SAO PAULO BTG Pactual Group's (BBTG11.SA) ability to consistently chalk up healthy profits in a tough market is debunking the "myth" among some investors that the business model of Latin America's largest independent investment bank is inherently unstable, Chief Executive André Esteves said on Tuesday.
Analysts and investors have cited BTG Pactual's strong reliance on trading-related revenues -- a highly profitable yet volatile source of income -- as one reason behind the stock's underperformance since its initial public offering in April.
Esteves, however, rebuffed those concerns in an interview, citing a business model that also allows the bank to generate income from more stable sources of revenue like advisory fees.
The Brazil-based bank has seen "resilience" in every line of its business -- from sales and trading to corporate lending and merchant banking -- "despite a very weak year for capital markets" on its home turf, he said at BTG Pactual's headquarters in Sao Paulo.
"Each quarter the myth that BTG Pactual's model is intrinsically volatile is getting knocked down," Esteves said. "That is a false perception about our business model."
BTG Pactual is well-positioned to benefit from record-low interest rates, which over time should spur activity in local debt and stock markets, areas where the bank is a major player.
The bank's profitability could also outperform that of rivals as it leverages growth in activities such as commodities sales and trading and private equity in places with strong dealmaking potential such as Mexico or Africa, Esteves said.
Esteves, a 44-year-old billionaire, is steering BTG Pactual through turbulent times in Brazilian capital markets by sharing investment risks with clients in sectors from oil and gas to infrastructure and agribusiness, while also ramping up bets in riskier investments such as U.S. mortgages, global credit and emerging market assets.
A surge in fees and strict cost controls helped BTG Pactual beat third-quarter profit estimates, underscoring the resilience of Brazil's sole listed investment bank in the face of an economic downturn. Profit tripled from a year earlier to 793 million reais ($387 million), buoyed by solid results in asset and wealth management, sales and trading, and corporate lending.
Units of BTG Pactual, a blend of common and preferred shares in the firm's investment-banking and private-equity divisions, shed 1.2 percent to 30.18 reais on Tuesday.
BTG Pactual and Esteves have become symbols of Brazil's growing economic might, competing head to head with global investment banks in a country with sophisticated capital markets and a promising long-term growth outlook.
The bank has been on a dealmaking frenzy in Brazil and beyond in recent years, acquiring stakes in retailer Leader Participações SA and commercial real estate developer BR Properties SA (BRPR3.SA). It has also made investments in countries like the United States, Colombia and Chile.
Esteves, a mathematician who grew up in a middle class neighborhood in Rio de Janeiro, started as a computer technician at BTG's predecessor Banco Pactual at 21. He rapidly rose through the ranks to become managing partner and sold the bank to UBS AG UBSN.VX in 2006 for $3.1 billion.
When UBS ran into serious capital problems as a result of the 2008 financial crisis, Esteves and his partners bought back Pactual for $2.5 billion in 2009 and formed BTG Pactual.
Esteves said he sees "no transformational deals" in the form of acquisitions that could modify the bank's current structure in the short or medium term. However, he expects BTG Pactual to increase activity in Mexico -- long seen as a banking market with a handful of entry barriers for foreign players.
Growing state intervention in Brazil's economy under President Dilma Rousseff, especially in the energy and financial sectors, has shaken investor confidence in the country, driving down an index of electricity shares .IEE by about 15 percent this year.
Esteves called those concerns "overstated," but he also said officials should do more to mitigate the perception of a heavy-handed government to avoid dampening investor interest in Brazil, the world's sixth-largest economy.
Like other banks in Brazil, BTG Pactual's profitability has declined in recent quarters as the economy slowed and loan delinquencies crept higher. But at 24.9 percent, the bank's annualized adjusted return on equity -- a measure of profitability -- is still well above that of its peers.
Esteves sees return on equity for Brazil's financial system falling to between 15 percent and 18 percent, versus 20 percent to 25 percent a few years ago. Rivals will feel the pinch of lower interest rates more than BTG Pactual, he predicted.
Brazil's benchmark lending rate, now at an all-time low of 7.25 percent, could fall further if policymakers feel the economy is growing below expectations, Esteves said. Lower interest rates in Brazil are "absolutely sustainable" and are here to stay, he added.
Esteves predicted that lower rates would spark a "revolution" in Brazilian capital markets in the next five years, allowing companies to rely more on bond and stock sales instead of credit as a way to fund investments.
"AN INVESTMENT BANK THAT INVESTS"
Esteves sought to contrast BTG Pactual with traditional Wall Street investment banks, highlighting his firm's practice of teaming up with clients to invest, as opposed to just buying and trading securities in financial markets.
"The political and business spectrum in Brazil love the fact that we are an investment bank that invests in the real economy," he said with a chuckle.
BTG Pactual is also eyeing potential opportunities in developed economies that have fallen on hard times such as Spain. Esteves, who on Monday attended a series of events in Spain, said one deal in the European country involving BTG Pactual could be announced as early as Tuesday.
He declined to elaborate.
($1 = 2.05 Brazilian reais)
(Reporting by Guillermo Parra-Bernal and Todd Benson; Additional reporting by Aluisio Alves; Editing by Tim Dobbyn)
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