The R$2.5 billion follow-on transaction that BTG Pactual completed Tuesday 11 June was the most visible milestone in an extraordinary year for the bank.
The bank’s share price has risen from R$18 one year ago to close at R$47 at the end of the trading session in which the deal was executed. Unusually, the bank’s share price rose by 15% on the news of the secondary share offering.
Speaking to Euromoney from New York, where he had led one of the four teams that comprised the deal’s roadshow, Roberto Sallouti, CEO of BTG Pactual, said the deal (led by the investment banking unit of BTG Pactual, Morgan Stanley, Banco Bradesco, UBS and Banco do Brasil) had fulfilled a number of his strategic objectives.
“We were explaining that we were going to use the resources to transfer the bank’s partial ownership of [Swiss private bank] EFG [International] to the holding company,” he says. It was also an opportunity to “update investors on our traditional franchise and present our plans for our new digital retail unit”.
The primary objective – the acquisition of the bank’s share of EFG – was a response to investors’ desire to improve the profitability of the bank’s business, he adds. “EFG was equivalent to about 300bps of core tier 1 and it was a low return on equity so we have taken that capital and deployed it into our core business.”
Sallouti says the deal will take the bank’s core tier 1 equity to “around 13.5%”, against his target of “running between 12% and 13%, with a 15% to 16% total capital ratio – so that gives us space to grow.”
He adds: “And not only that but it takes out an asset that was having very little return on equity [and allow us to] allocate to our core businesses that are yielding around 19% ROE.”
We had all these individual efforts that were presenting great results but we realized that it was such a huge opportunity that we needed to pull all these together so that we can better explore synergies- Roberto Sallouti, BTG Pactual
The follow-on also had the benefit of increasing the bank’s free float to 23%, from 18%, and therefore qualifying as liquid enough to be eligible to pension funds (the actual rule is 25% free float to be an eligible equity for pension funds but BTG has a been granted a special dispensation due to a commitment to increase to a 25% free float within 18 months). Sallouti says increased liquidity was also an attractive benefit of the deal to existing investors.
The offering closed three oversubscribed. Sallouti says orders were “well diversified: between new and current shareholders, local and international investors, as well as global financials specialist funds and sovereign wealth funds. The final geographic allocation went to two-thirds Brazil and one-third international accounts and comprised a “high quality order book” comprised of about 60% long-only funds.
His final strategic objective was to respond to investors’ request to make BTG “a clearer Latam financial services story, and having a Swiss bank as part of our core holding didn’t make sense”.
The roadshows were an opportunity to update the investor community on the bank’s ambitious plans for expansion into retail banking. The investment bank has been adding new verticals – driven by digital investment – in the past few years.
Most recently the bank announced a move to offer full consumer banking services in Brazil aimed at the top two socioeconomic groups (A and B), which will supplement earlier digital initiatives in broadening its private banking platform to the mass affluent sector.
The bank has also digitized Banco Pan to be its retail bank offering to the C and D consumer segments, as well as digitizing Banco Pan’s insurance company to offer insurance products to the mass market. BTG is also investing in a digital pilot of SME products and has launched a subsidiary called Decode that focuses on data analytics and performance marketing.
“We had all these individual efforts that were presenting great results but we realized that it was such a huge opportunity that we needed to pull all these together so that we can better explore synergies,” says Sallouti.
The bank hired Amos Genish, ex-president of Telecom Italia and Telefonica Vivo, as senior partner and head of its retail digital services. Sallouti says the bank is preparing to capitalize on a 20-year structural growth opportunity.
“I am convinced interest rates are going to 5.5% in Brazil and inflation will converge to a 3% target,” he says. “This will force people to have credit duration and equity risk in their market. This will lead to a deeper and more sophisticated market. This will tremendously benefit our core business of sales and trading, investment banking, asset management, wealth management and credit.”
He believes that Brazil’s higher level of adoption of technology and internet-based services (already seven out of 10 banking transactions is conducted digitally) will lead to another structural shift: the decentralization of a banking industry that has, after the exit of HSBC and Citi, seen the top five banks have a combined market share of 85% of assets, 80% of credit and 75% of deposits.
“These two trends together are a perfect opportunity for us to develop our digital retail unit,” says Sallouti, and he argues that investors’ growing awareness of the existence of – and potential for – its consumer business is responsible for much of the recent stock performance.
“At the turn of the year we were basically one-times book and our (retail) peers were at 2.3-times book value,” he says. “And I think that as investors saw that our ROE was going towards 20%, which will happen in the next two years, then we should be moving towards that benchmark. They’re now trading at roughly 2.7-times and we are at 2.1% so my view is that was part of the re-pricing.”
Another factor was other investors’ recognition that pure Brazilian digital plays had huge multiples that weren’t recognized by the development of BTG’s capabilities in this area.
“If Banco Inter is worth seven-times book then BTG Pactual’s [digital business] is trading for free because our traditional business alone justifies our current higher multiples," says Sallouti. "So I think that we have showed that this transaction unlocks a lot of value.”