Good day, everyone. Thank you for waiting. Welcome to BR Partners' video conference call to discuss first quarter 2023 earnings results. We inform you that this video conference call is being recorded and can be accessed in the company's IR website, where you can find the full package of our financial disclosure. For the Q&A, we ask you to ask your questions via the Q&A icon at the bottom of your screen. After the presentation, your names will be announced. You can ask your questions live. A message to open your mic will be prompted on your screen. You can also ask your questions in writing.
We emphasize that the information contained in this presentation and forward-looking statements that might be made during the video conference relating to BR Partners' business prospects, projections, and operating and financial targets are based on the beliefs and assumptions of the company's management, as well as on information currently available. Forward-looking statements are not a guarantee of performance. They involve risks, uncertainties and assumptions as they refer to future events, and therefore depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions and other operating factors may affect the company's future performance and lead to results that differ materially from those expressed in such forward-looking statements. Today, we have the following officers present: Ricardo Lacerda, CEO, Marcelo Costa, CFO, Danilo Catarucci, Managing Director and Head of Capital Markets, and Vinicius Carmona, IRO. Now I will turn the floor to Mr.
Good day, everyone, and thank you for participating in our earnings video conference call to discuss first quarter 2023 results. The first quarter of 2023 again took place in a challenging environment for the financial markets. Nevertheless, we managed to show resilience, maintaining our profit and high profitability in the midst of major macroeconomic turbulence and turbulence in the corporate market of Brazil. We were able to maintain a healthy level of revenues and a good pace of activity in all our business lines. As we have already observed in previous quarters, in addition to the great fiscal uncertainties in the fiscal sphere, which already generates great uncertainty in the markets, the Brazilian corporate sector has been carrying a heavy burden.
The high interest rates in Brazil and the high cost of debt, besides being an obstacle to the realization of new projects, investments and innovation, is putting pressure on the results of companies. Cash generation is not being sufficient to generate deleveraging and, in some cases, not even to cover financial expenses. This, added to the two credit episodes of two large companies in the retail and energy sectors that occurred in the quarter, led to great damage and losses to creditors and investors and caused the market's perception of risk to increase, directly impacting spreads and creating a business environment with limited growth. In this adverse environment, investors and the business community have both spurned strategic decisions for growth and investment, which directly impacted the markets in which we operate.
At the same time, it is also the moment to be more creative and to be even closer to our clients, paying attention to opportunities. After all, some economic sectors are still very active and with opportunities for consolidation. Lastly, despite a more restricted market, we were able to once again show our capacity to navigate through adverse scenarios. We reinforced our operating leverage so as to be ready to seek more profitability and growth when the market shows signs of recovery, depending mainly on interest rate cuts. To start the presentation of the results, total revenue was BRL 102 million, up 3.9% quarter-on-quarter and down 4.9% year-on-year. Net income totaled BRL 33 million, decreasing 2% and 17% quarter-on-quarter and year-on-year, respectively. Quarterly ROAE remained at 17%.
Our Private Securities Portfolio and bridge loans reached BRL 1.7 billion, up 16% and 99% quarter-on-quarter and year-on-year, respectively. Regarding the operational highlights, in investment banking, we announced 11 deals from the beginning of the year to date, of which six were restructuring deals, an increasingly strategic and complementary pillar to the company's business. In capital markets, despite the major challenges mentioned earlier, we were able to find good opportunities and issued six debt operations totaling BRL 318 million. Now, in the next slides, we will comment on the results of our business units, starting on slide three with investment banking. Investment banking revenues totaled BRL 31 million in Q1, a reduction of 7% quarter-on-quarter and 24% year-on-year.
For a few quarters now, we have commented that the more challenging macroeconomic scenario has held back companies from making strategic moves, especially M&A.Which explains the drop in revenues. However, we had a very positive deal flow in the first quarter and participated in major deals, such as our advisory services to the Casino Group on the sale of their stake in Assaí in the secondary market. In addition, we continue to work with a good pipeline of deals in this first half, as there are opportunities for consolidation in some markets even though we are not in a bullish market. I would like to call your attention to the consolidation of our positioning in special situations and restructuring advisory.
