taking my question again. I had two questions. And the first question is a follow-up about the ROE that we discussed in the Portuguese call. In my opinion, it's clear that high interest rates environment is positive for the bank. The bank is well diversified and then it is positive for the ROE. And if you assume that interest rates should continue high in 'twenty three, maybe this current level of ROE should be sustainable. My question is, when we see the interest rates going down, what could you do to keep the ROE at the same level in a lower interest rate environment? My question is what levers you can use to keep the ROE at this the same level in a lower interest rate environment? And my second question is about the common equity Tier 1. You mentioned that 12% to 13% is a good level to run the bank. My question is, what would be the low end growth that we should expect for the next year in order to see the common equity run around this level of 12% to 13%. My question is because we know that the loan growth is important to impact the Comenor Eka 2.1. So I'm trying to understand here what would be the loan growth level for the next year to keep the common equity one around this level? Thank you. Thank you, Gustavo. So on your first question on return on equity, I think you remember that at the Q1 of this year, we explained our theory that BTG was an all weather stock. Because even though interest rates would increase, that would probably have some effect on the speed of the net new money, some effect on investment banking, maybe some effect on sales and trading, but we always said that, that will be compensated by the growth that was already, let's say, expected and plus the higher interest rates. To keep ROEs at this level or to continue showing an increase in ROE as we benefit from operational leverage, as you said, knowing what the level of interest free risk free interest rates are is very important. So assuming interest rates will fall, we probably have to gain operational leverage at a faster speed or compensate this from a pickup in the ROAs of wealth management and asset management or compensate it with a high more increased activity in sales and trading. So we're quite confident that we need to see at the speed at which you have this fallen interest rates. But assuming that we have stable interest rates over the next 12 months, we would probably expect that we continue to benefit from operational leverage in our business and thus can creep up the ROE assuming that interest rates are stable. On the second question, of course, I think Tier 1, we think we can continue grow growing anywhere between 20% 30% the credit portfolio next year, and we don't anticipate with that any need for additional capital, but that will allow us to continue with this 12% to 13% core equity Tier 1, 2% to 3% Tier 2, keeping a total capital ratio a bit above 15%. Okay, Roberto. Thanks a lot. And our next question today comes from Cito Lombardo with Goldman Sachs. Please go ahead. Hi, good morning or good afternoon. Thanks for the call and taking my question. A couple of questions also. Maybe first on the sales and trading, you've looked 5 out of the last 6 quarters, you've been around like 1.3000000000, a bit of 1 point $3,000,000,000 $1,400,000,000 per quarter. Is this a new normalized level? I mean, as you continue to grow, I guess, particularly in Wealth Management and does that continue to boost sort of the sales and trading revenues that you get from client flows? How should we think about sort of sales and trading going forward? And then my second question, a bit of a follow-up to Gustavo on the loan portfolio. I think in the past you mentioned that you can grow to about 3x net equity. You're right around those levels. You did mention some of the incoming banks are closer to 5x to 7x. Will you increase your loan portfolio more than that 3 times equity? How should we think of it from that perspective? Thank you. Hi, Tito. Thank you for your questions. So on sales and trading, we actually think that the average of the last 4 quarters with some volatility around that number is actually a good estimate of what the recurrent business is. We continue to benefit from new products, for example, commodities related to agricultural products that we're launching, the increase in, for example, local corporate bonds as we penetrate new segments. So we have more SME clients, we have more high income retail clients. We, given the brand perception, even in large corps, we're having more multinationals. So the truth is the business is benefiting from all of this. And that's why we think that a good estimate is the average of the last 4 quarters with some volatility is a good level of what the normalized business is. On the credit, yes, you're right. We used to have this 3x equity as a guidance. But clearly, given that we've reached now 30% in retail funding, We're very confident with the level of the liquidity coverage ratios we have. Some of the growth actually in credit does not require funding. So we think we can explore new levels, maybe going up slowly to closer to the 4x equity, but we don't have any guidance on this. We'll continue growing as long as we see healthy opportunities for growth. We're not seeing any limitations to growth, neither on how much we're willing to have on the size, neither on opportunities in the market, given the diversification we have between corporate, large corporate, SMEs, special situations between Brazil, the rest of Latin America. This has made us very comfortable to continue growing and to maybe go slowly toward this 4x equity credit, but that is not a guidance. But let's say, you are right, we used to have the ceiling, but we feel comfortable that we can now increase the ceiling a bit. Great. Thanks, Roberto. That's very clear. A couple of follow ups, if I may. Just on the sales and trading, we have seen the VAR, the value risk has gone the last few quarters. Should this continue to trend higher? How should we think about the right level of that? And just follow-up both on the loan portfolio. Just following elections, the economy expected to slow a bit. Any either concerns, any opportunities that you see that can either hurt or boost the growth on the loan