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BTG Pactual
BBI Equity Research
Monday, June 4, 2012

A Play on Brazilian Capital Markets Growth

PPP BTG Pactual
We are initiating coverage of BTG Pactual (BBTG11) with an Outperform rating
and a target price of R$36.30. Based on our numbers, the bank is currently trading at a Banking
P/E of 8.3x for 2012 and 6.3x for 2013, as well as a P/BV 2012 of 1.7x. Our target price
implies a P/E 2012 of 11.8x and P/BV 2012 of 2.4x. Although we expect the stock to Outperform
behave as a high-beta stock in the market in the short term, we believe it should benefit Target Price: R$36.30
from a long-term trend of development in the Brazilian capital markets. In our view, in the Upside: 41.8%
next few quarters the main driver for the stock performance should be BTGs ability to
assure the market about its capability to deliver ROEs of around 25% on a recurring
basis (as guided in the IPO).

A key point of discussion in the investment case for BTG involves treasury and
proprietary operations sizable contribution to results. This basically involves two
divisions: global markets (through BTG Participations) and sales & trading (mostly fixed
income, FX and local equities in Brazil). The global markets line is based on prop
trading/positions, essentially through capital allocated in hedge funds managed by BTG.
In this line results are market beta sensitive. The sales & trading line, for its part,
comprises brokerage, commissions, energy trading and results from positions assumed
by the bank taking market risk, frequently involving positions related to client trading
execution. The concerns regarding this line involve volatility and difficult predictability.
Although trading positions became a greater source of concerns after J.P. Morgans
problems, in our view BTGs positions are relatively small in most markets, and
consequently easier to unwind.

BTGs listed stock (BBTG11) is a unit formed by a combination of shares of Banco


BTG Pactual (Brazil) and BTG Pactual Participations (Bermuda). Banco BTG
contains the investment bank, asset management, wealth management and sales &
trading, while BTG Participations encompasses the principal investments line (global
markets and merchant banking strategies, with proprietary money). BTG Participations is
a Bermuda company, without employees and almost no G&A expenses. Its capital and
assets are managed by Banco BTG Pactual, mostly through it asset management
company. This corporate structure adds complexity to the case, but also gives the group
flexibility in allocating capital and pursuing opportunities.

One of the most distinguishing features of BTG Pactual is its partnership Carlos Firetti, CFA - 55 11 2178 5363
scheme. BTGs partnership structure enables its employees based on their
performance to become eligible to buy shares at book value (financed by the group),
Bruno Chemmer, CFA - 55 11 2178 4903
representing an important part of their compensation. In addition, partners shares
never vest to be traded in the market, and partners can only sell their stakes to the
partnership at book value. In our view this creates a strong alignment between Gustavo Lbo - 55 11 2178 5329
partners and minority shareholders, considering that partners have a major interest in
generating returns and providing long-term sustainability for the company, since their
stakes constitute a large portion of their wealth.

(R$mn) 2011A 2012E 2013E 2014E Key Figures 4-Jun-12

EPS (R$) 1.63 3.07 4.08 4.90 Local price 25.60
Net earnings 1,440 2,713 3,599 4,326 ADR -
Shareholders' equity 8,540 13,154 15,853 19,098 Price range - 52 weeks (BRL) 24.95 32.58
ROAE % 18.1% 25.0% 24.8% 24.8% Shares outstanding (mn) 882.8
P/E 15.7 8.3 6.3 5.2 ADTV (since 4/27/12 - R$mn) 53.9
P/BV 2.6 1.7 1.4 1.2 Market cap (R$mn) 22,600
Dividend yield % 2.0% 3.0% 4.0% 4.8% Net earnings - 3-yr. CAGR 44.3%

Bradesco Corretora Av. Paulista, 1.450 7th floor Sao Paulo Brazil 55 11 3556-3001
Bradesco S.A. Corretora de Ttulos e Valores Mobilirios (Bradesco Corretora) does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that
Bradesco Corretora and its affiliates may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.
For full disclaimer and definitions, please refer to the end of this report. Not for distribution in the United States, Canada or Japan or to U.S. persons.
BBI Equity Research Monday, June 4, 2012

