As stress tests go, the arrest of a bank’s CEO on corruption charges – sparking a huge withdrawal of funds from the asset management and wealth management divisions – is a tough one. However, the response from BTG Pactual’s management team has ensured the bank has recovered from the first phase of its existential challenge at least. Its bonds were trading at under 50 cents on the dollar in early December 2015 and are now well into the 80s. They are still recommended as a buy by many analysts at that level.
Persio Arida, executive chairman of BTG Pactual, led the bank’s short-term restructuring strategy of non-core disposals and liquidity management. Between November 25 and December 18, 2015, the bank sold R$10 billion ($2.73 billion) in assets including the sale of loan, bond and securitization portfolios to Bradesco and Itaú and equity stakes in a range of companies, such as BR Properties and hospital chain Rede D’Or.
Persio Arida, BTG Pactual
Other disposals are underway, including the sale of its Swiss-based private bank BSI to EFG, although BTG plans to retain a minority stake (between 20% and 30%). The bank has also shored up confidence in its liquidity position while clients scrambled to withdraw investments managed by the bank, notably securing a line of credit from the central bank’s guarantee fund FGC.
Combined, the strategy countered the confidence shock suffered by clients and counterparties and prevented the crisis turning to collapse.
As the bank moves into the second quarter of 2016, does Arida think that the day-to-day operational challenge to stabilize the bank is over?
“The short answer to the question is: yes, we have stabilized the business,” says Arida. “The immediate challenge for us was to address liquidity, ensure that the bank was appropriately funded and able to meet all its obligations, and to continue to conduct business on behalf of our clients.
"We also knew that we would need to handle outflows from our investment funds. It is difficult to imagine a worse stress scenario, but we moved quickly by selling credit portfolios and non-core assets, as well as minimizing the use of liquidity in our trading operations. We are pleased that we were able to meet our obligations punctually and without having to resort to gates or closing any funds. This is testimony, in part, to the quality of our assets, but it also underscores the critical importance of our partnership culture.”
Analysts, including Exotix Partners’ Nashwa Saleh, have complimented the bank on the value it has generated from the disposal process – the fire sale hasn’t required accepting low discounts on assets.
“We have always had a very conservative approach to valuation and mark our assets accordingly,” says Arida. “We also had a portfolio of highly desirable assets, so selling them was less problematic than some people had suggested. Another factor was that it was common knowledge that we would sell assets. We had a competition among buyers, which enabled us to secure good disposal valuations.”
These valuations have shored up the bank’s capital ratio – which remains strong. BTG’s Basel ratio dropped to 15.5% in financial year 15 (14.3% as of Q3 2015) – well above the regulatory minimum of 11%. However, the bank is still set to sell BSI.
Exotix’s Saleh says the disposal will mark an important shift in the bank’s strategy: “We had noted at the time [of BTG Pactual’s acquisition of BSI] that it improved both balance-sheet structure and revenue mix at the time, moving BTG from a pure investment banking model closer to a private bank structure with a more stable revenue mix. Divesting BIS would result in the bank going back to its core investment bank model at this stage.”
However, Arida points to the likely retention of a big minority stake in BSI and its retained (though diminished) onshore business as critical to the bank’s model: “Wealth management remains a core activity for us, and keeping a stake in the combined EFG/BSI is important because it gives us continued exposure to Switzerland as a wealth-management centre.”
While the crisis has passed, the bank still faces challenges to its recovery – not least the weak domestic economy. In March, Moody’s downgraded the bank to Ba3 from Ba2, saying: “The bank’s recurring earnings will decline as a result of client defection in certain business lines [and] Brazil’s deteriorating operating environment will compound the pressures on revenue generation stemming from the harm inflicted on the bank’s franchise by recent events.”
The share structure used in the IPO Arida declined to be drawn on reports that the bank plans to delist – potentially taking advantage of depressed equity valuations and giving greater operational flexibility. On December 14 Brazil’s securities regulator CVM announced that it had refused BTG’s request to repurchase up to 41% of its outstanding units ()
Arida gives little away about the next steps. “Our focus is on continuing to consolidate our businesses and ensuring we are best-placed to serve our clients and other stakeholders,” he says. “We will keep the core businesses of BTG Pactual while continuing to sell non-core assets.”