portfolio following the elections? I know it's early, but just initial thoughts. So on the sales and trading VAR, the truth is we were probably at a too low in the last end of last year, Q1 of this year. Activity has picked up, LIBOR picked up. Maybe we continue around these levels, maybe it increases a bit, decreases a bit. But clearly, it's not we don't anticipate growing, going to the levels that we had, let's say, 2 or 3 years ago of ours. So we think hovering around current levels, plus minus, let's say 10, 12 bps is a good estimate of our. On elections, it's still very clear. It's still unclear, as you said. We still have to understand what is the what will be the fiscal policy of the elected government and what are the implications for public debt and for, let's say, tax levels and how that affects corporates, we still need to understand what is the reform agenda of the next government and we need to understand what will be the plan for the public sector banks, for Petrobras and for concessions. As of now, we think good economic management will continue. Of course, a little shift here and there, given just the, let's say, the inclinations of the elected government. We continue to anticipate responsible economic policy. So in that sense, we don't anticipate at this moment changing our strategic guidance. Perfect. That's very helpful. Thanks, Roberto. Thanks, Tito. And our next question today comes from Thiago Baxista with Banco UBS. Please go ahead. Yes. Hi, guys. Good morning. I have one question about potential for inorganic expansion. Is there any area that would make sense for the digital to try and to expand through acquisitions? For instance, digital bank or a client company, do you believe that those type of segments should complement BTG Pactual current business? Thank you, Thiago. Yes, we are always analyzing potential acquisitions. As you know, we have a history of being quite active in that. We basically see 2 types of acquisitions, those that help us add or speed up new product offerings to our client base or those acquisitions that help us bring scale faster to our current businesses. So we continue to analyze these two opportunities. Of course, the recent market volatility, the more restrictive private equity and venture capital markets makes these opportunities become, let's say, happen more often. So yes, we're analyzing all this. Nothing transformational, but if there are acquisitions that we think complement our product offering or help us speed up time to market or help us bring scale to the current businesses at what we consider fair prices, we will definitely be looking into those. Thank you. And ladies and gentlemen, our next question today comes from Pedro Leduc with Itau BBA. Please go ahead. Good afternoon, guys. Thank you so much for hosting the call and taking the question. 1 on the Wealth Management division. And here, of course, more market challenges, net new money pace dipped below €30,000,000,000 Still remarkable under these market conditions again, but you also have probably the strongest or largest internal, external team that you've had in this past year. So I want to pick your brain a little bit on how you're feeling the size of this footprint given these market conditions? You believe that the investment cycle, at least the bulk of it now being slightly behind? And then a second question also on Wealth Management, remarkably resilient role, I know takeaways, revenues you make on your wealth under management, very good. I also wanted to get an idea from you from what is helping drive this stable take rates. You mentioned growing deposits, if it's maybe floating, if it's already penetration of other products than investments? Any color there would be much appreciated. Thank you. Thank you, Pedro. So on the net new money, we continue to we will continue to have investments, of course, in new bankers and new IFAs. But when you look at the percentage of investments to the first business, just because of the sheer size of the business, of course, it will reduce percentage wise and maybe even nominally, but we expect to continue to invest across the board. But the good thing is, and as you mentioned, the ROAs, the ROAs reflect a bit of the J curve. This J curve, the ROAs reflect a bit more of the client mix. So high income retail has a bit higher ROAs than the high ultra high wealth management segment, which was where we started our business of wealth management. As you bring in transactional banking to these clients that also allows you to have a new revenue pool. Sometimes when you bring in assets into your platform, these assets don't produce ROAs for a while, because let's say, it's a client that brings in a bond. So you have to expect the bond or the time deposit to mature for them to start generating ROAs. So it's the combination of all of these things, revenue mix, product mix, maturation of the resources that came into our platform in the past years that producing this ROA. Yes, we continue to continue investing, maybe not at the same pace percentage wise, at a similar pace nominal wise, but we're very satisfied with the whole externalities of having this whole complementary business of both allows us to have retail funding, also allows us to have retail distribution, and we think this reinforces the whole franchise of the bank. Any color on the floating or deposit contribution on that take rate? Of course, it increases as interest rate increases and deposits increase as we gather net new money. So yes, there is a contribution. This contribution increases percentage wise, let's say, in the gross ROA percentage wise with the level of interest rates naturally. But what we've seen is that it's more or less stable volume compared to total assets as we see the business grow. Thank you. That brings us to the end of the question and answer session. I will now return the floor to Mr. Roberto Salucci for his closing remarks. Well, thank you all once again for joining our call and thank you for your partnership and trust. We really look forward to having all of you once again the next quarter. Thank you very much. Have a great day. Thank you. This does concludes today's presentation. You may disconnect your line at this time and have a nice day.