Contents Page

Investment Thesis 3

Valuation 5

SWOT Analysis 7

Units and Shareholder Structure 10

The Partnership Scheme 12

Overview on BTG Pactual 13

Balance Sheet Analysis 14

Main Revenue Lines 15

Revenues Model and Estimates 22

Operating Expenses Model and Estimates 28

Net Earnings Estimates 29

Key Figures (Annual) 30

Key Figures (Quarter) 31

BBI Equity Research Monday, June 4, 2012

Investment Thesis

We are initiating coverage of BTG Pactual (BBTG11) with an Outperform rating and
a target price of R$36.30. Based on our numbers, the company is trading at a P/E 2012
of 8.3x and P/BV 2012 of 1.7x. In terms of P/E, BTG is trading below large Brazilian
banks (Bradesco and Ita) and slightly above international peers. However, in terms of
P/BV, BTG has a significant premium, especially to its international comparables (large
local banks are trading at an average P/BV 2012 of 1.6x, while US and European
investment banks are trading at an average 0.6x P/BV 2012), implying expectations of
greater sustainable ROE. In our valuation model we assume a sustainable ROE of 22%
for BTG, despite managements guidance that the bank may deliver returns in the 25%-
30% range. Our more conservative assumption is due to a lack of visibility on a significant
portion of BTGs revenues, which are derived from trading.

Large Brazilian banks have in general been delivering returns of 20%, on average, while
international investment banks have been delivering ROAEs of below 8%. We should
bear in mind, however, that BTG has no perfect comparison. While large Brazilian banks
obtain most of their revenues from their retail operations (despite having their own
investment banking units), international comparables operate in more mature markets
and are undergoing a deleveraging phase that is hurting their returns. BTG, for its part,
has considerable flexibility in deploying capital, considering its structure in Brazil (Banco
BTG) and Bermuda (BTG Participations), which in our view results in fewer regulatory

In our view, BTG is one of the best vehicles to take advantage of Brazilian capital
markets development and the countrys economic expansion. BTG operates in a
wide range of segments of Brazils capital markets, including investment banking, sales
and trading, and asset and wealth management. With a small and integrated structure,
BTG Pactual has considerable agility in its decision-making process. Its international
competitors with local Brazilian operations have sometimes suffered as a result of
troubles their parent companies have been having abroad, and have therefore
subsequently lost market share in recent years. Moreover, BTG operates with fewer than
1,400 employees, providing a quite efficient structure, with lower compensation ratios and
higher revenues per employee compared to its peers.

BTGs strong balance sheet in Brazil is an important differential for its investment
banking business, compared to other independent investment banks in Brazil
(those that are not linked to large Brazilian banks). We believe that in general,
capability to provide loans to investment banking clients in Brazil is crucial for getting
mandates in the investment banking business. Capacity to execute and distribute deals of
Brazilian companies is broadly similar, with the main difference in our view being strength
of personal relationships, creativity and corporate lending relationships. Although BTG
does not provide traditional banking services and plain vanilla working capital lines, it has
enough balance sheet capacity to provide loans associated with specific transactions,
bonds and other structured operations. This differentiates BTG in particular from
international investment banks that are facing capital restrictions in Brazil.

We see BTGs partnership scheme as a good instrument for long-term

sustainability, providing competitive compensation for its top performers and
incentives to attract new talent. The fact that a large portion of partners wealth is
linked to BTGs book value only helps further strengthen the alignment between top
management and minority shareholders. Since partners shares never vest, to be traded
on the market, and partners can only exercise their put options at book value, their focus

BBI Equity Research Monday, June 4, 2012

turns to delivering sustainable long-term ROAEs that will increase BTGs book value per
share thus their own wealth. In addition, we believe the fact that a large portion of
partners wealth is linked to the bank means that they are more aware of risk
management, which is especially important in BTGs case given the importance of
proprietary trading gains in its total revenues.

Our main concerns regarding BTG are based on the fact that a large portion of
BTGs revenues rely either on proprietary trading gains or client execution
operations, which carry a great deal of market risk. Despite having a good track
record, and a savvy team of traders who are specialized in various asset classes, trading
and client execution operations can result in significant losses, as well as substantial
earnings volatility (especially on a quarterly basis). Thus, we fear that in scenarios of
greater market volatility and stress, BTG may deliver lower levels of return than its peers
with a more credit-oriented and fee-based revenue profile.

In our view, the greatest challenge for BTGs management is to improve investors
perception of the reliability and sustainability of earnings. One of the most intense
discussions during the IPO was related to the abovementioned dependence on trading
gains, which are largely considered highly unpredictable. In our view, expansion of fee-
based revenues as a share of total revenues is an important driver for the bank,
improving earnings quality. We see important developments in that direction in
businesses such as asset management, wealth management and investment banking.
Indeed, we expect strong opportunities for growth in the coming years in an environment
of lower interest rates, investments in infrastructure and maturity of investments.

