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By Guillermo Parra-Bernal
SAO PAULO, Nov 5 (Reuters) - Grupo BTG Pactual SA reiterated a pledge to deliver return on equity of at least 20 percent a year as it shrinks the role of principal investments on revenue, speeds up geographic expansion and taps more stable sources of income.
With the purchase of Swiss private bank BSI Group, BTG Pactual is shifting its revenue mix to money management, which produce higher multiples, from capital-internsive activities like principal investments, executives said on a conference call on Wednesday to discuss third-quarter results.
Chief Executive Officer André Esteves said the share of principal investments, or income from investing the bank's own money in hedge funds, private-equity investments and real estate, in BTG Pactual revenues "is shrinking relative to other business areas."
Esteves' remarks came after the bank reported quarterly net income at the São Paulo-based bank fell for the first quarter in six, driving down return on equity (ROE) to the lowest level since the first quarter of 2013. ROE, a widely watched gauge of profitability in the banking industry, fell to 17.3 percent last quarter, below expectations of 19.4 percent.
Esteves has repeatedly pledged to deliver ROE of 20 percent annually, even under tough market and economic conditions.
BTG Pactual earned 769 million reais ($308 million) in the quarter, below the average analyst estimate of 864 million reais, according to a Reuters poll.
Bets on risky investments and complex securities fell in the quarter as market aversion jumped. As such, value at risk, or the maximum level of risk that a financial firm can take in a specific period, fell to 88.5 million reais in the quarter.
"Normalizing principal investments, sales and trading and administrative expenses, we get to 20 percent ROE," said Carlos Macedo, an analyst with Goldman Sachs Group Inc.
Principal investments had a shortfall of 164 million reais, compared with the poll's estimate of a gain of 302 million reais. The global markets line was the driver behind the gap, while merchant banking and real estate recovered from weak performance in recent months.
Esteves specifically pointed to a diminished role of global markets, or hedged funds that trade global securities, as well as merchant banking, which include a portfolio of over 30 private-equity investments managed by BTG Pactual. Both units are part of the principal investments line.
His drive to trade more physical commodities helped sales and trading income rise an unexpected 21.2 percent. That line, which totaled 784 million reais, stood above last year's quarterly average, a sign of healthy revenue generation. Expenses fell 4.7 percent, more than the 1.8 percent decline the poll predicted.
Units of BTG Pactual, a blend of common and preferred shares of BTG Pactual's investment-banking and private-equity units, fell 0.8 percent to 31.32 reais on Wednesday in São Paulo. The stock is up 17.7 percent this year ($1 = 2.509 Brazilian reais) (Editing by Franklin Paul, Jeffrey Benkoe and Bernard Orr)