SAO PAULO (Reuters) – Grupo BTG Pactual SA’s push to grow outside Brazil is an attempt to seize opportunities created by the retreat of global investment banks, not the result of the economic woes plaguing its home market, Chief Executive Officer André Esteves said.
Last year’s $1.7 billion purchase of Switzerland’s BSI Group Inc as well as BTG Pactual’s foray into global commodities sales and trading will bolster the Brazilian investment bank’s profit resilience and stability in coming years, Esteves, 46, said in an interview with Reuters late on Thursday.
When the BSI acquisition is completed, about 45 percent of BTG Pactual’s revenue will stem from asset and wealth management, providing the bank with more stable proceeds and returns, he added. Income from both segments currently represent about a quarter of revenue.
The shift in BTG Pactual’s revenue mix toward money management means that the share of principal investments – or income from using the bank’s own money in real estate, hedge funds and private equity investments – will shrink relative to other areas, Esteves added. The BSI purchase is “helping accelerate that trend,” he said.
Despite a gloomy economic outlook, sluggish capital markets activity and rising borrowing costs in Brazil, Esteves is confident that BTG Pactual will continue to deliver annual return on equity around 20 percent. And while Brazil will remain a key market for BTG Pactual, its non-Brazilian operations will account for most of its income and staff once the BSI deal is finalized.
“There is no correlation between a good Brazil or a bad Brazil with a more international BTG Pactual,” Esteves said. “The retreat of global lenders” after the 2008 financial crisis “is what gave us the opportunity to expand our activities in commodities, in Latin America, to buy BSI.”
The conclusion of the BSI transaction is expected in the next two months.
BTG Pactual has faced criticism for what some in the marketplace saw as excessive risk taking in sectors highly exposed to Brazil’s economic malaise or to firms linked to a corruption scandal at state-run oil company Petróleo Brasileiro SA.
Rapid growth following its initial public offering three years ago and problems in a small sample of the bank’s private-equity investments prompted some analysts to question whether proprietary investments could drag down return on equity.
Esteves rebuffed those concerns, stressing that BTG Pactual has cut assumed market risk in recent quarters. Value at risk, or the maximum amount that a bank can lose in a trading session, fell to 0.46 percent of BTG Pactual’s capital in December, about half what it was three years ago.
“The results of the past three years showcase the diversification of our revenues, in a geographical and in a product bases,” Esteves said. “The amount of headlines about the principal investments line is disproportionate to the risk and revenue they represent for BTG Pactual.”
Oil rig supplier Sete Brasil Participações SA and drugstore chain Brasil Pharma SA have been singled out in newspaper reports as potential setbacks for BTG Pactual’s merchant banking investment portfolio. The bank has made hefty profits with other investments, including the sale of a stake in Spain’s Tunels de Barcelona i Cadí last year.
He declined to discuss investments on a case-by-case basis.
“We’ve done well and we’ve made mistakes in our merchant banking business, but what really matters in the end is that the overall results of the portfolio are broadly positive, even with the economic downturn” in Brazil, Esteves said.
BTG Pactual’s stock has recouped some losses this month, a sign that investors are more comfortable with its investments. The stock had shed 26 percent between mid-October, when the Petrobras scandal gained traction, and late March.
Esteves stood by his pledge that he does not want BTG Pactual to compete with the likes of Goldman Sachs Group Inc on their home turf. He believes that the global investment banking business model is under test, since tougher regulations in developed markets make it harder to deploy capital efficiently.
“We don’t see ourselves doing investment banking outside of Latin America, or if the deal has nothing to do with the region,” he said.
He said the acquisition of BSI was well timed because it took place when Swiss regulators moved to dismantle a business model based on tax secrecy. Esteves hopes BTG Pactual’s strong focus on product diversification will allow BSI to outperform rivals in the changing landscape.
“This transition from the secrecy-oriented model to the services-oriented model in Switzerland is offering us the opportunity to do what we do best: to offer our products in a differential way,” he said.
(Editing by Todd Benson)