BBI Equity Research Monday, June 4, 2012


Gordon Growth Model Our Main Valuation Methodology

As we traditionally do in our coverage of banks, our chosen valuation methodology is a

two-stage Gordon growth model. The first stage comprises the period between 2012 and
2016, for which we use our earnings forecasts for each separate year and apply a 25%
dividend payout ratio. The second stage is a calculation of the perpetuity value, in which
we calculate a justified P/BV and multiply it by the equity value for 2017 to reach the
perpetuity value. The present value of the added dividends of the first stage and the
present value of the perpetuity are added together, reaching our fair value market cap.
The discount rate used is a cost of equity of 15.2%. The parameters we assumed for
calculating the justified P/BV are the following:

g (earnings growth) 7.5%

sustainable ROAE 22.0%
Ke (cost of equity) 15.2%

Our parameters for calculating the cost of equity are presented in the table below. We are
using a beta of 1.31x (the historical average of a list of investment bank peers), which is
more than what we use for local retail banks (1.0x).

Figure 1: Parameters for Discount Rate Calculation

Risk Free 3.90%
Market Risk Premium 6.00%
Country Risk (Bps) 150
Beta 1.31
Inflation Differential 2.00%

Ke (USD) 13.25%
Ke (R$) 15.25%
Source: Bradesco Corretora estimates

Figure 2: Two-Stage Gordon Growth Model

2012E 2013E 2014E 2015E 2016E 2017E
Net earnings (Recurring) - R$mn 2,713 3,599 4,326 5,032 5,569 5,987
Pay Out 25% 25% 25% 25% 25% 40%
Dividends (Present Value) - R$mn 678 781 814 822 789
Equity - R$mn 13,154 15,853 19,098 22,872 27,049 30,641
ROE (Recurring) 25% 25% 25% 24% 22% 23%
P/BV Fair 1.87
Perpetuity (Present Value) - R$mn 28,196
Perpetuity + Dividends - R$mn 32,080
Number of Units (mn) 882.8

Target Price (R$) 36.30

Source: Bradesco Corretora estimates

As a result of our two-stage dividend growth model, we reach a fair value market cap of
R$32,080mn, and based on the total of 882.8mn units of BBTG11 issued, we reach a
target price of R$36.30 for the stock.

Comparables and Multiples Analysis

In terms of P/E, BTG is trading below Brazilian large banks (Bradesco and Ita), and
higher than international peers. However, in terms of P/BV, BTG has a significant
premium, especially to international peers (which we consider to be mainly Goldman

BBI Equity Research Monday, June 4, 2012

Sachs, Morgan Stanley, JP Morgan, Credit Suisse, Deutsche Bank and UBS). While BTG
is currently trading at 8.3x P/E 2012 and 1.7x P/B 2012, its local comparables are trading
at 9.0x P/E 2012 and 1.6x P/B 2012, and comparable US and European banks are
trading at 7.7x P/E 2012 and 0.6x P/B 2012.

Keep in mind that there is no perfect comparable for BTG Pactual, either locally or
abroad. Although local large banks operate in the same environment as BTG (subject to
the same regulation and macroeconomic conditions), their focus is on their retail
operation, despite having their own investment banking units (BBA, in the case of Ita,
and BBI, in the case of Bradesco). US and European investment banks operate in an
entirely different macroeconomic environment and are having to significantly deleverage
their operations, which has impacted their levels of returns (average ROAE of 8%, while
Brazilian banks deliver over 18%).

In our view, BTG Pactual trades at a premium to its comparables, given its higher
expected returns and earnings growth. Management guided that sustainable levels of
ROAE are between 25% and 30%, and in our valuations, as a conservative approach we
use 22% as a sustainable level. Nevertheless, BTGs earnings should be volatile given
the market risk for some of the revenue lines, while local retail (which has fee and credit-
based operations), in particular, has much more stable earnings.

