BTG’s Lower Bonuses Portend More Bank Cuts on M&A Decline

Grupo BTG Pactual (BBTG11), the Brazilian investment bank led by billionaire Andre Esteves, is cutting bonuses amid sliding revenue and the slowest market for mergers and acquisitions in six years.

Provisions for bonuses, which are paid to all employees of the Sao Paulo-based bank, fell 31 percent to 426 million reais ($188 million) in the first half of 2013 from a year earlier, the company said in a statement last week. They dropped 45 percent in the second quarter from the first.

BTG, Brazil’s biggest M&A adviser, predicted in January that merger volume would surge as much as 40 percent this year. Instead, takeovers through July plunged to the lowest level since 2007 as the outlook for economic growth worsened. Goldman Sachs Group Inc., UBS AG and Barclays Plc have responded with staff reductions in Brazil, and more lenders may follow BTG in lowering bonuses, according to Renata Fabrini, a partner at executive-search firm Fesa.

“When one bank starts to pay less, the others tend to follow, because they aren’t afraid anymore of losing executives to the competition,” Fabrini said in an interview from Sao Paulo.

BTG’s revenue fell 17 percent in the first half to 2.7 billion reais. The revenue figure BTG uses to calculate bonuses declined 46 percent from the first quarter to the second, when the bank lost 106 million reais on proprietary trading and 149 million reais on real estate investments, according to last week’s statement.

Photographer: Jin Lee/Bloomberg

Grupo BTG Pactual Chief Executive Officer Andre Esteves said, “We reduced our risk exposure in general.” Close

Grupo BTG Pactual Chief Executive Officer Andre Esteves said, “We reduced our risk exposure in general.”

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Photographer: Jin Lee/Bloomberg

Grupo BTG Pactual Chief Executive Officer Andre Esteves said, “We reduced our risk exposure in general.”

Revenue Link

BTG’s bonuses, which get paid in a lump sum at the start of the year, are “highly correlated to revenue,” Fabrini said.

The company declined to comment on bonuses. Shares rose 1.8 percent to 28.55 reais at 5:06 p.m. in Sao Paulo.

Investment-banking fees industrywide in Brazil dropped 13 percent this year through July from a year earlier, to $506 million, the lowest since 2009, according to London-based research company Dealogic. At BTG, investment-banking revenue in Brazil fell 39 percent to $70 million, the data show.

Business slowed amid speculation the U.S. Federal Reserve would trim its $85 billion monthly bond-buying program and as Eike Batista’s commodities empire collapsed, contributing to a decline in Brazilian shares and M&A volume. The benchmark Ibovespa (IBOV) index has lost 18 percent since the start of 2013.

“Higher volatility in the markets is reducing returns for Brazilian corporate and investment banks, and they’re increasing the focus on cost reduction and efficiency,” said Ricardo Amatto, a partner at headhunter firm Amrop Panelli Motta Cabrera in Sao Paulo.

ROE Decline

BTG’s annualized return on equity, a gauge of profitability, fell to 17 percent in the first half from almost 31 percent last year.

The firm’s revenue from investment banking rose 56 percent to 279 million reais in the first half of 2013 even with the slowdown in Brazil, as international acquisitions completed since last year added to the total. The bank concluded its takeover of Bolsa y Renta SA, Colombia’s biggest brokerage by trading volume, in December, and acquired Celfin Capital SA, Chile’s biggest brokerage, in November.

BTG held on to its top ranking among M&A advisers in the first half of 2013, data compiled by Bloomberg show. The bank ceded the No. 1 position on Brazil investment-banking fees to Itau BBA through July, the wholesale arm of Itau Unibanco Holding SA, according to Dealogic. Sao Paulo-based Itau, the biggest Latin American bank by market value, generated $81 million of fees, up 8 percent, Dealogic said.

Credit Suisse Group AG ranked third with $60 million, and Banco Bradesco BBI SA was fourth, with $51 million. Officials at the banks declined to comment on bonuses.

Bonus Gap

U.S. and European banks have been shrinking bonuses since the 2008 financial crisis and were paying less to executives than their local competitors in Brazil, Fesa’s Fabrini said. That gap may narrow this year because U.S. banking profits are rising, she said, adding that it’s “too early to say.”

Even with the drop in bonus expenses, BTG’s cost-to-income ratio, which measures total revenue and operating expenses, was 50 percent last quarter, still above the 40 percent average for the past two years, Mario Pierry, an analyst at Deutsche Bank AG, said in a report. BTG’s management has said several “cost-optimization initiatives are under way following its recent acquisitions,” according to Pierry.

‘Value Destruction’

BTG eliminated about 60 people from Celfin last November, leaving the firm it acquired with about 600 employees, a person with direct knowledge of the matter said at the time.

The “value destruction” in emerging markets and the “flight to quality” from international investors will probably keep bonuses falling at Brazilian banks, according to Amatto at Amrop.

That’s what BTG is preparing for, Esteves, the bank’s chief executive officer, said on a conference call last week with analysts.

“We reduced our risk exposure in general,” Esteves, 45, said. “We increased our liquidity to confront a more difficult environment, to be prepared for opportunities that appear in moments of crisis.”

To contact the reporter on this story: Cristiane Lucchesi in Sao Paulo at clucchesi5@bloomberg.net

To contact the editors responsible for this story: David Scheer at dscheer@bloomberg.net; Christine Harper at charper@bloomberg.net

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