Good morning, and welcome to the third quarter of 2018 results conference call of Banco BTG Pactual. With us today, we have Roberto Sallouti, João Dantas, Pedro da Rocha Lima. We'd like to inform you that this event is being recorded, that all participants will be in 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 then zero to reach an operator. Today, we have a simultaneous webcast that may be accessed through the website at www.btgpactual.com/ir. There will be a replay of this call from November sixth through November twelfth.
Before proceeding, let me mention that this call may contain forward-looking statements relating to the prospects of business, estimates for operating and financial results, and those related to growth prospects of Banco BTG Pactual. These are merely projections, 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. 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 to everybody attending. We could please start on the page three of the presentation. We would like to point out some of the highlights of the quarter. First point to mention is that we continue to deliver a very strong performance in our current franchises. We're specifically very satisfied with the growth of both our Wealth Management and Asset Management businesses, which are showing a 35% growth in the assets under management year over year. Also important to mention that at the end of the third quarter, we concluded the launch of BTG Pactual Digital, which is our retail platform. The platform is now 100% complete with all the products there to be acquired by clients. Not only is the B2C or the direct platform to clients directly, but also the B2B platform, which will be servicing independent financial advisors ready.
We do expect that growth in this platform will accelerate over the next quarters, and this will be reflected in our Wealth Management numbers. Third point to mention is the very good performance of our Corporate Lending business. Here, both of the large corporates and of our special situations or NPL business having very solid performance, where we had a 32% growth in revenues from the previous quarter. Finally, during Q3, the same as happened in Q2, we adopted a very conservative risk allocation policy. This can be seen in the average daily VaR, which decreased 23% from the previous quarter, and probably as a percentage of our equity, is probably the lowest VaR that we ever reported. This led to another weak quarter of results in Sales and Trading. Turning to page four, we talk a bit about the numbers of Q3.
We have total revenues of BRL 1.255 billion and adjusted net income of 685 million. This gave us an adjusted ROE of 14.3% for the quarter. As we are showing in the previous quarters, if we only take the amount of capital that is allocated to Banco BTG Pactual, excluding the amount of capital allocated to EFG or Banco Pan, it was an 18.3% ROE for the quarter. We had a net income per unit of BRL 0.78. Cost income and comp ratios have basically stayed a bit above historical average, but nothing significant. We had CIR of 47% and comp ratio of 22%. We finalized the quarter with total assets of BRL 164 billion, a Basel ratio of 17.8%, and shareholders equity of BRL 19.3 billion. We also, during Q3, paid interest on capital distributed to shareholders of BRL 592 million.
Turning to page five, we see the results for the first nine months of 2018, here we have revenues of BRL 3.8 billion and net income of BRL 2.03 billion. Similar to Q2, this gave us an annualized ROE of 14.4% for the nine-month period, and excluding the capital allocated to EFG and Banco Pan, an annualized return of 18.6%. Cost-income ratios were very similar as Q3. CIR 46%, comp ratio 22%. As stated previously, we finished the quarter at BRL 19.2 billion equity. If you look at page six, we have the breakdown of revenues of the different business units. What you can see here, what you're seeing quarter after quarter, is the growth of the client franchise businesses and of credit in the composition of revenues. We expect this trend to continue throughout the next quarters. Finally, on page seven, it's what I mentioned previously.
Here we are showing the regulatory capital allocated to each of the financial institutions that we have under BTG Pactual and the ROE to this capital allocated. For Q3, we had for BTG Pactual core business, 18.3% return, for Banco Pan 6% return, and EFG was flat, basically because EFG reports results once a semester. In Q4, we will show here the equity pickup of the whole second semester, this will then give the ROE for the capital allocated. With this introduction, I'll pass the floor to João Dantas, who will talk about each of the business units.
Thank you, Roberto, thank you all on the call. Please turn to page nine, we start here to do the drill down on the performance of our businesses. As we mentioned, you will see throughout the presentation, the performance has been marked by strong performance on client activities and weak performance regarding markets, we'll see the details of that. Starting with Investment Banking, our revenues in the quarter were BRL 58 million, this is basically activity from DCM. We saw throughout Latin, especially in Brazil, very weak activity in ECM and M&A in general. This was an excellent year for our DCM franchise. For the third quarter, the mood for EM in Latin, as we saw it, has been more volatile, this was reflected in, as I said, the activity in capital markets.
In the quarter, we observed very weak flows into equity funds dedicated to emerging markets. Some flows still resilient for fixed income funds in investment in emerging markets, especially hard currency funds. This is reflective of flows for EM in general and is reflective of the risk-off environment, a more volatile environment than we saw throughout the quarter. Naturally, as we see elections coming to completion in the region, we had the Mexican election, we now have the Brazilian election, today we have the midterm elections in the U.S., all these can certainly impact that trend of more volatile and weak flows in emerging markets, and it will be interesting to observe developments in capital markets until the end of the year. Finally, our market position remains strong.