In the year 2021, in the middle of the bull market and with the economy working at low interest rates, we invested time and resources to set up a team of excellence that is 100% dedicated to corporate restructuring advisory, a business that is very complementary to the IB activities and where we have the great advantage of working independently from our client without conflicts of interest. Today, with the high cost of debt in Brazil, we have shown the strength of our franchise in advising our clients in the most difficult times. In this first quarter, we worked in six debt restructuring operations and in iconic and complex operations such as the advisory to CVC, Marisa, and Santos Futebol Clube.
I'd like to underscore that our restructuring division acts in several stages to help the client's financial health, such as debt renegotiations and restructuring, structuring of complex operations to generate liquidity and de-leveraging, sale of non-core assets, and even the drafting of plans for court-supervised reorganizations. This activity has been crucial in offsetting some of the slowdown in M&A and maintaining our resilience in investment banking, as well as enabling our clients' business continuity in this restrictive environment. In the chart to the right, we show the breakdown of deals by sector and type of advisory. We continue to have a well-diversified sector activity, as can be seen. Regarding the type of advisory, we highlight the increased share of special situations and restructuring operations, which represented 26% of the total number of deals that we announced in the last 12 months.
In the next slide, we will present the capital markets results. Total revenues amounted to BRL 24 million , up 22% over the previous quarter and down 6% over last year. We were able to grow quarterly revenue in the most difficult period for the local debt market since our IPO as a result of the competence of our team, enabling complex debt structuring deals that reconciled the interests of our clients and investors. As we can see, the volume of issuances decreased. We issued six debt operations totaling BRL 318 million . In the breakdown of issuances by sector, we continue to be present in important sectors of the economy with a stronger presence in real estate, taking into account our expertise in structuring MBS and rates with different clients in this sector.
Now, with everything that was said at the beginning of the presentation, in other words, the episodes of credit default of two large companies, the increase in the cost of debt with higher spreads, in addition to the interest rates remaining very high with the Selic rate at 13.75%, and increase in the leverage of the Brazilian business community, the risk perception of investors increased significantly. The primary market for debt issuances suffered a major shock with an evident flight- to- quality movement in which investors showed low appetite for risk and prioritized liquidity more and more. We saw a change in the profile of operations with more diligent investors, smaller operations, more complex structuring, shorter maturities, wider spreads, and a high degree of debt collateralization. We experienced a quarter of high volatility in prices and postponement or even canceling of some operations.
We already see what we can call a new normal in the market, which is a scenario of reduced volume of issuances and repricing of operations. Now I'll give the floor to our CFO, Marcelo Costa, who will continue the presentation.
Hello. It is a pleasure to be here again with you. In the next slide, we will show the results of treasury, sales, and structuring, TS&S, investments and other revenues. Treasury, sales, and structuring reported revenues of BRL 12 million , a reduction of 41% in the quarter and 20% compared to Q1 2022. Every quarter, we stress that the volatility in the results is more marked in this area, both for large revenues, as was the case last quarter, and for more timid quarters, such as this first quarter of 2023.
For a better base of comparison, for example, if we compare the last four quarters ending in March 2023 with those ending in March 2022, the revenue remained practically stable, being BRL 60 million in the LTM Q1 2023 and BRL 63 million in the LTM Q1 2022. Furthermore, we have improved the mix of operations with greater recurrence, mainly foreign exchange, commodities, and secondary market operations, leading to less dependence on the primary debt market. We have also been able to expand our client base, which provides a greater resilience of results and diversification of the products that we offer. However, it is evident that the primary debt market was not very active in the first quarter due to the factors already mentioned by Vinicius, which implied fewer opportunities to structure Derivatives and impacted the quarter.
Another crucial point is that we have also been more conservative and continue to prioritize the risk-return ratio in our operations, withdrawing from some opportunities and opting to be more selective in the counterpart risks that we take following our credit guidelines in a much more stressed market. Looking at the continuity of our business in the mid to long term, which is our focus, we continue to expand the relationship with new large clients that have healthy Basel ratios to sustain the growth of our activities. Regarding the investments area, revenues totaled BRL 1.3 million, in line with prior quarters. The slight reduction quarter-on-quarter is due to a non-recurring fee that was accounted for in Q4 2022, referring to the expansion of FIP Pet's funding with new investors coming on board.
