BTG Pactual: Esteves brings business back into banking

Rob Dwyer
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BTG Pactual’s CEO, André Esteves, says he used its recent IPO to lock in a spirit of entrepreneurialism at the firm. He reckons it is the key to the investment bank’s continued rise. But how far can he take the bank?

André Esteves is often asked if he has political aspirations. So often is he asked that when Euromoney is told by one of the three PRs sitting in on the meeting that the interview will end in five minutes, the idea of asking him if he has any such ambitions is dismissed as a waste of time. After all, how many billionaires have launched political careers in the pages of this magazine?

On reflection though, Esteves could make a formidable politician, and not just for his huge personal wealth, success and access to the great and good. He’s a natural politician. He’s charming, youthful and has a full head of hair. He is able to deliver stock responses in a way that makes them sound fresh, previously unspoken. He answers questions by saying what he wants to say – and no more. He reveals little and yet appears open and engaging. Even when he is encouraged to comment on controversial subjects – and he gives a pretty devastating critique of Wall Street remuneration – it feels premeditated. Some say this blend of charm and control is a product of extensive media training. But perhaps he’s simply a natural at dealing with the press, in the same way that he is undeniably gifted in building a business, making deals, making money.

The bank Esteves is building is entering a new phase. BTG Pactual went public in April this year – providing it with a new capital base that is more efficient for continual expansion. However, it also means Esteves’s management responsibilities now include overseeing quarterly results, participating on equity analyst calls as well as answering to a new stakeholder group of shareholders. If the competition were hoping this new distraction, coupled with the slowing Brazilian economy, would lead to some slowdown in results, they were to be disappointed. The bank has so far exceeded analysts’ expectations – by some margin. In the second quarter of 2012 it reported earnings of R$822 million ($402 million) – R$0.96 a share. The consensus forecast was R$0.63 a share.

The analysts following BTG Pactual are in for a hard time. For example, most of the outperformance of the latest results was in marking to market an equity pick-up of R$316 million within the bank’s principal investments’ real estate unit on its stake in BR Properties. In addition, revenue from the global markets division of the same unit benefited from profitable trades on the back of declining interest rates in Brazil and US mortgage markets. In total, principal investments revenue was R$687 million in the three months to the end of June, up 20.1% quarter on quarter and 3,022.7% year on year.

"Of course beating expectations is always good, but the challenge for us as a public company is not focused too much on the short term," says Esteves. "It’s good to deliver good results but we always told shareholders to expect a long-term high return on equity. We will have natural quarterly or yearly volatility, but in the long run we will provide very good ROE."

So far, so good. "Return on equity was a little over 30% for the first half – 30.4%." The bank doesn’t give guidance on long-term ROE targets and so Esteves avoids specific predictions but says: "It is reasonable to expect that we can provide above 20% return on equity in the coming years."

He adds: "It [will be] a fantastic return on equity and that’s because we have a significant franchise that doesn’t use capital," referring to the bank’s large asset management unit (managing over R$132 billion including the wealth management unit and monies under advisory) and the ‘pure’ investment bank. "People talk a lot about our capital investment, but the ultra-high return on equity that we have on a sustainable basis is related to the size of the fee basis that doesn’t use capital and we expect to keep this model."

As well as struggling to predict the bank’s results within a narrow band of accuracy, part of the analyst’s job is to probe for weaknesses below the headlines. The fear of upsetting the giant of Brazilian banking (who is still just 44 years old) is palpable. One analyst agreed to talk only if his comments were "strictly" off the record. And in the conversation that followed he conducted an unusual two-sided role-play, coloured by self-defeatism about the potential weaknesses he saw in BTG Pactual.

Clearly, Esteves is adroit at managing analysts too. "You could ask him about the proprietary trading [which was a source of the recent outperformance]. Even they can’t keep winning every bet, and there could be risk there," the analyst says, before continuing: "But he’ll tell you that they are not as leveraged as was the case at JPMorgan and they can extricate themselves from their positions without moving the market."