Earnings Call: Q3 2018

Nov 6, 2018

Slides

Good morning, and welcome to the Third Quarter of 2018 Results Conference Call of Banco BTG Pactual. With us today, we have Roberto Saluti, Jona Dantas, Pedro de Raucha Lima. We'd like to inform you that this event is being recorded and 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. Today, we have a simultaneous webcast that may be accessed through the website at www.btgpac2l.com/ir. There will be a replay of this call from November 6 through November 12. 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 and as such are based exclusively on the expectations of Banco BTG Pactual's management concerning the future of the business. Such forward looking statements depend substantially on changes in market conditions, government regulations, competitive pressures, the performance of the Brazilian economy and the industry among other factors and risks disclosed in Banco BTG Pactual's filed disclosure documents and are therefore subject to change without prior notice. Now I'll turn the floor over to Mr. Roberto Salute, who will begin the presentation. Mr. Salute, please go ahead. Thank you very much. Good morning to everybody attending. If we could please start on the Page 3 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 client franchises. We're specifically very satisfied with the growth of both our wealth 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 Q3, 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. And not only is the B2C the direct platform to clients directly, but also the B2B platform, which will be servicing independent financial advisers ready. So we do expect that growth in this platform will accelerate over the next quarters, and this will be reflected in our wealth management numbers. 3rd 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 non NPL business having very solid performance, where we had a 32% growth in revenues from the previous quarter. And finally, during Q3, the same has 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 bar that we ever reported. And this led to another weak quarter of results in sales and trading. Turning to Page 4, we talk a bit about the numbers of Q4, Q3. We have total revenues of BRL1.255 billion and adjusted net income of BRL685 1,000,000. This gave us an adjusted return on equity of $14,300,000 for the quarter. And as we are showing in the previous quarters, if we only take the amount of capital that is allocated to Banco Dit de Chapacral, excluding the amount of capital allocated to ESG or Banco Ditur, it was an 18.3 percent return on equity for the quarter. We had a net income per unit of 0 point 7 8 dollars Cost income and comp ratios has basically stayed a bit above historical average, but significant. We had cost to income ratio of 47% and comp ratio of 22%. And we finalized the quarter with total assets of billion, a Basel ratio of 17.8 percent and shareholders' equity of BRL19.3 billion. We also during Q3 paid interest on capital distributed this to shareholders of BRL592 1,000,000. Turning to Page 5, we see the results for the 1st 9 months of 2018. And here we had revenues of BRL3.8 billion and net income of BRL2.03 billion. Similar to Q2, this gave us an annualized ROE of $14,400,000 for the 9 month period. And excluding the capital allocated to ESG and Bancooper, a annualized return of 18.6%. Cost income ratios were very similar as Q3. Cost income 46%, comp ratio 22%. And as stated previously, we finished the quarter at €19,200,000,000 equity. If you look at Page 6, we have the breakdown of revenues of the different business units. And what you can see here and what you're seeing quarter after quarter is the growth of our client franchise businesses and of credit in the composition of revenues. We expect this trend to continue throughout the next quarters. And finally, on Page 7, it's what I mentioned previously. Here we are showing the regulatory capital allocated to each of the financial institutions that we have under DTG Pactual and the ROE to this capital allocated. So for Q3, we had for BTG Pactual core business 18.3% return, for Bancooper 6% return, and EFG was flat basically because EFG reports results once a semester. So in Q4, we will show here the equity pickup of the whole 2nd semester and this will then give the return on equity for the capital allocated. So with this introduction, I'll pass the floor to Jean Bertas, who will talk about each of the listed units. Thank you, Roberto, and thank you all in the call. We'll turn to Page 9 and start here to do the drill down and the performance of our businesses. As we mentioned and you will see throughout the presentation, the performance has been marked by strong performance on client activities and weak performance regarding markets and we'll see the details of that. So starting with Investment Banking, our revenues in the quarter were BRL58 1,000,000 And this is basically activity from DCM. We saw in throughout LatAm, especially in Brazil, very weak activity in equity, therefore markets and M and A in general. But this was an excellent year for our BBB franchise. For the Q3, the need for emerging markets in LATAM as we saw it has been more volatile and this has 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 every month, especially hard currency funds. And this is reflective of flows for EM in general and is reflective of the risk off environment and more volatile environment that we saw throughout the quarter. Naturally, as we see elections coming through completion in the region, so we have the Mexican election, we now have the Brazilian election. Today, we have the midterm elections in the U. S. All these will can certainly impact that trend of more volatile week flows in emerging markets and it will be interesting to observe development in capital markets until the end of the year. Finally, our market position remains strong. For the 9 months period of 2018, we are number 1 in number of transactions in Latin America in M and A, number 2 in Brazil and number 1 in Latin America for ECM. So this gives us the ability to maintain comfortably our leadership position in investment banking to our platform. So moving to Page 10, the corporate lending results. So our revenues reached BRL311 1,000,000, and our corporate lending portfolio remained flat in BRL26.1 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. So the new credits that we issued that replaced those that matured in the quarter were issued at the marginal need for provisions lower than those that matured. So small part of the contribution from these provisions and also strong contribution of reversals of pre existing provisions relating to credits that were being renegotiated and those renegotiations as they were success during the quarter, we captured also the benefit from reversal of provisions. Also strong provision 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 counter parties. 