Expansion Into New Lending Segments Will Strengthen Credit Portfolio Quality

Key Takeaways

• Strong organic growth in Wealth and Asset Management signals future revenue potential, driven by record net new money inflows.
  
• Expansion into corporate and SME lending may boost revenues and strengthen the credit portfolio's quality.
  
• Dependency on uncertain market conditions and regulatory changes, coupled with competitive pressures and macroeconomic challenges, could pose significant risks to revenue and financial stability.

Catalysts

Provides financial products and services in Brazil and internationally.

• Banco BTG Pactual's Wealth Management and Asset Management units are experiencing strong organic growth, with record net new money inflows, suggesting future revenue growth potential in these areas.
  
• The expansion into new products and market segments, particularly in corporate and SME lending, offers potential for increasing revenues and maintaining high-quality credit portfolios.
  
• The Sales and Trading business unit's robust performance, driven by expansion of client franchises and efficient VaR allocation, indicates potential for stable or growing earnings.
  
• The bank's successful issuances of AT1 perpetual notes and unsecured notes reflect strong investor confidence, enhancing capital position and supporting future business growth, which may positively impact earnings.
  
• Operational leverage improvements, as demonstrated by decreasing cost-to-income ratios, suggest potential for enhanced net margins and earnings growth.

Banco BTG Pactual Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Banco BTG Pactual's revenue will decrease by 0.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 32.9% today to 49.6% in 3 years time.
• Analysts expect earnings to reach R$17.4 billion (and earnings per share of R$4.72) by about December 2027, up from R$11.4 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.3x on those 2027 earnings, up from 11.5x today. This future PE is lower than the current PE for the GB Capital Markets industry at 23.4x.
• Analysts expect the number of shares outstanding to decline by 8.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 20.84%, as per the Simply Wall St company report.

Banco BTG Pactual Future Earnings Per Share Growth

Risks

• Dependency on market conditions and regulatory changes could pose risks to revenue, as market rates compression and government regulations are factors that might change unexpectedly.
  
• The significant reliance on the growth of the Investment Management and Corporate and Investment Banking sectors makes earnings vulnerable if these sectors experience a slowdown or face increased competitive pressures.
  
• The potential negative impact of the Americanas event on credit provision shows that unexpected market events could pose a risk to net margins and overall financial stability.
  
• The high growth in unsecured funding and SME portfolio expansion presents credit risk, especially in a challenging macroeconomic environment, which could impact net income and asset quality.
  
• Increased competition and macroeconomic uncertainties, particularly in Sales & Trading, could hinder the ability to maintain net income growth and achieve sustainable earnings expansion.

Valuation

• The analysts have a consensus price target of R$40.92 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$48.0, 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 2027, revenues will be R$35.1 billion, earnings will come to R$17.4 billion, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 20.8%.
• Given the current share price of R$27.62, the analyst's price target of R$40.92 is 32.5% 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.