Revenues from capital remuneration totaled BRL 33 million, with significant growth in both the quarterly and annual analysis. On a quarterly basis, the increase is basically due to the reevaluation of the assets managed by the investments division, as occurs annually. On an annual basis, the increase is due to the rise in the basic interest rate and the growth of the company's net worth. In slide six, we present the evolution of revenues generated directly in the client business, which considers revenues from investment banking, capital markets structuring and distribution fees, revenues from Treasury Sales & Structuring, and management fees from our FIPS. In the gray band, we show the revenues from the capital invested in CDI and from private debt securities that we carry in our balance sheet.
In the 1st chart, we can see that even after the capital raised with the IPO in 2021, 73% of the company's revenues continue to be generated directly by the client-facing divisions, even considering that capital revenues have benefited from the high Selic rate. In the 1st quarter of 2023, LTM client revenues totaled BRL 297 million, a decrease of less than 5% compared to the same quarter last year, even in a period with a much more challenging macroeconomic scenario. When we break down this revenue in the chart on the right, we have a better idea of how the IPO was a fundamental pillar to reduce the volatility of our business in turbulent environments, especially for the investment banking activity.
The capital markets have been able to expand the fees in a relevant fashion after the IPO, with a 25% increase in the annualized period in Treasury Sales and Structuring, despite a slight reduction in the period, which is natural given the volatility of revenues of the area. We achieved BRL 60 million in the last twelve months, an average of BRL 15 million per quarter. I'd like to remind you that before the IPO, the average revenue was under BRL 5 million per quarter. The take-home message is that the biggest share of these two business areas have offset most of the slowdown of IB. On slide seven, we have our performance indicators. We see in the white line that our efficiency ratio reached 44%.
Although it is a healthy ratio, the increase compared to the same period in 2022 is due firstly to the greater challenges in growing revenue in the current scenario and, on the other hand, to higher administrative and personnel expenses, which were fundamental to cope with the growth and development of the process infrastructure, systems, and technology of the company, a company which today has great capacity for operational leverage. We are ready to grow revenues with this structure when the markets in which we operate heat up again, which should naturally translate into a better ratio in the mid to long term. The blue line shows an increase in the compensation ratio, which was 27%, due to some factors. We are growing and increasingly maturing our partnership. We recognized the performance of 7 key people and expanded the partnership to 27 partners.
People retention and meritocracy are part of the company's DNA, thinking about the long-term sustainability of our business. Investing in the right people will allow us to grow our revenues as we have always done throughout our history. The second factor is that always in the first quarter of the year, we start to provision for the bonus of the following year on a nominal basis, which we adjust along the quarters according to how the divisions perform. We have started to accrue part of the personnel expenses of the future wealth management platform. Our focus is on growing our business in the long term, and we are set for growth when we get back to a more benign business environment.
On slide eight, we present evolution of our income, BRL 33 million, in line with last quarter, and posting a 17.5% reduction compared to Q1 2022, mainly due to a more difficult macroeconomic scenario. Net margin was 33%, a healthy level. As for profitability, we are pleased to be able to maintain an ROE well above the cost of capital. 17% in a moment of downturn in our economic cycle and in a totally adverse market environment, showing the resilience of the company. In slide nine, we show the growth of our Private Securities Portfolio and bridge loans, which totaled BRL 1.7 billion at the end of March 2023, up 15.5% quarter-on-quarter and up 99.3% year-on-year.
This increase is explained by the growth of the Private Securities Portfolio in line with our strategy of using capital intelligently and more actively in the debt issuances that we structure and co-invest in with our investors. It is worth noting that 100% of this portfolio is made up of debt securities that we originate, structure, and distribute from companies which have a full due diligence performed by our credit and risk areas. We point out that 96% of our portfolio is rated AA and B and has no non-performing loans according to the criteria of Resolution 2.682 of the Brazilian Central Bank, BACEN.