Figure 3: Comparables
Last Mkt Cap P/E P/BV
Price* (USD mn) 11A 12E 13E 11A 12E 13E ROE (%)
GRUPO BTG PACTUAL-UNIT 25.6 11,010 15.7 8.3 6.3 2.6 1.7 1.4 25.0
Large Brazilian Banks 172,887 8.4 7.8 6.6 1.5 1.3 1.2 18.0
ITAU UNIBANCO HOLDING S-PREF 28.3 62,275 8.9 8.9 7.3 1.8 1.6 1.4 19.1
BANCO BRADESCO SA-PREF 29.4 54,610 10.1 9.2 7.8 2.0 1.7 1.5 20.3
BANCO DO BRASIL S.A. 19.3 26,915 5.5 4.9 4.3 1.0 0.8 0.7 18.1
BANCO SANTANDER (BRASIL-UNIT 15.7 29,087 9.0 8.2 6.9 1.2 1.2 1.1 14.6
Large American Banks 424,825 7.9 8.1 6.4 0.7 0.6 0.6 7.8
BANK OF AMERICA CORP 6.9 74,359 7.7 10.3 6.5 0.3 0.3 0.3 3.4
CITIGROUP INC 24.8 72,776 6.5 6.1 5.4 0.4 0.4 0.4 6.9
JPMORGAN CHASE & CO 31.0 118,007 6.9 6.9 5.8 0.7 0.6 0.6 8.8
WELLS FARGO & CO 30.1 159,683 10.6 9.2 8.1 1.2 1.1 1.0 12.3
Large American Investment Banks 70,534 20.2 7.8 6.2 0.5 0.5 0.5 7.1
GOLDMAN SACHS GROUP INC 91.0 46,088 23.6 7.8 7.0 0.7 0.6 0.6 7.7
MORGAN STANLEY 12.4 24,445 16.9 7.7 5.4 0.4 0.4 0.4 6.6
European Banks 97,914 8.0 7.2 5.8 0.6 0.6 0.5 NM
CREDIT SUISSE GROUP-SPON ADR 19.1 23,437 8.7 7.5 5.4 NM NM NM NM
DEUTSCHE BANK AG-REGISTERED 34.3 31,854 5.7 5.7 5.0 0.5 0.5 0.4 NM
UBS AG-REG 11.1 42,623 9.7 8.5 6.9 0.8 0.7 0.7 NM
Chinese Investment Bank 22,883 12.2 21.5 17.1 0.7 1.5 1.4 7.1
CITIC SECURITIES CO LTD-H 1.9 22,883 12.2 21.5 17.1 0.7 1.5 1.4 7.1
M&A Boutiques 4,766 17.3 15.1 11.2 3.2 3.1 2.8 19.6
LAZARD LTD-CL A 22.3 2,899 13.7 15.1 10.2 3.4 3.2 2.8 19.6
EVERCORE PARTNERS INC-CL A 23.2 939 17.5 14.3 10.5 NM NM NM NM
GREENHILL & CO INC 31.9 928 20.9 15.8 12.8 3.0 3.0 2.9 NM
Brokers 15,944 13.4 12.7 10.9 1.5 1.4 1.3 10.8
RAYMOND JAMES FINANCIAL INC 32.3 4,449 14.3 13.0 11.0 NM NM NM 12.1
JEFFERIES GROUP INC 12.6 2,590 11.6 10.1 8.9 0.8 0.8 0.7 6.9
TD AMERITRADE HOLDING CORP 16.2 8,905 14.4 14.9 12.8 2.1 2.0 1.8 13.4
Asset Management 70,655 12.9 10.3 8.9 1.5 1.1 1.0 9.5
ALLIANCEBERNSTEIN HOLDING LP 12.4 1,305 10.0 11.1 9.9 0.4 0.4 0.4 NM
FRANKLIN RESOURCES INC 102.7 22,106 11.8 11.5 10.7 2.5 2.4 2.1 19.5
BLACKROCK INC 165.0 28,551 14.0 12.5 11.1 1.2 1.1 1.0 8.6
FORTRESS INVESTMENT GRP-CL A 3.0 1,544 6.8 7.0 5.3 3.2 1.3 1.1 NM
INVESCO LTD 20.8 9,319 12.4 10.8 9.2 1.3 1.0 1.0 8.6
LEGG MASON INC 24.1 3,408 16.4 12.1 10.1 0.6 0.5 0.5 0.9
STIFEL FINANCIAL CORP 29.8 1,598 16.6 12.5 10.1 NM NM NM 9.8
Source: Bradesco Corretora estimates and Bloomberg
* Last price is in BRL for Brazilian banks and in USD for other banks

BBI Equity Research Monday, June 4, 2012

SWOT Analysis

Risks and Threats

Importance of proprietary trading for BTG Pactuals overall results. Results from
proprietary positions and trading represent a significant portion of BTG Pactuals results.
Despite the relatively small size of the positions compared to the overall market, as well
as careful risk management, the bank could experience volatility in its results in adverse
market conditions. Its results are generally market beta dependent (despite also
generating alpha).