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. And that was a very strong contributor for the quarter. NPL is not an accrual business. So there are quarters where we don't capture significant revenues from that business. But in the present quarter, we had quite interesting results coming from renegotiation of guarantees, renegotiation and down payment from clients. So this has contributed to the strong BRL311 million of revenues from corporate lending. Finally, the core seller growth as we saw, as we've been seeing throughout the quarters for the last 12 18 months has failed. We saw that many of the decisions from our counterparties to take credit were being postponed during the Q3, perhaps as we discussed for Investment Banking. For the Q4 we may see more activity resuming in corporate lending as well. Moving to Page 11, now we have sales and trading. And as you can see, we have R224 $1,000,000 of revenues in the quarter, which was the lowest quarter of the previous of the year and lowest as well compared to the Q3 of 2017. Revenues decreased in sales and trading in most of our brokerage and flow back and not only in Brazil, but across LATAM. The Q3 was marked by the risk off and volatile attitude of clients markets across global emerging markets that in particular follow-up on. And as a result of that market environment, we see lower balance sheet utilization for financial and risk intermediation. So the balance sheet utilization has been reduced significantly and therefore our VAR reduced about 25, our VAR utilization reduced 25% in the quarter from 0.40% of our average equity to 0.30% of our average equity. And also our BIS ratio increased to 17.8%. Moving to Page 12, and here is one of the highlights of the client of our performance with our client franchise, which is asset management. AUM reached BRL184.2 billion coming from a year ago, a level of BRL 130 6,800,000,000. So this is a 34.6% increase year on year on assets under management, driven basically by strong menu money. This is truly organic growth. So 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. So the net new money was the main driver and the net new money is a consequence of number 1, the stable environment for interest rates, stable in Brazil at 6.5% nominal, which has been pushing, 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. And also among the asset classes in which we manage assets, we have been performing our asset management business has been performing very well. So the top tier performed in the period. So both the numbers 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 BRL84,400,000,000 of wealth under management to BRL115,500,000,000 wealth under management, which is a 30 6.8% growth year on year. Also driven by strong menu 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 annual money and continue to see our competitive position in Latin America markets to remain strong and in growth mode. And moving to Page 14, here we have principal investments where our revenues reached BRL211 1,000,000 with BRL220 1,000,000 contribution from merchant banking portfolio. This is the 3rd consecutive quarter where we have positive contribution from merchant banking portfolio. This is, of course, a function of us having significantly completed our rebalancing. So our merchant banking teams have been working a lot for the past couple of years in rebalancing our portfolio. And as we see positive contribution from the assets that we hold, we see that this rebalancing was successfully completed. Now 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, a negative 5,000,000 dollars in the quarter, which for a difficult market for trading is quite adequate results. And in real estate, we have nothing to report. The 4,000,000,000 negative is just the cost of funding of the real estate portfolio. As you typically see, when there is no realization events in our real estate portfolio, we typically will capture just the cost of funding quarter on quarter. So moving to Page 16, some of the expenses and efficiency ratios. For the Q3 of 2018, as you can see, our cost income ratio was 47%. For the 9 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 and expense that we have is goodwill and motivation. As you know, we typically amortize goodwill in any asset that we acquire until goodwill disappears typically in 5 years' time. And if you adjust for that expense and some also some legal fees that are nonrecurring, Our cost income ratio for the quarter would have been 36% and for the 9 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. And it's important to highlight that we have been gaining efficiency and became and are operating the bank with a more efficient CIR regardless of the fact that we've been investing in the build up 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 and L, so they've been expand through P and L. So we don't accumulate CapEx as we build this digital platform. And as you see, we move to a more efficient CIR, which means that the benefit that the investments we've been doing to build the digital platform has also already been benefiting our efficiency overall for the other client platforms, I can quote, wealth management, asset management, credit and others. So this is 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. So we went from BRL56 1,000,000 in the 2nd quarter to BRL88 1,000,000 in the 3rd 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 a deal before in Sao Paulo and now we've agreed to that same possibility of tax amnesty in Rio, which increases, but just on a one off basis, the tax charges in the quarter. And finally, effective income tax rate of 18 point 6% for the 9 month period. This is reflected of basically our payment of tax deductible dividends called JCP and we've been using that throughout the year. Moving to Page 18, there's a little bit of balance sheet analysis. Our total assets have reached BRL163.9 billion, 4% increase from last quarter, which puts us at 