BTG’s Esteves Reports Returns Seen Failing to Justify Risks

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Billionaire Andre Esteves’s Grupo BTG Pactual failed to persuade some analysts that Latin America’s largest independent investment bank is able to deliver returns that justify the risks it’s taking.

Return on equity for the first quarter dropped to 18 percent, the Sao Paulo-based company said Wednesday in a statement, missing Esteves’s goal of 20 percent for the seventh quarter since the firm’s 2012 initial public offering. While a jump in sales and trading revenue helped BTG beat analysts’ earnings estimates, losses on principal investments almost quadrupled.

Esteves, the chief executive officer who jokes that the firm’s name stands for “better than Goldman,” has been trying to swat down concern that losing bets on private-equity stakes will undermine BTG’s finances. Speculation swirled earlier this year among rivals of Esteves, who became a billionaire before turning 40, that such losses will force him to sell his firm to a bigger bank.

“BTG has this speech about being better than Goldman, and that it offers ROE above the market average,” Rodolfo Amstalden, an analyst at investment-consulting firm Empiricus Research, said in an interview. “ROE of 18 percent is disappointing for a company that intends to be the world’s best investment bank.”

ROE Forecast

Esteves, 46, said on a conference call with analysts Thursday that he was maintaining the firm’s guidance on ROE. “We continue to be confident we will achieve something similar to that even in a weaker economic environment,” he said.

The CEO will have to manage that goal while grappling with fallout from holdings linked to Petroleo Brasileiro SA, the state-owned oil company embroiled in a bribery scandal. First-quarter results included a provision for the impairment to BTG’s investment in oil-rig supplier Sete Brasil Participacoes SA equivalent to approximately 25 percent of its book value. Revenue for the quarter topped analysts’ estimates even with that provision, which totaled 280 million reais ($92 million).

Prospects for Sete have improved in recent weeks, and the new valuation represents BTG’s best estimate for its worth, Esteves said on the call, adding that he expects BTG’s merchant-banking business to post positive results for the year.

Recession Concern

Adding to those headwinds are projections that Brazil’s economy will shrink 1 percent this year, after expanding an average 1.56 percent annually since 2012. Such a contraction, which would be the biggest in a quarter century, may trim demand for BTG’s investment-banking services, such as merger advice and IPOs.

“BTG is riskier than all the major commercial banks in Brazil with a lower return,” Carlos Daltozo, an analyst at Banco do Brasil SA in Sao Paulo, said in an interview after earnings were released. “Buying its shares carries excessive risk,” said Daltozo, who has the equivalent of a hold recommendation on the stock.

Shares of the firm have dropped about 4.5 percent since April 2012, when it held its IPO, the worst performance among the nation’s biggest banks during the same period. They rose less than 1 percent to 29.86 reais at 1:46 p.m. in Sao Paulo.

Beats Estimate

Earnings climbed 2.6 percent to 854 million reais, or 94 centavos a share, from 832 million reais, or 92 centavos, a year earlier, according to the statement. That beat the 93-centavo estimate of five analysts surveyed by Bloomberg as revenue from sales and trading jumped 34 percent.

“The sales and trading business had very strong numbers because of foreign-exchange trading and commodities,” Daltozo said.

Revenue from corporate lending increased 61 percent, to 317.8 million reais, due to a recovery on the non-performing loans portfolio, BTG said.

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