Acquisitions Of Orama, MY Safra, And Julius Baer Will Expand Scale And Product Offerings In Asset And Wealth Management

Key Takeaways

• BTG Pactual’s diversified credit portfolio and reduced funding costs suggest potential for continued earnings growth.
  
• Acquisitions and strong asset inflows bolster wealth management scale and product offerings, boosting revenue prospects.
  
• Growth relies on stable credit conditions and expansion, with risks from market, competition, and regulatory changes potentially impacting margins and revenue.

Catalysts

Provides financial products and services in Brazil and internationally.

• BTG Pactual's credit portfolio grew by 29% in 2024, with diversification across products, segments, and geographies, as well as a reduction in the cost of funding, suggesting potential for continued revenue and earnings growth.
  
• Strong performance in investment banking, with a 30% growth driven by debt capital markets and M&A activity, indicates potential for further revenue expansion if sales and trading recover, impacting overall net margins.
  
• Acquisitions such as Orama, MY Safra, and Julius Baer in Brazil are expected to enhance scale and improve product offerings, likely aiding revenue growth in asset and wealth management.
  
• Asset and wealth management experienced significant net inflows, with asset management recently surpassing the R$1 trillion mark, suggesting ongoing growth prospects for assets under management, potentially boosting revenue.
  
• The expansion of wealth management through acquisitions and consistent growth in net new money hint at lasting increases in assets under management, which should positively impact revenue and earnings.

Banco BTG Pactual Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Banco BTG Pactual's revenue will grow by 1.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 33.9% today to 47.4% in 3 years time.
• Analysts expect earnings to reach R$17.4 billion (and earnings per share of R$4.56) by about March 2028, up from R$11.8 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.5x on those 2028 earnings, up from 14.4x today. This future PE is greater than the current PE for the GB Capital Markets industry at 13.9x.
• Analysts expect the number of shares outstanding to grow by 0.08% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 20.93%, as per the Simply Wall St company report.

Banco BTG Pactual Future Earnings Per Share Growth

Risks

• The growth in corporate lending and business banking is heavily reliant on maintaining credit quality and stable spreads amidst challenging macroeconomic conditions, which could impact net margins if these conditions worsen.
  
• Sales & Trading experienced a decline in annual revenues due to a very low VaR allocation and challenging market conditions, which, if persistent, could hinder future revenue growth.
  
• The significant reliance on net new money inflows in Wealth and Asset Management may face risks from increased competition and regulatory changes in tax-exempt product offerings, potentially affecting revenue growth in these segments.
  
• High growth in unsecured funding is offsetting some of the funding costs, but a potential increase in interest rates or changes in retail funding conditions could affect the net interest margin adversely.
  
• With a capital ratio close to its target and ongoing aggressive expansion, any unexpected market or economic downturn could pressure BTG Pactual to adjust its payout strategies or growth plans, impacting projected earnings.

Valuation

• The analysts have a consensus price target of R$40.167 for Banco BTG Pactual based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$47.0, and the most bearish reporting a price target of just R$37.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$36.6 billion, earnings will come to R$17.4 billion, and it would be trading on a PE ratio of 19.5x, assuming you use a discount rate of 20.9%.
• Given the current share price of R$35.57, the analyst price target of R$40.17 is 11.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.