Market conditions affect an important portion of BTGs revenues. Market conditions

affects not only trading-related business, but also other revenues lines like asset
management through management fees, wealth management, volumes of ECM
transactions, capacity for divesting from private equity investments, etc.

Competition from other domestic and international players. Brazilian capital markets
increased relevance may attract even more players, further intensifying competition. In
this environment, BTG may have a smaller market share than expected, with a decrease
in fees.

BTG is highly dependent on its more senior partners. Departure of partners could
adversely affect BTGs ability to properly execute its business strategies and investment
policies, and could even undermine its ability to continue growing.

An important part of BTGs operations are not subject to Brazilian regulation and
Central Bank supervision, being subject to Bermuda law instead. The Brazilian
Central Bank is known for its strict monitoring and supervision, but since BTG
Participations is a company registered in Bermuda and not controlled by the Brazilian
bank, it is not subject to it.

Regulatory risks in Brazil. BTG is subject to developing local regulation, which in our
view has a tendency to become stricter, especially regarding proprietary trading and
investments, in line with what is under way in more-developed markets.

Strengths and Opportunities

Strong positioning to tap into the development of Brazils capital markets and
economy. The countrys capital markets still have a long way to go before catching up
with more-developed economies. In our view, BTG is in a quite favorable position to take
advantage of this development in the coming years through its investment banking
division. Moreover, BTGs asset and wealth management divisions should both benefit
from Brazils financial deepening phase, in which more-developed investment funds
should be demanded in light of increased savings and lower interest rates.

BBI Equity Research Monday, June 4, 2012

Figure 4: Number of Listed Companies Figure 5: Market Cap of Listed Companies as % of GDP


3,945 3,838
3,520 190% 183%
3,276 172% 168%
2,886 161%
2,079 118% 108%
1,816 105% 98%
83% 74%
72% 70% 67%
373 44%

Source: BVMF, WFE, IMF and Bradesco Corretora estimates

Strong and permanent alignment between minority shareholders and partners, and
preserved ability to retain and attract new talent. In our view BTG was very innovative
in maintaining its partnership scheme, even after its IPO, unlike other investment banks
that went public around the world. The fact that partners only trade their stakes at book
value, meaning that shares never become vested for sale in the market, leads to long-
term commitment with returns. In our view, maintaining the partnership means BTG
preserves its strong capacity to attract and retain people, which in our view is central to
the business. Moreover, since a significant portion of partners wealth is usually linked to
BTGs book value, increasing BTGs book value per share (BVPS) through high levels of
ROAEs is in partners best interests.

Strong track record of results. Despite considerable dependence on proprietary trading

and client flow operations, which entail a great deal of market risk and therefore add
sizable volatility to earnings and returns (especially focusing on a quarterly basis), BTG
has been able to deliver strong levels of returns since its inception in 2009 (ROAE above
25% in 2009 and 2010, and 18.1% in 2011, impacted by the additional capital from the
private placement). Management has guided that the sustainable levels of ROAEs for
BTG are between 25% and 30%. We are more conservative in our forecasts, assuming a
sustainable level of return of 22%. This level is still considerably higher than that of top-
performing local banks.

Aggressive compensation system leading to higher productivity (higher revenues

per employee and lower compensation ratio compared to peers). BTG Pactual has
quite impressive figures compared to its investment banking peers, posting much higher
revenues per employee, coupled with the lowest compensation ratio (bonus + salaries /
net revenues). This high productivity is partially attributable to BTGs large trading gains
(which have much higher revenues per employee compared to a retail operation, for
example) and the fact that BTG has a smaller structure (headcount of ~1,400, whereas
some international peers have over 100,000).

BBI Equity Research Monday, June 4, 2012

Figure 6: Revenues per Employee FY2011 (US$ thousand) Figure 7: Compensation Ratio FY2011(%)

Peer Average: 38.8%

1,573 50.6% 52.0%

Peer Average: US$ 541 42.4%

24.0% 24.9%
523 454

BTG Pactual Goldman Sachs Morgan Stanley Credit Suisse Ita Ita BTG Pactual Goldman Sachs Morgan Stanley Credit Suisse

Source: Bradesco Corretora estimates and Companies

Diversified revenue sources. Although trading accounts for a large portion of net
revenues, and some lines such as investment banking and merchant banking are rather
highly correlated to capital markets performance, BTG has other business lines that are
more recurring and fee based. BTGs corporate lending business is relatively small
(R$21.5bn book) and has considerable potential to grow. In addition, although the wealth
and asset management businesses depend on financial markets performance, they are
largely fee based. Meanwhile, we believe that BTG benefits from the fact that all its
business units have large cross-selling potential, especially between the investment
banking, corporate lending and wealth management divisions.

