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Still Better Than Goldman

5 November 2015 By Antony Currie

BTG Pactual’s earnings flatter its performance. The Brazilian investment bank cranked out net income of 1.5 billion reais ($397 million) in the three months to September. That works out to a return on equity of 28 percent, meaning the firm run by Andre Esteves has yet again put its Wall Street rivals to shame. Dig a bit deeper, though, and the results are more pedestrian.

BTG Pactual is benefiting from several trends. The Brazilian central bank raised interest rates 2.5 percentage points this year. That steepened the yield curve, often a boon for financial institutions, and boosted the return on loans. As a result, revenue from interest and other income jumped almost 50 percent from last year’s third quarter.

Volatility in foreign exchange and commodities has played to BTG Pactual’s strengths, catapulting sales and trading revenue to 1.4 billion reais, a 361 percent rise from the same period last year. Together with interest income, that far outweighed losses on oil and gas-related principal investments and disappointing investment banking revenue of just 66 million reais.

BTG Pactual also relies less on the Brazilian economy than it once did. Its latest acquisition, Swiss private bank BSI, should mean that some 60 percent of the bank’s revenue will come from abroad, Esteves says.

On top of that, BTG Pactual is efficient. It spent just 53 percent of its revenue on expenses in the third quarter. That’s slightly more than in recent quarters, but still less than the most frugal big American lender, U.S. Bancorp, which covers costs with 54 percent of its revenue. The figure for Goldman Sachs is 70 percent.

The Brazilian bank gets a break every quarter, though, either by paying low taxes or receiving a bit of money back. In the third quarter, the government effectively paid BTG Pactual 305 million reais, because a 5 percent increase in Brazil’s corporate tax rate allowed the bank to use some deferred tax assets.

Strip all that out and apply a 30 percent tax rate to earnings and BTG Pactual’s ROE drops to 15 percent. That still beats the American competition, but it’s rather less impressive than the headline number suggests.



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