In the first chart, we present the bank's leverage, which reached 2.5x in March 2023, a considerable increase over recent quarters, but which still leaves plenty of room for the continuity of our asset growth strategy while respecting our strict credit quality criteria. As regards to the Basel ratio, we ended the quarter with a healthy ratio of 19.9%. We are very comfortable with these levels and have room to continue allocating capital in a strategic way and supporting the growth of the Derivatives activities and the Private Securities Portfolio for the year 2023. We point out that 100% of the company's Basel ratio is Tier one. In slide 10, we present the evolution of the company's shareholders' equity, which totaled BRL 792 million in March 2023.
While the shareholders' equity of the bank vehicle was BRL 683 million. We point out that all dividend payments have been made with cash generated in the vehicles outside the bank, and that the bank's results have been recapitalized. This can be seen by the 5.4% year-over-year growth. On the bottom of the slide, we present the evolution of the company's funding. We reached funding of approximately BRL 1.8 billion at the end of March 2023, an increase of nearly 80% compared to March 2022. I would like to point out that we continue to maintain very comfortable levels of liquidity that are in line with the bank's leverage. Average term of funding with third parties was 214 calendar days.
Before ending the presentation, I would like to announce that the board of directors has approved the payment of interim dividends, referring to the results of Q1 in the amount of BRL 0.12 per unit. Lastly, I reinforce that we are happy with the results we have achieved, even with all the challenges already mentioned here. I'd like to say that we have a very prepared and motivated team with a partnership that is aligned and is confident in the long-term growth capacity of the company. We close our presentation and invite our investors to ask questions so we can discuss everything. Thank you very much.
We will now begin the question and answer session. To ask questions, click on the Q&A icon at the bottom of your screen and type your question to get in line.
When you're announced, a prompt to enable your microphone will appear on the screen, and you must open your mic to ask questions. We recommend that you ask your questions all at once. The first question comes from Pedro Leduc, Analyst, Itaú. Pedro, you can open your mic. Go ahead.
Thank you for the results. I have two questions. One about SG&A. You mentioned a provision to structure the wealth management platform. Could you comment if this is the run rate that we could expect? Could we have any counterpart revenue? I have to think about the control ratio of that by the end of the year. If you can give us more color on where we stand and why you started provisioning for that now.
Thank you, Pedro. Thank you for the question.
We have been working on this business plan for wealth management for a while now, and this has advanced. We are close to announcing the upcoming structure. Internally, we are already allocating costs for that. Initially, we don't expect any significant increase in these provisions or in the cost of personnel. I think that the percentage was a little higher than our target of 25% because of the wealth management provisioning and also because what we said in the beginning of the year, we try to provision on a nominal basis what we expect to be the bonus for the year. Over the quarters, over time, we adjust that based on revenues and performance of the different divisions. At this point, we still have a target for the year of around 25%.
Of course, with the progress of our wealth management operation, wealth management has a slightly different compensation structure than what we have in IB. The percentages are a little higher. Personnel cost can increase a little as well, and there is a little less operating leverage. It is possible that over time, this might change a little, the structure, and we might set a different percentage target, but it's not anything that we see at this point. It is something that we will communicate in a transparent fashion to all investors as this develops and unfolds and as we start generating revenue in that area. For now, we have a 30% limitation for personnel expenses, but our effective target for the year remains at around 25%.
Excellent, Ricardo. Thank you for being transparent in this whole process.
My second question is about the business of issuances and fixed income. A good performance for fees, among others, despite a challenging market. I'd like to understand how you see the second quarter regarding spreads, et cetera. It seems that things are slightly calmer now. I'd like to understand what the pipeline is like and if you see a slightly better market for fixed income issuances.
Leduc, thank you for the question. The market indeed improved a lot vis-à-vis Q1. The industry of open funds continues to have withdrawals, but at a much slower pace, and offers are returning, of course, at a much slower pace than we had last year. We already have offers in the market, and that is a good sign when we start seeing that the market is recovering because the level of spreads in the secondary market are being reduced.
We have already seen, in addition, the mood of the operation and the mood of investors changing. You know, we still need more liquidity in the market. We are at a moment where secondary market spreads are closing. That helps opening up room for new issuances in the primary market. Q2 should remain challenging still, but, you know, compared to what we had, particularly in February and beginning of March, the situation is much better. We have a positive outlook. For the second half, despite inflation rates, the expectation is that the interest rates will fall, and that tends to help the capital markets for incentivized products and for plain vanilla products as well.
