Brazil: BTG fights for survival
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Brazil: BTG fights for survival

Esteves’ exit fails to slow outflows; oil and gas exposure in spotlight.

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The arrest of André Esteves at the end of November has severely harmed BTG Pactual

The arrest of former BTG Pactual CEO, André Esteves, has finally extended the Brazilian corruption investigation, Lavo Jato, to the country’s financial industry. The fall-out for Brazil’s largest investment bank has been swift and severe, and its new management team was still scrambling to shore up its short-term liquidity position to reassure investors and stem the flood of withdrawals from its asset management division as Euromoney went to press in mid-December.

While there seems little chance of financial contagion spreading to the rest of the banking sector from BTG’s precarious situation, the focus has fallen on bank exposure to the underlying source of these investigations – Petrobras, and the rest of the oil and gas industry that is suffering operational paralysis and growing, and in some cases possibly unsustainable, indebtedness.

Meanwhile, the quasi-sovereign oil firm’s huge amount of debt (R$507 billion at the end of Q3 2015) has led a growing number of analysts to predict it will need government support, which would be good news for bondholders but a further dilution in the equity base would trigger another lurch downward in the share price.


Esteves’ arrest and subsequent charges relate to an alleged attempt to dissuade a former Petrobras director, Nestor Cervero, from giving testimony about bribes he received, as part of a plea bargain to reduce his jail sentence. Police and prosecutors have not yet formally dragged the bank into the investigations but they say they have uncovered documents that suggest the bank paid Congress president Eduardo Cunha a R$45 million bribe. There are also deals that investors fear may become linked to corruption, such as BTG Pactual’s acquisition of 50% of Petrobras’ assets in Africa in June 2013 for $1.53 billion. 

Despite the bank, and Esteves, acting quickly to minimize the damage – Esteves resigned and sold his stake in the bank when prosecutors managed to extend his temporary arraignment to an open-ended incarceration – the bank’s share capitalization has fallen by over 50%, fixed income fund investors have pulled out over 60% of funds and AUM, including in the private banking division, have fallen by 15%.

All of the rating agencies have stripped the bank of its investment grade rating, which will cause further problems as it is an active counterparty in trading markets in Brazil and Latin America.

In the short term, the bank faces a severe liquidity crisis but a R$6 billion loan from Brazil’s Deposit Guarantee Fund (FGC), agreed on December 4, provided near-term safety from collapse. The bank’s new management team, under co-CEOs Roberto Sallouti (previously head of asset management) and Marcelo Kalim (CFO), also acted prudently by dismantling trading positions, selling portfolios of loans to competitors and selling other non-core assets. The bank also put up some of its private equity assets for sale: according to CVM filings, BTG Pactual is preparing to divest BR Properties and BodyTech. The bank also plans to try to sell recently-acquired Swiss private bank BSI.

The move to offload its $1.7 billion acquisition, which it completed only three months ago, is a clear sign that the private banking franchise is caught up in the crisis. Clients have less flexibility to react in the short-term, because of lock-up agreements and penalties for liquidizing positions, than the bank’s other tiers of investors, but high net-worth individuals and families are reported to be seeking an exit from the bank that, before the crisis, had the fourth largest AUM in the industry. 

BTG Pactual refused to discuss any of the issues it is facing and other private banks declined interviews but local business magazine Veja has reported that while BTG’s competitors refuse to speak openly about its problems, so as not to appear “vultures”, there is fierce pitching to BTG’s client base. Banco Safra, one of the country’s smaller private banks, has reportedly offered to pay redemption fees if clients switch their business. Banco Safra did not return calls seeking comment.

Meanwhile, as BTG Pactual struggles to define its future scale, there is also growing concern that Lavo Jato will have a big impact on the rest of the banking industry in 2016, even in the absence of any formal corruption charges. Petrobras’ dominates the oil and gas sector, not only with its own scale but also as head of the supply chain for private sector companies. 


Analysts say private and public banks are taking a much more conservative stance to the oil and gas sector. The public banks have the largest exposures, with 10.4% of Banco do Brasil’s R$472 billion credit portfolio connected to the sector. Private banks also have large loans, with bank reports showing that Itaú has 1.8% of its R$477 billion credit portfolio extended to the sector, the majority of which is to Petrobras. Bradesco has 3.2% of its R$366 billion extended to oil and gas companies and Santander has allocated 3.7% of its R$262 billion portfolio to the industry. In the short term, private sector banks will try to lower these exposures, which will increase the risks of these companies refinancing debt.

Marcela Nagib, Petrobras analyst for JPMorgan, says Petrobras alone has between $20 billion and $22 billion of debt to roll over in the next 14 months. “At some point the government will have to provide some kind of support but, given the political situation right now is very challenging, we don’t see that in the near term,” says Nagib.

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