UPDATE 2-BTG Pactual's Esteves sees commodities increasingly adding to profit

Wed May 7, 2014 5:12pm EDT

(Adds comments from executive in paragraphs 6-10)

By Guillermo Parra-Bernal

SAO PAULO May 7 (Reuters) - The contribution of commodities sales and trading to Grupo BTG Pactual SA's profit will rise in coming quarters, Chief Executive Officer André Esteves said on Wednesday, underscoring the synergies the unit has with the investment bank's trading desk.

A move to extend the offering and trading of specialized products for fixed-income, equities and currencies to commodities since late 2012 was shown to be "the right decision because we leveraged our synergies in a number of key areas," Esteves said in a conference call to discuss first-quarter earnings.

BTG Pactual is betting big on commodities, taking advantage of regulatory hurdles afflicting larger rivals. Some operations outside Brazil are being integrated rapidly, raising revenue in areas from asset management to financial advisory services, Esteves and other executives added.

The contribution of commodities sales and trading, which includes grains, oil and gas, energy and mining and metals, to profit will be incremental in spite of a tough market for the asset class, he added. He provided no guidance on the unit, but said its share in the sales and trading revenue line should be similar to that of currencies, fixed-income and equities.

"Not more, not less, just in line with the other legs of the business," Esteves said of the weight of commodities sales and trading on revenue.

The São Paulo-based lender reported first-quarter net income of 832 million reais ($373 million), well above the 797 million estimate in a Reuters poll. Compared with the fourth quarter, profit rose 8.3 percent, while on an annual basis it soared 35.9 percent - the result of a tumble in taxes amid stable revenue and a slight decline in expenses.

Esteves, 45, who said BTG Pactual's business model is more stable than analysts think, weathered the toughest start to a year for Brazilian capital markets in a decade by cutting banker bonuses by 28 percent in the wake of lower private-equity and asset management income. Sales and trading thrived as the commodities drive bore fruit, making up more than half of first-quarter revenue.

While the bank has remained secretive over its foray into commodities, sources told Reuters BTG Pactual hired Ricardo Leiman from Noble Group Ltd and nearly 200 staff among traders, analysts and managers in London, Geneva, New York and elsewhere to cover everything from freight to grains to natural gas. The bank has spent $300 million on the unit, the same sources noted.

The ability to extract more profits from the unit also is a function of BTG Pactual's investments to add scale and the use of its balance sheet to offer products and win new clients, Investor Relations Director Jõao Dantas said in an interview.

The unit became operational within a year because it merged prior trading of financial commodities with new capabilities to trade physical commodities on a larger scale, he said.

Shares reversed early gains and shed 0.3 percent to 31.50 reais on Wednesday. The stock is down 4.3 percent in the past 12 months.

'CONSERVATIVE SIDE'

Esteves' efforts to expand in areas such as commodities and in countries such as Mexico, Chile and Colombia are likely to impact results more in coming quarters, analysts said.

BTG Pactual and peers are struggling with rising risk aversion that is weighing on share and bond offerings throughout Latin America this year.

"The figures showed the resilience of the bank's business model," Carlos Firetti, head of equity research at Bradesco BBI, said on Wednesday. "Despite large quarterly variations in different business units, as a whole, the bank's revenue mix can sustain decent levels of return."

As a result of that, BTG Pactual is on the "more conservative side" in terms of risk allocation, Esteves said. "We are happy that we could deliver in terms of return on equity in a very challenging market scenario," he said.

Annualized return on equity was 20.2 percent in the first quarter, compared with the 19.4 percent estimate in the poll, and in line with Esteves' 20 percent target for the long run. Return on equity, or ROE, is a measure of how well a bank spends shareholder money.

Total revenue fell 5.2 percent to 1.71 billion reais on a quarterly basis, missing the poll's estimate of 1.74 billion.

Principal investments - or income from investing the bank's own money in hedge funds, buyouts and real estate - unexpectedly swung to a loss after real estate and private-equity investments flopped. The line has a 115 million real shortfall, compared with the poll's estimate of 385 million reais in gains in the quarter.

Wages and banker compensation in the first quarter fell to 384 million reais from 535 million reais in the fourth quarter, reflecting weaker capital markets activity and declining asset management revenues. General expenses fell 12.7 percent, despite the bank's expansion into different regions and markets.

($1 = 2.23 Brazilian reais) (Reporting by Guillermo Parra-Bernal; Editing by Jeffrey Benkoe, Chizu Nomiyama and Eric Walsh)