For the nine-month period of 2018, we are number 1 in number of transactions in Latin America in M&A, number 2 in Brazil, and number 1 in Latin America for ECM. This gives us the ability to maintain comfortably our leadership position in Investment Banking throughout Latin. Moving to page 10, the Corporate Lending results. Our revenues reached BRL 311 million, and our Corporate Lending portfolio remained flat in BRL 26.1 billion quarter-on-quarter. Basically, this reflects for Corporate Lending, it's a normality. It's been a quite normal quarter where revenues were benefited from lower new provision expenses. The new credits that we issued that replaced those that matured in the quarter were issued at a marginal need for provisions lower than those that matured.
A small positive contribution from these provisions and also a strong contribution of reversals of preexisting provisions relating to credits that were being renegotiated and those renegotiations as they were successful during the quarter, we captured also the benefit from reversal of provisions. Also a strong contributor was the NPL portfolio. It comes from our special situations business. Our special situations business is more than just non-performing loan. It encompasses provision of services to counterparties. There are sometimes consulting fees that can be captured. There's a multiple discipline business where we act not only as takers of NPL portfolios, but we do much more wide activity. That was a very strong contributor for the quarter. NPL is not an accrual business. There are quarters where we don't capture significant revenues from that business.
In the present quarter, we had quite interesting results coming from renegotiation of guarantees, renegotiation and down payment from clients. This has contributed to the strong BRL 311 million of revenues from Corporate Lending. Finally, the portfolio growth, as we've been seeing throughout the quarters for the last 12, 18 months, has scaled. We saw that many of the decisions from our counterparties to take credit were being postponed during the third quarter. Perhaps as we discussed for Investment Banking, for the fourth quarter, we may see more activity resuming in Corporate Lending as well. Moving to page 11, now we have Sales and Trading. As you can see, we have BRL 224 million of revenues in the quarter, which was the lowest quarter of the year and lowest as well compared to the third quarter of 2017.
Revenues decreased in Sales and Trading in most of our brokerage and flow desks, not only in Brazil but across LatAm. The third quarter was marked by the risk-off and volatile attitude of clients in markets across global emerging markets, but in particular fall upon. As a result of that market environment, we see lower balance sheet utilization for financial and risk intermediation. The balance sheet utilization has been reduced significantly, therefore our VaR utilization reduced 25% in the quarter from 0.40% of our average equity to 0.30% of our average equity. Also our BIS ratio increased to 17.8%. Moving to page 12, here is one of the highlights of our performance in our client franchise, which is Asset Management. AUM reached BRL 184.2 billion, coming from a year ago, a level of BRL 136.8 billion.
This is a 34.6% increase year-on-year on assets under management, driven basically by strong net new money. This is purely organic growth. Either clients of our asset management are investing more with us or new investors are becoming clients of our asset management franchise, which means it's purely organic growth. The net new money was the main driver, the net new money is a consequence of, number one, the stable environment for interest rates, stable in Brazil at 6.5% nominal, which historically is a low level of interest rates for the country and is driving our growth in terms of market share since the types of managed products that we offer to our clients are differentiated in terms of performance. Also amongst the asset classes in which we manage assets, our asset management business has been performing very well.
The top-tier perform in the period. Both phenomenons have helped us grow in market share and attract significant inflows as we see in the page 12. Moving to page 13, a similar phenomenon happens for our Wealth Management business. We grew from a year ago, BRL 84.4 billion of wealth under management to BRL 115.5 billion wealth under management, which is a 36.8% growth year-on-year. Also driven by strong net new money and very good performance, very good services are driving this growth in market share that we see for our Wealth Management business. We continue to receive significant inflows of net new money and continue to see our competitive position in Latin America markets to remain strong and in growth mode. Moving to page 14, we have principal investments where our revenues reached BRL 211 million with BRL 220 million contribution from merchant banking portfolio.
This is the third consecutive quarter where we have positive contribution from merchant banking portfolio. This is, of course, a function of us having significantly completed our rebalancing. Our merchant banking teams have been working a lot for the past couple of years in rebalancing our portfolio, as we see positive contribution from the assets that we hold, we see that this rebalancing was successfully completed. Going forward, regardless of having the opportunity to divest further from some of the assets we still hold, what we expect is that these assets will continue to perform adequately given the market scenarios. In global markets, we had a flat result of negative BRL 5 million in the quarter, which for a difficult market for trading is quite adequate results. In real estate, we have nothing to report.
