August 10, 2016 / 9:07 PM / 2 years ago

Spare capital to give BTG Pactual chance to grow, boost returns

SAO PAULO, Aug 10 (Reuters) - Grupo BTG Pactual SA, a Brazilian investment bank that has slashed assets by one-fourth since the November arrest of founder André Esteves, is considering share buybacks or even takeovers after the cutbacks will leave it with $1 billion in excess capital.

Executives at BTG Pactual said on Wednesday they are open to all options to deploy spare capital and boost returns, once cash from a slew of asset sales enters the coffers of the company, Latin America’s largest independent investment bank.

The spinoff of BTG Pactual’s commodities trading unit, the sale of control in Swiss private bank BSI SA for about $1.1 billion, and this week’s disposal of a stake in a Brazilian parking garage company will likely boost the bank’s core capital ratio to 20 percent by year-end from 14.2 percent in the second quarter, they said.

The transactions are expected to be concluded by early October.

Esteves, who steered the bank through an aggressive global expansion, was arrested in November on allegations that he colluded with a senator to obstruct an ongoing probe. He was later released, but subsequent surge in client withdrawals forced his former partners and successors to shed assets and dismantle risky but profitable trading positions.

A source familiar with the bank’s strategy told Reuters recently that failing to address BTG Pactual’s excess capital could limit its return on equity. “Staying open to any use of excess capital will allow BTG Pactual to grow without incurring too much risk in the process,” said the source.

BTG Pactual could expand segments including distressed-loan books and trading, money management and investment-banking operations, said the source, who requested anonymity because the strategy remains private.

The bank will further cut private equity investments, as agreed when it took a 6 billion-real ($1.9 billion) lifeline from a financial industry-backed deposit guarantee fund last year, the source said.

While BTG Pactual dropped plans to acquire 500 million reais in troubled loans from Portuguese lender Banif SA early on Wednesday, the source said, the bank will continue to look for targets in that segment. The excess capital could also be allocated to sales and trading activities, one of BTG Pactual’s strongest revenue lines, the source added.

Units, a blend of common and preferred shares in BTG Pactual’s investment-banking and buyout arms, shed 0.4 percent to 17.45 reais on Wednesday. Since Esteves’ arrest, the units have plunged 40 percent.


BTG Pactual’s excess capital could position it to benefit as Brazil’s harshest recession in eight decades begins to subside, analysts said, allowing it to take more risk. A recovery could offer more mandates to buy or sell companies and underwrite bond and stocks offerings, they said.

Still, the recent indictment of Esteves on obstruction of justice charges after he had returned to BTG Pactual in a senior advisory role in April could hamper the bank’s strategic planning at the moment.

Analysts said that Esteves, for a decade Brazil’s most influential dealmaker, would have been better placed than other partners at BTG Pactual to look for growth opportunities with the extra capital the bank now has.

BTG Pactual’s latest quarterly results showed the downside of a reduced asset base as returns from trading and money management activities declined, leading it to miss second-quarter profit estimates for the first time in two years.

Return on equity, a gauge of profitability, slumped to 16.1 percent, the lowest in three years and below estimates.

“Going forward, the smaller footprint will make it difficult to generate profitability at a much higher level,” said Goldman Sachs Group Inc analyst Carlos Macedo. ($1 = 3.1348 Brazilian reais) (Reporting by Guillermo Parra-Bernal; Editing by Christian Plumb and Steve Orlofsky)

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