* Return on equity seen topping Brazil's average
* Profit beats poll estimates on asset management
* Shares climb to record amid growing optimism
* CEO Esteves sees ample room for growth in loan book
By Guillermo Parra-Bernal
SAO PAULO, Feb 20 BTG Pactual Group
could consistently attain return-on-equity levels above 20
percent in the long run, underscoring the flexible business
model of Latin America's largest independent investment bank,
Chief Executive André Esteves said on Wednesday.
Fourth-quarter results, which beat analysts' estimates,
added further evidence of BTG Pactual's ability to generate
fee-based income, mitigate the weighting of trading activities
in the bank's revenue mix and take advantage of market
conditions even in challenging times, Esteves said in a
Annualized return on equity, a widely followed gauge of
profitability in the financial industry, "should post readings
on top of 20 percent - to me it's a level that could be reached
in line with our goals for the business", Esteves said.
That level is way above the average 16 percent ROE for the
three largest private-sector commercial lenders at the end of
Shares in the company hit an all-time intraday high as BTG
Pactual's third straight quarterly profit beat partially eased
concerns that the bank is too reliant on trading-related
activities for growth. Units, a blend of common and preferred
shares of BTG Pactual's investment-banking and private equity
divisions, gained as much as 2.4 percent to 36.93 reais.
São Paulo-based BTG Pactual reported net income of 854
million reais ($436 million) in the fourth quarter, up 7.7
percent from the prior three months, as a surprising jump in
asset management proceeds helped offset higher expenses and weak
advisory and trading revenue.
A Thomson Reuters poll of five analysts had forecast profit
of 677.5 million reais.
BTG Pactual's ROE unexpectedly rose to 25.1 percent at the
end of December from 24.9 in September. The poll had predicted
ROE at 20.6 percent.
"Another sound beat provides further evidence of the
benefits of BTG's well diversified and unique business model,"
said Mario Pierry, an analyst with Deutsche Bank Securities.
"We also liked the solid pick-up in asset and wealth
management revenues, which are more recurring and fee-based, and
thus are traditionally assigned higher trading multiples by the
Total revenue rose 12 percent on a quarter-on-quarter basis
to 1.891 billion reais, topping the 1.35-billion-reais estimate
in the poll. Receipts from asset management services more than
tripled, offsetting an 18 percent fall in investment banking
fees, a 47 percent drop in sales and trading income, and a
decline in revenue from principal investments of 9.5 percent.
Esteves said the buoyant results in asset management were
driven by a 13 percent jump in money under management and a gain
in the average return on assets. Returns in the division rose
following a change in the mix from traditional fixed-income
instruments to products that charge higher fees.
Equally, the division received a boost from the one-time
collection of performance fees from global hedge funds, which
close their accrual period at year-end, as well as the payment
of performance fees by a group of investors who partially exited
a BTG Pactual-managed real estate fund.
STILL, WORRIES LINGER
The results signal that BTG Pactual's activity in 2013 might
be bolstered as risk aversion eases amid escalating confidence
in the developed world. Esteves has moved aggressively to expand
BTG Pactual's involvement in risky trades in U.S. real estate
markets, emerging-market bonds and equities and other
investments in Europe.
In the call, he said Brazil's economy could grow by around 3
percent while capital market activity should be stronger than in
2012. A sagging deal flow for mergers and acquisitions, and for
bond and equity sales in Brazil in the quarter, hurt BTG
Pactual's revenue but helped keep compensation expenses in
Principal investments - or gains from investing the bank's
own money on hedge funds, buyouts and real estate - fell to the
lowest level in a year after BTG Pactual's merchant banking unit
failed to make a relevant divestment in the quarter.
Still, the so-called global markets segment showed robust
results stemming from "successful developments" in global
credit, emerging markets and strategic equity investments as
global economic conditions improved during the quarter.
Compensation expenses fell 21 percent, a little more than
the 20 percent drop estimated in the analyst poll. Tumbling fees
from debt and equity sales and M&A deals led to a cut in banker
bonuses. Sales, general and administrative expenses rose 52
percent in the quarter, in line with estimates in the poll.
The quarterly performance of value-at-risk, or how much BTG
Pactual traders might lose in one day, was far worse than
expected. VaR, as the gauge is known, jumped to 109.2 million
reais in the fourth quarter from 88 million reais in the third.
The adverse result in VaR sparked worries that BTG Pactual
could be deploying too much capital on proprietary trading,
masking elements of a business model for investment banks that
some analysts see as inherently unstable.
"Though our first take is mostly positive, fourth-quarter
results raise questions about the sustainability and quality of
results - how much did performance fees boost the bottom line,
what kind of returns on allocated capital is principal
investments generating?" said Saúl Martínez, a senior analyst
with JPMorgan Securities.
Bolstering profit, BTG Pactual's loan book rose 60 percent
in 2012, ending the year at 33.77 billion reais. Esteves, 44,
has used proceeds from a $1.96 billion initial public offering
last year to extend more lending to BTG Pactual's growing
portfolio of corporate clients in Brazil and other Latin
Esteves said "there is still some ample room to increase our
loan book, we believe we haven't reached any limit in lending
BTG Pactual's loan book could grow to about 42 billion
reais, or roughly three times the bank's capital base, without
putting capital under pressure, Chief Financial Officer Marcelo
Kalim said in another call.