The BRL 4 million negative is just the cost of funding of the real estate portfolio. As you typically see when there is no realization gains in our real estate portfolio, we typically will capture just the cost of funding quarter-on-quarter. Moving to page 16, some of the expenses and efficiency ratios. For the third quarter of 2018, as you can see, our cost income ratio was 47%. For the nine-month period year-to-date, our cost income ratio was stable at 46%. If you adjust, however, for non-recurring expenses and the main non-recurring expense that we have is goodwill amortization. As you know, we typically amortize goodwill in any asset that we acquire until goodwill disappears, typically in five years' time.
If you adjust for that expense and also some legal fees that are non-recurring, our cost income ratio for the quarter would have been 36%, and for the nine-month period, it would have been 38%. These levels of efficiency ratios are even better, lower than the average that we have presented in the past years. It's important to highlight that we have been gaining efficiency and are operating the bank with a more efficient CIR, regardless of the fact that we have been investing in the buildup of the digital platform that, as Roberto mentioned in the opening remarks, is now completed from an investment perspective. All these investments were done essentially internally with our technology support teams, commercial teams. We have applied significant effort and significant costs. All those costs have been flown through P&L, so they have been expensed through P&L.
We don't accumulate CapEx as we build this digital platform. As you see, we move to a more efficient CIR. Which means that the benefit that the investments we have been doing to build the digital platform have also already been benefiting our efficiency overall for the other client platforms. I can quote Wealth Management, Asset Management, credit and others. This is a quite interesting achievement, quite positive achievement that we like to highlight since we look forward to 2019 with the opportunity to gather more assets in the digital business without increasing the costs to run the bank. Also to mention an increase in the tax charges other than income tax. This is also a non-recurring increase. We went from BRL 56 million in the second quarter to BRL 88 million in the third quarter.
This is just due to the settlement in a process of tax amnesty that was provided by the Municipality of Rio, in which all the banks have been adhering to in Brazil. They have adhered before in São Paulo, and now we have adhered to that same possibility of tax amnesty in Rio, which increased, but just on a one-off basis, the tax charges in the quarter. Finally, effective income tax rate of 18.6% for the nine-month period. This is reflective of basically our payment of tax-deductible dividends called JCP, and we have been using that throughout the year. Moving to page 18, there is a little bit of balance sheet analysis. Our total assets have reached BRL 163.9 billion, a 4% increase from last quarter, which puts us at 8.5x assets to equity leverage ratio.
As we have said before, we have always operated the bank between 10 and 12 times assets to equity in terms of leverage ratio. The current level of BRL 163.9 billion of assets still allows us to continue to grow our assets and grow our business throughout 2019. We could see the opportunities to do that in markets. In page 19, we have the broader credit portfolio. The behavior here is pretty much in line with the Corporate Lending portfolio. Also Wealth Management credit has not grown. It was stable during the quarter. Credit quality also remains stable and spreads also remain stable. Moving to page 20, unsecured funding base has expanded 10.9% quarter-on-quarter from BRL 30.4 billion to BRL 34.8 billion. This growth was basically driven by time deposits and securities issued.
These are deposits and funding transactions done essentially in Brazil, but also in Chile, where our Investment Banking franchise is growing.
With that growth, we have basically renewed and expanded our term for funding by issuing longer maturities in replacement of the credit that matured during the quarter. We will continue to grow our unsecured funding base regardless of not having grown the credit portfolio, because this keeps us with dry powder to take advantage of the opportunity to grow the credit business during the next year. Finally, page 21, as we mentioned, Basel ratio has expanded to 17.8%, and VaR as a percentage of average equity was reduced in the quarter to 0.3%. These were our remarks, and we're glad to take your questions. Thank you very much.
The floor is now open for questions from investors and analysts. If you have a question, please press star then 1 on your touch-tone phone at this time. If at any point your question has been answered, you can remove yourself from the queue by pressing the star key followed by 2. Questions will be taken in the order they are received. We'll ask you to please pick up your handset when you ask your question in order to ensure optimum sound quality. Please hold while we poll for questions. Today's first question will be from Carlos Macedo with Goldman Sachs. Please go ahead.
Thanks. Hi, Roberto, João. A couple of questions here. First, you had an opportunity to divest part of the PetroAfrica stake with the recent [Vitol-led] deal. You chose to keep the stake you had, and I know you explained that you expect the performance to be solid going forward. A more general question on your investments and how you look at them. Is there a timetable specifically for you to sell down from any of these investments? Is it going to be opportunistic? Is there some kind of deadline? I'm not specifically meaning just the principal investments that you have, but also some of the participations that, the EFG investment, the ECTP investment, ultimately even the Banco Pan investment, if that's the case. Is there something that, a plan that you set out or is it going to be a lot more opportunistic in nature?