Excellent, Danilo. Thank you. Again, congratulations to the whole team.
Thank you.
Next question by Ricardo Buchpiguel, sell-side analyst, BTG. He has two questions.
Number one, the special situations and structuring area showed strength in this quarter. What about the pipeline for the rest of the year? How does the remuneration of these services work? By retainer? Success fee? Could you give us an idea of how much this business line represents in the IB revenues? How can the restructuring division remain active or create value to clients in times of economic boom? Better yet, imagining that by year-end, Brazil starts a cycle of falling interest rates and consequent deleveraging of companies, how can this area continue to create value? These are the two questions by Ricardo.
Thank you, Ricardo. Well, to start, as Vinicius mentioned in the presentation, in 2021, we made a decision at a moment of a market boom to increase our division.
We brought in two senior people who are the heads of our debt structuring division, Fabiana and Andrea, and we allocated more people to the team to act directly in that segment, and this has been bringing excellent results. In Q1, we had the announcement of a number of operations, and that accounted from 20%-25% of our investment banking revenue in the quarter. We expect this to continue during the year. This is contributing significantly to offset the slowdown of the other more traditional investment banking segments. We are very happy with this effort that we made because it was the right decision to make of having a more robust team for a product which has a lot of synergy with our areas of operation.
In terms of compensation, we do have a retainer component, unlike other investment banking products, which are practically 100% pegged to the result of that structuring, so we operate with a significant retainer element. Given the difficulty of the clients with whom we operate, we end up accepting payment in installments. We're going to see, quote unquote, "recurrent revenue," from this product over the year, and we expect to maintain this percentage at 20% or 25% of the IB revenue. How to maintain that in moment of an upturn in better cycles? Well, in the last 15 years we have always done some degree of debt restructuring in our investment banking division. We see that some of these deals are simpler of restructuring of debt and things that we can complete in a shorter period of time.
A public example that we can mention is the CVC example. There are other situations that take many, many years to be resolved. Here in Brazil, we have situations such as the case of Oi that has been happening for many years, and other situations that we see in the market which are highly complex, which entail a very high debt with complicated regulatory situations that end up extending for long periods of time, that stretch from one cycle to the next, maintaining this area with a good level of operation. We have people, particularly those two heads of the area, Fabiana and Andrea, we have both of them dedicated to debt restructuring. On the other hand, the team that acts on execution and support is a team that works in both M&A and restructuring.
There is some flexibility in terms of how to use these resources for one product or for another, depending on the moment of the cycle in which we find ourselves. I don't think that this is going to increase the cost of the area or have an idle period, although we might have better market moments that we all hope will come very soon.
Thank you.
Next question, by Marcelo Gonçalves, buy-side analyst:
Could you give us more color on the reevaluation of assets that impacted the revenue of capital? This was Marcelo's question.
Thank you, Marcelo. Actually, this revenue from reevaluation of assets is the reevaluation of FIPS that we manage. We currently have two FIPS: FIP Outlet and a FIP focused on pet shop.
Always in Q1, we do an accounting reevaluation of these funds, and that's why we have this impact of almost BRL 9 million in the quarter. We broke this down in the chart because we wanted to be more transparent in terms of what is the revenue from the equity, from the capital and CDI, and what is the revenue from the reevaluation.
Thank you.
Next question by Larissa Oliveira, sell-side analyst:
To what extent the Americanas and Light cases impacted the drop in capital markets and treasury sales and structuring? You mentioned a new normal. Does this mean that issuances of Derivatives is stabilizing at a lower level than pre-Americanas?
Well, let me answer this from the macro standpoint, and then Danilo can talk about the impact. Of course, these were two situations that meant a big blow for the Brazilian markets, particularly private markets because of the size. In both situations, we're talking about dozens, or in the case of Light, more than BRL 12 billion in debt. In the case of Americanas, there was fraud. I mean, this is not totally understood yet. In the case of Light, of course, there are important regulatory issues that are being questioned by the creditors. Given this request for court-supervised reorganization that was filed today to the court system of Rio de Janeiro. It's only natural that these events, given their magnitude, it's only natural that they caused a certain retraction and an impact that I would say was rather significant in both cases.