BBI Equity Research Monday, June 4, 2012

Units and Shareholder Structure

Unit holders of BBTG11 are investing in two separate entities: Banco BTG Pactual
S.A. and BTG Pactual Participations. Banco BTG Pactual is a Brazilian company listed
on BVMF Bovespa, while BTG Pactual Participations is a company registered in
Bermuda (subject to Bermuda law and tax code) and listed on Euronext Amsterdam. Unit
holders own 1 common share and 2 preferred class A shares of Banco BTG Pactual, and
1 BDR (Brazilian Depositary Receipt) linked to common shares and 2 BDRs linked to
preferred shares of BTG Pactual Participations. There is no holding company or direct
link between BTG Pactual Participations and Banco BTG Pactual. The unit serves as a
virtual holding company.

Figure 8: Unit Composition

Banco BTG Pactual S.A.
1 Common Share + 2 Preferred Class A Shares
BTG Pactual Participations, Ltd
1 BDR of Class A Shares + 2 BDRs of Class B Shares
Source: Company and Bradesco Corretora

Although partners do not hold units, their economic interest in the company is the
same as unit holders. It is important to point out that partners hold preferred class B
shares in the bank (as opposed to unit holders, which hold class A shares), which can be
converted into common shares in the event of future equity offerings. This will allow BTG
to maintain the minimum parity of 50% common and 50% preferred shares, as required
by the Brazilian Central Bank. On the Bermuda side, partners own a direct stake in BTG
Investments LP (as opposed to unit holders, which own BTG Pactual Participations). This
explains why management holds a golden share in BTG GP Management to keep control
of BTG Participations. Management asserts that partners did not migrate to the same
position as unit holders because this would be a taxable event. Members of the
consortium have the option to migrate to BTG Participations from BTGI.

The following figure illustrates the shareholder structure.

BBI Equity Research Monday, June 4, 2012

Figure 9: Shareholder Structure

Brazil Abroad


Unit Purchasers in
BTG Pactual Holdings BTG GP Management
S.A. (Brazil) Ltd. (Bermuda)

Members of
Consortium and
Participating Partners
BTG Pactual
Banco BTG Pactual Participations Ltd.
S.A. (Brazil) (Bermuda)

BTG Bermuda LP
Ltd. (Bermuda)
Brazil US and UK
and Cayman
Operating broker
HK asset Branch
Entities dealers
BTG Investments LP

Source: Company and Bradesco Corretora

Why has management kept the two companies (Banco BTG and BTG
Participations) separate? BTG Pactual Participations will continue to exist for the
following reasons:

Tax benefits. There are no taxes at the corporate level in Bermuda.

Private equity and prop trading investments (Volcker Rule). The

Volcker Rule requires US banks to divest from proprietary trading and
private equity (with proprietary money) over time, and has been
negatively impacting US investment banks in recent years. Currently,
there is no Volcker-like rule in Brazil, but such regulations often make
their way into the developing world. Management says that by keeping
the two companies separate, BTG would be immune from such a rule if it
ever made its way to Brazil.

BTG Participations is the vehicle used to finance new partners in

the partnership. Partners must acquire their stake in the partnership,
and it is common for the partnership to finance this acquisition, especially
for new partners. In Brazil banks are not allowed by law to finance its
controlling shareholders/directors, so these operations are booked in
BTG Participations (Bermuda).

Despite not being listed on any corporate governance level of Bovespa, the units
entail 100% tag-along rights if holders decide not to break them up. Management
tried to comply with Bovespas Level I of Corporate Governance, but was unable to, as
the stock trades as a unit containing BDRs. The units have 100% tag-along rights only if
investors keep them as they are. If they decide to break up the units and trade BTG
Participations and Banco BTG Pactual separately (which is an option, although liquidity
should be an important constraint), the tag-along right drops to 80%. Management has
taken this action to prevent investors from breaking up the units.
BBI Equity Research Monday, June 4, 2012

Management intends to pay out 25% of combined earnings as dividends. Although

minimum dividends are 1% of net income for each company, BTG has stated its intention
to pay 25% of combined net income as dividends. Dividends may come from any of the
entities in the unit, in any proportion, respecting the minimum payout, which allows
management to calibrate capital between Banco BTG and BTG Participations. This can
be especially beneficial in times of tighter BIS ratios for the bank, leading BTG to reach
the 25% payout ratio by paying the majority of the proceeds from BTG Participations in
Bermuda, and therefore not penalizing the banks capital base.