Second question, could you give us more color on BTG Pactual Digital? You mentioned how it's helping your expenses. Could you talk about the revenue side, if there are any contributions to the net new money that you've been adding to your funds and both on the Wealth Management, Asset Management side and other factors? Thank you.
Thank you, Macedo. On your first question about divestments, I think it is very important that we separate what are the legacy principal investments from what are investments in financial companies. With regards to the legacy principal investments, we basically have two assets, PetroAfrica and Eneva. We basically had the opportunity to divest of both of these assets, and we have decided not to divest because we think that they will be accretive to our positions as part of just our regular trading business. PetroAfrica, the consortium led by Vitol, proposed a structure where PetroAfrica becomes a much more stable and financially predictable company, basically using a lot of hedging to reduce the volatility of oil price, improving the capital structure, allowing it to pay dividends quicker, and also not having any new exploration or development of fields.
Basically, it has become a fixed income transform, in many senses, a fixed income asset. Thus, also with this analysis, we thought it would be best for us to keep. The same thing with Eneva. We could go and do a block, but we are very optimistic with how the company is performing, we think we can be patient about doing a block eventually whenever we think it is fairly priced. It's the same thing for PetroAfrica. With regard to the participation in financial companies, ECTP, yes, at some point over the next quarters, we expect ECTP to buy back the share of equity which the bank still holds, which is below 20% and very small, which has come, I believe, from 40%, if I'm not mistaken, and we expect that to continue.
With regards to PAN and EFG, these are financial businesses. We expect to keep them, as long as we can see. If at some point you have an investor interested or a very attractive offer, we can consider. I would consider these two assets in a very different category than the ones that I mentioned previously. With regard to your second question, on Digital, we are intentionally not giving out many details. We are reporting it within our Wealth Management numbers. As you have noticed, Wealth Management has been very strong.
Naturally, part of this is because Wealth Management itself has been doing very well, also because it has been getting increased contribution from the new retail business, be it the B2C or the B2B business. We do not plan to report this separately as we think this would be much more market intelligence to our competitors than necessarily very accretive to investors. Naturally, when we meet personally, we can discuss and we are open to be convinced otherwise. At this point, we were not really inclined to give up what we consider strategic information about the business.
Okay, perfect. Now we can just cover to understand if it's going according to the plans that you've laid out when you kicked it off.
It's slightly ahead of the plan of when we laid it out.
Okay, great. Just going back to the first question, thank you for separating and showing us the ROE for excluding Banco Pan and EFG. Correct me if I'm wrong, having these cross-ownerships in financial companies also increases the amount of capital you have to hold in the bank. If you were to adjust for that, the ROE that you would generate within the Banco BTG Pactual would be even higher than the 18% that you reported for the third quarter. Is that a correct reading?
No, it would be exactly the 18%.
If you were to adjust the capital, in other words, if you were to pay a dividend to get to
Yeah
a capital that's more adequate to what you do in the bank, put it that way. You would have like an 18% common equity to one ratio.
No, we would have an 18% return on equity.
Okay. The adjustment that you made here already considers the fact that the excess capital that you hold in order to offset these financial investments would be paid off as dividends. Is that correct?
Correct. That is correct. That is the exercise we did. Also very important to mention is that we are very optimistic with both Banco Pan and with EFG. EFG has been going through the integration of the two banks, BSI and EFG, and it has been happening in what we consider in a very satisfactory manner, and we think that the integration costs will end as they have reported. I'm not saying anything that's not public here, will happen until year-end, and next year we will get clean results, which they are also reporting clean results, and the clean results will be the final results. We think that will start being accretive to our ROE. The same thing with Banco Pan. Banco Pan released the results yesterday. It's going through a very significant digital transformation.
It has also focused a lot its business, it's reporting, if you take out the legacies, it's currently at around a 15% return on equity, taking out the legacies. We think that this 15 will grow and that over time, the legacies will end. We're also optimistic with Banco Pan becoming more and more accretive to the total ROE of the group.
Fantastic. Thank you so much.
Thank you.
Once again, if you would like to ask a question today, please press star then one. Once again, to ask a question, star then one. Once again, to ask a question, please press star then one. At this time, since there are no other questions, I'd like to conclude today's question and answer session. I will now turn the floor to Mr. Roberto Sallouti for any closing remarks.
I would like to thank all of you once again for attending the call. Looking forward to meet all of you in around three months where we can discuss the full year results. Thank you very much and have a great day.
Thank you. This does conclude today's presentation. At this time, you may disconnect your lines and have a nice day. Thank you.