Brazil’s BTG Pactual is the best bank in the emerging markets in Euromoney's Awards for Excellence 2022. Led by chief executive Roberto Sallouti, it certainly posted strong recent results: in the first quarter of 2022 total revenue grew 56% to R$4.4 billion ($856 million), net income leapt 72% to $2.1 billion and return on equity hit 21.5%. And the future looks – if anything – even better.
“We’re in a sweet spot – and we’re the only ones [in our home market of Brazil],” says João Dantas, senior partner, member of the board and one-time CFO at the bank. “We’re growing as much or more than the fintechs, but we are profitable.”
Successful penetration of the mass-affluent sector has seen the bank move to consolidate its offering to high-income retail – current accounts and mortgages – effectively enjoying operational leverage from its existing digital platform.
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“Every new high-income retail client becomes profitable at inception for us because they bring over their investments – we charge similar fees to those we charge our private banking clients – and the new revenues dilute our costs,” says Dantas, who adds that a similar dynamic is behind the bank’s $17 billion small and medium-sized enterprise loan portfolio.
The addition of current accounts – thereby turning itself into a retail bank – has changed the market’s perception of BTG. The bank has now dropped its digital brands BTG Plus and BTG Pactual Digital and is proactively marketing itself as a retail bank.
It is confident of its retail offering and that it has mitigated the risks of damaging the brand in its traditional wealth-management and investment-banking services.
However, Dantas explains that it has been important internally to retain its culture and partnership structure. The bank had 6,293 employees (288 of whom are partners) as of March 31, 2022, and has managed to grow headcount in a controlled manner, avoiding any rupture with the bank’s internal processes or ethos.
Dantas says the move into retail has increased BTG’s total addressable market. He estimates that there are only a little more than 100,000 private banking clients in Brazil, while there are up to six million individuals that are now targets for its retail services.
As well as diluting costs and boosting profitability, the new segment also provides diversification – particularly in funding.
“When I was CFO, I was discussing the financing benefits that would come from growing our retail funding base to around 30%,” says Dantas. “We’ve hit that level already [including its subsidiary Banco Pan], and we’re still very early in our retail journey.”
He does, though, feel that the market hasn’t been valuing the bank correctly. BTG recently conducted a share buyback – the size was relatively small, the bank only used a small portion of its authorised budget of R$1 billion – that was intended to signal that management disagreed with the extent to which its stock had sold off, which was broadly in line with market levels.
Dantas believes a ‘sum-of-its-parts’ approach is the best methodology for valuing BTG, but one with a multiplier.
“We are a sum-of-the-parts business that is delivering a lot of synergies,” he says, pointing out that retail growth is boosting the profitability of the bank’s investment banking operations.
Previously, the bank was paying fees to distribute primary issuance to retail buyers; those buyers can now be retained and the transactions made more profitable.
So, why has the bank not improved the transparency of its retail-growth reporting so that analysts and investors can get a better feel for a business that might attract growth-level multiples?
We’re in a sweet spot... We’re growing as much or more than the fintechs, but we are profitable
Dantas says that market conditions have cycled away from these dynamics – growth stocks were being punished in the recent sell-off – which lessens the pressure for the bank to extract these elements when reporting.
He then makes the structural point that BTG’s management ethos is driving the retail bank, rather than vice-versa.
“Our investors appreciate that we’re not reporting how many clients we added last week or how many downloaded our apps, because they’re looking at growing revenues and increasing profits,” he insists.
“KPIs [key performance indicators] are important, but when you report those [externally] it immediately becomes an important reference," he says. "Because we’re human beings and we act around references, we need references. So, if an organization embeds references around the number of accounts or downloads – how many credit tickets are issued – you are going to push people within the organization to maximise KPIs that are not necessarily the primary KPIs that are most important for the bank – nominal income and profitability ratios.”
The name Wells Fargo hangs heavily in the air.
Yet the incorporation of behavioural factors into management strategy is a strong thread at BTG Pactual. Dantas admits that the bank has moved relatively slowly when entering new market segments.
One of the main reasons for this is an under-utilized management tool in financial services.
“Fear,” he says bluntly, “which is helpful for human beings to continue to exist on the face of this planet – as well as companies. When you have a successful brand already, you need to be very careful where you go, and why you go that way.”
Retail is the new path for BTG: it not only brings the potential for a lot of new business, but it does so in a way that boosts profitability – and won’t be dilutive of that 20%-plus RoE.