Partnership Scheme

An important part of BTG Pactuals success is linked to its ongoing partnership

scheme. In our view the partnership model fosters meritocracy and long-term
commitment, and allows BTG to attract the best available talent. Moreover, the model
enables BTG to maintain a lean and cost-efficient organizational structure. The company
currently has 163 partners, who are also executives of the group. The partners currently
own 74.7% of equity, while the private placement participants (mainly sovereign wealth
funds) own 14.6% and the units issued in the IPO represent 10.7% of total equity. The 36
most senior partners, who we consider to be key contributors to BTGs success, own
approximately 60% of the company. It is important to keep in mind that partners must buy
their stake in the partnership.

Figure 10: Top Management

Member of both the Brazil and Global Management Committees. He joined the firm in 1989,
Andre dos Santos Esteves
became a partner in 1993, and was appointed a Managing Partner in 2002. He was a Director
Chief Executive Officer
of FEBRABAN from 2003 to 2007 and Member of the Board of BM&F from 2002 to 2006.

Member of both the Brazil and Global Management Committees. Arida was Governor of the
Persio Arida Central Bank of Brazil in 1995, President of BNDES from 1993 to 1994, Director of the Board of
Chairman of Asset the Central Bank of Brazil in 1986 and Special Secretary of Social-Economic Coordination,
Management Ministry of the Planning, Budget and Management from 1985 to 1986. In the private sector, he
worked in a variety of roles, such as at Ita, Sul-Amrica, Unibanco.

Member of the Brazil Management Committee. He joined Pactual as head of the tax
Joo Dantas
department in 1993, became controller of the Bank in 1997, and CFO in 2006. He is also a
Managing Partner
board member of the Brazilian Financial and Capital Markets Association (ANBIMA).

Member of both the Brazil and Global Management Committees. He joined the firm in 1994
Roberto Sallouti and became a partner in 1998. After Banco Pactual was sold to UBS, Sallouti served as Joint
COO Head of Latam FICC (Fixed Income, Currencies, and Commodities) and Emerging Markets
Fixed Income from 2006 to 2008.

Member of both the Brazil and Global Management Committees. Kalim was Chief Investment
Marcelo Kalim Officer of UBS Pactual from 2006 to 2008. He joined the firm in 1996, and became a partner in
CFO 1998. He started as a fixed-income trader in 1996, later becoming Head Funds Manager and
co-Head of Pactual Asset Management.

Source: Company and Bradesco Corretora

BTG Pactuals partnership model remains in place, even after the IPO. Unlike other
investment banking and asset management firms in Brazil and around the world that
have gone public in the past, BTG has taken several concrete steps to ensure that its
partnership model will not change going forward.

Partners can only trade their shares among each other and only at book value. We
expect that such shares will never be eligible to be traded on the market or to third
parties, except for certain, limited exceptions, such as in connection with a sale of
BTG Pactual as a whole. It is important to point out that partners have always had to
acquire their stake in the partnership, and shares received by partners are economically
equivalent to units (shares of Banco BTG Pactual and BTGI). This acquisition can be

BBI Equity Research Monday, June 4, 2012

financed under special conditions, and the vehicle used is BTG Pactual Participations.
Exiting partners receive the proceeds from the sale of their stake in 5 installments.

The partnership holds a call option against the partner, while the partner holds a
put option against the partnership (both with strike prices at book value). Since new
shares will not be issued for the partnership, new partners receive shares from existing or
departing partners. As a result, the partnership has the right, at any time and for any
reason, to require any partner to sell all or a portion of his or her stake at its current book
value, rather than the price at which the stock is trading on the market. This partnership
equity may then be resold to other existing partners or new executives at book value. If at
some point in time BTG Pactual shares are trading below book value, the strike price
changes to market price to prevent arbitrage. Additionally, if all partners decide to
exercise their put option at the same time, the partnership is only obliged to buy a
maximum of 12% of the shares in the partnership every six months.

The partnership scheme creates a long-term alignment between partners and

minority shareholders. Since a large portion of partners wealth is linked to the banks
equity (shares only trade at book value and never at market price), the aim is to maintain
high levels of return (ROAE), resulting in an increase in book value per share, and
consequently the exercise value of the put option. Additionally, despite the dilution,
capital increases above book value especially at near 2.5x-3.0x BV are always
accretive for the partners.