The Light case is perhaps more recent. It's more pulverized. It has perhaps a bigger impact, but the market will absorb these issues. In all cases, there will be a natural dispute between the two companies and their creditors, but things will work out in the end one way or another. The impact was relevant in both cases.
Indeed, to add to what Ricardo mentioned, these two impacts obviously affected mainly the open fund industry, which accounts for the biggest share of the fixed income industry. Of course, it led to some moves, such as a very high nominal interest rate. This has led resources to migrate from the funds industry to bonds operations and MBS, LCIs, LCAs, LCIs of large banks. Of course, these two episodes did accelerate this movement.
As you asked in your question, the industry is stabilizing, potentially at a level that is different than Q4 2022. Little by little, this level should recover because part of the repricing of many assets now with the rebound of the secondary market will have a positive repricing, which will have a positive impact in the quotes of the funds, which will reduce the pace, the pace of resumptions and net funding. This should stabilize. It is stabilizing at a new level. This is how we're interpreting this. Thank you.
There is a second question.
There is a second question by Larissa, right?
We can proceed to the second question by Larissa.
All right. The company is more conservative in risk-taking by the treasury. Should we expect a lower growth for this line along the year?
Just to make this very clear, in our Treasury, the risk we take is the counterpart risk of our clients. We don't take any proprietary risk. In terms of the dynamic for the quarter, our division has two big drivers. We always are customer-centric, but we have operations that we call risk management, and these are shorter-term operations with lower tickets. We have the hedges linked to capital markets operations, not necessarily to our capital markets, but to capital markets in general. What we saw this quarter is that we had fewer capital markets operations. Very, very few indeed. We have reinforced this client portfolio and this other component of more recurrent operations. When we compare with Q4 2022, we had revenue close to BRL 20 million, and we had a more relevant contribution from the capital markets.
We had a lot more capital markets in the mix than flow. In this quarter, it was different. It was more recurring operations. This shows that with the growth that we're having, in the second half of last year, we practically doubled the number of clients we have in our division. With that, we are able to generate more and more recurring revenues, and we rely less on capital markets. Of course, if we have capital market operations, we can also generate more relevant revenues. To answer your question, we continue to believe that the growth of this division will continue. For this year, we expect to have a result similar or slightly above what we had last year. We are tracking it also in the second quarter.
Thank you.
To continue, next question by Jose Eduardo Daronco, sell-side analyst.
Good afternoon, everyone. Congrats on the results. If you'll allow me a follow-up question on wealth management. In terms of forecasting, do you believe the wealth management should gain scale quickly, taking advantage of the current portfolio of clients of the company, or should this growth be gradual, starting slow and increasing along the next quarters? Thank you.
The business plan we have today, this growth will be gradual. We don't expect any revenues in wealth management in 2023. We'll expect a small revenue starting in 2024, but accelerating a little more in 3 to 5 years from the moment we announce the platform. That's the outlook we are working with in terms of adding wealth management revenue.
As a reminder, if you want to ask a question, click on the Q&A icon on the bottom of your screen and type in your question.
If you want to ask your question live, send us a message and we'll send you a prompt to enable your mic. If there are no more questions, the Q&A session is ended. We would like to turn the floor over to the company for their closing remarks.
Very briefly, my final statements. I would like to thank you again for your participation, the participation of our investors. Thank you for participating in our video conference call to discuss our results. I believe that we were able to show results that were quite resilient, even in an extremely difficult moment for Brazilian markets in Brazil. We were able to show top line and bottom line in line with prior quarters that happened in exceptionally good market moments. The way we see our firm and the opportunities is exactly that.
We want to remain resilient in the more difficult moments, to be able to continue to deliver strong results and return on equity close to 20%, reinforcing our structure so that we can capture a greater upside when the cycle comes back, the market improves, which we expect will happen soon. Again, despite a very turbulent scenario, a much more difficult scenario, we were able to deliver not only short-term results, but we were able to continue to structure the firm in a very robust way to prepare for the next cycle when we expect great growth. Again, thank you very much for participating, we are always available to speak with our investors.
The 2023 earnings video conference call of BR Partners is now closed. The Investor Relations Department is at your disposal to answer any further questions or doubts.
Thank you very much and have a great day.