8.5x assets to equity leverage ratio. As we have said before, we've always operated the bank between 10 12 times assets to equity in terms of leverage ratio. So the currency level of $163,900,000,000 of assets still allows us to continue to grow our assets and grow our business throughout 2019, you can 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. So also wealth management credit has not grown. It was stable during the quarter. Credit quality also remained stable and spreads also remained stable. Moving to Page 20. Unsecured funding days have expanded 10.9% quarter on quarter from BRL30.4 billion to BRL34.8 billion. This growth was basically driven by time deposits and securities issued. These are deposits and transactions, funding transactions done essentially in Brazil, but also in Chile, where our investment banking franchise is growing. And 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. And we will continue to grow our unsecured funding base regardless of not having grown the credit portfolio because which keeps us with dry powder to take advantage of the opportunity to grow the credit business during the next year. And finally, Page 21, As we mentioned, dollar ratio has expanded to 17.8% and far as a percentage of average equity was reduced in the quarter to 0.3%. So these are our remarks and we're glad to take your questions. Thank you very much. Today's first question will be from Carlos Rafeala with Goldman Sachs. Please go ahead. Thanks. And Roberto, Jean, a couple of questions here. First, you had an opportunity that is part of the Petro Africa stake with the recent Petrobras deal. And you chose to keep the stake you had. And I know you explained that these are 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? And I'm not specifically meaning just the principal investments that you have, but also some of the participations that the EFG investment, ACTP 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 the negative to be a lot more opportunistic in nature? 2nd question, could you give us more color on VTE Digital? You mentioned how it's helping your expenses. Could you talk about the revenue side, if there are any contributions, there are contributions to the net new money that you've been adding to your funds and both in the wealth management, asset management side and other factors? Thank you, Marcelo. So on your first question about divestments, I think it is very important that we separate what are the legacy principal investments for more of our investments in financial companies. So with regards to the legacy principal investments, we basically have 2 assets, the Petro Africa and the Neva. 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. So Petro Africa, the consortium led by Vitol, proposed a structure where Petro Africa 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. So basically, it has become a fixed income transformed in many senses of fixed income assets. And so that's as shown with this analysis, we thought it would be best for us to keep. And the same thing with Enel, we could go and do a block, but we are very optimistic with how the company is performing. And so we think we can be patient about doing that block eventually whenever we think it is fairly priced. And it's the same thing for Petrobrasco. With regard to the participation in financial companies, ECPP, yes, at some point over the next quarters, we expect ECPP to buy back its 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 pumps and DSG, these are financial businesses and 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. But I would consider these 2 assets on 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. And as you have noticed, Wealth Management has been very strong. Naturally, part of this is because Wealth Management itself has been doing very well, but 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 personally we can discuss and we are open to be convinced otherwise. But at this point, we're not really implying to give up what we consider strategic information about the business. Okay, perfect. Now we can just color to understand if it's going according to what you've been the plans that you've laid out when you kicked it off? It's slightly ahead of the plans of when we laid it out. Okay, great. Just going back to the first question, I mean, thank you for separating and showing us the ROE for excluding Banco Pan and EFG. But if I'm correct me if I'm wrong, but having these cross ownerships in financial companies also increases the amount of capital you have to hold in the bank. And if you were to adjust for that, the ROE that you would generate within the total PPE by 12, it would be even higher than the 18% that you reported for the Q3. 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 a capital that's more adequate to what you do in the bank, put it that way, you would have like an 18% Tier 1 or common equity Tier 1 ratio? No, no, no. We would have an 18% return on equity. Okay. But just so the adjustment that you made here or what you considers the fact that the excess capital that you hold in order to offset these financial investments would be paid off as dividend. Is that correct? Or is that in the That is correct. That is the exercise we did. And also very important to mention is that we are very optimistic with both Bancooper and with ESG. ESG has been going through the integration of the turbines, BFI and ESG, 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 covered 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. So we think that will start being accretive to our ROE. And the same thing with Banco Perna. Banco Perna released the results yesterday. It's going through a very significant digital transformation. It has also focused a lot its business. And it's reporting, if you take out the legacy, it's currently at around a 15% return on equity taking out the legacy. And we think that the 15% will grow and that over time, the legacies will end. So we're also optimistic with Banco Plan becoming more and more accretive to the total ROE of the group. Fantastic. Thank you so much. Thank you. This time, it seems like there are no other questions. I'd like to conclude today's question and answer session. I'll now turn the floor to Mr. Roberto Saluti 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 few months where we can discuss the full year results. So 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.