Overview of BTG Pactual

BTG is an independent investment bank and asset and wealth management firm, with a
dominant franchise in Brazil. BTG has built a reputation in Brazil for its aggressiveness in
doing business across all of its revenue lines. Moreover, its attractive partnership scheme
has allowed for attracting and retaining important talent in the Brazilian capital markets.
BTG has operated as a meritocratic partnership since its inception in 1983.

BTG has its roots in Banco Pactual, which was founded in Rio de Janeiro in 1983. In
2006, UBS acquired Pactual for US$2.6bn. After exiting Pactual, Andre Esteves founded
BTG in 2008, and used the company as a vehicle to buy Pactual back from UBS in 2009,
creating UBS Pactual. In Figure 11 below,, we show a timeline of BTGs history, including
important recent events such as the private placement in 2010, the acquisition of Banco
Panamericano and Celfin, and the recent IPO.

The private placement in Dec. 2010 was a very important step in BTGs history, as it
proved that it could bring strong names in the investment community to be part of the
banks business. BTG Pactual secured a capital infusion of US$1.8bn from a consortium
of international investors (the stake acquired was 18.65% of BTGs total capital at the
time), valuing BTG as a whole at US$9.7bn (2.2x P/BV 2010 post-money). The
consortiums members included:

Government of Singapore Investment Corporation (CIG)

China Investment Corporation (CIC)
Ontario Teachers Pension Plan Board (OTPP)
Abu Dhabi Investment Council (ADIC)
J.C. Flowers & Co. LLC (American private equity company)
RIT Capital Partners and Lord Rothschild (UK trusts)
Grupo Santo Domingo (Colombian family office)

BBI Equity Research Monday, June 4, 2012

EXOR S.A. (Agnelli family office, from Italy)

Inversiones Baha, Ltd. (Motta family office, from Panama)
Some partners of BTG Pactual

The 2012 IPO secondary offering targeted some of the consortium members that wished
to sell their stake either in full or partially (JC Flowers, Agnelli family, Rothschild and
Motta family office were the main sellers). We point out that of the 18.65% stake acquired
in 2010, 2.6% was acquired by BTGs current partners. The 2.6% is the only stake owned
by partners that is outside the partnership scheme, and therefore allowed to be sold on
the market. Despite being allowed to sell in the IPO, none of the partners who
participated in the private placement sold any stake in the secondary offering.

Figure 11: BTG Pactuals History

1983-86 1994-98 2002-03 2008 2010 2012

Pactual is founded as Beginning of Wealth Pactual Corretora de BTG is estabilished as a Agreement for a On April 26, BTG
Brokerage House in Rio Management activities Mercadorias Ltd. global investment US$1.8bn capital Pactual conducts
de Janeiro (Broker Dealers) company founded by increase via a sale of IPO, launching its
Acquisition of Banco Andr Esteves, Persio an 18.65% stake of units, BBTG11, at
Launch of Asset Sistema S.A. Opening of Belo Arida, a group of former the Group to R$31.25
Management and Horizonte (MG) and Pactual partners and international
Investment Bank activities Recife (PE) offices managing directors from investors

1989 2000-01 2006 2009 2011 2012

Opens office in So Pactual Asset UBS acquires Banco BTG acquires UBS Acquisition of a BTG Pactual
Paulo Management S.A. Pactual for Pactual for co-controlling acquires Celfin
Beginning of DTVM US$2.6bn, creating US$2.5bn, thereby stake in Banco Capital, a leading
Internationalization UBS Pactual establishing BTG PanAmericano investment bank
Pactual Banking Ltd., Pactual franchise in the
in Cayman Andean Region
Source: Company and Bradesco Corretora

BTG Pactual has over 1,300 employees, and offices on four continents: South America
(So Paulo, Rio de Janeiro, Braslia, Recife, Porto Alegre and Belo Horizonte), North
America (New York), Europe (London) and Asia (Hong Kong). With the acquisition of
Celfin (Chilean investment boutique, with strong presence in the Andean region) in early
2012, and thus far not yet approved by the Brazilian Central Bank, BTG has considerably
increased its presence in Latin America.

Balance Sheet Analysis

BTG features a solid balance sheet, with a positive gap between its credit portfolio and
funding. As of the end of 2011, average funding maturity was at 953 days, while the
average term of the credit portfolio was at 900 days. Moreover, BTGs positive credit
ratings (Global Scale Investment Grade by S&P, Fitch and Moodys) help explain the
banks abundance of funding, both locally and internationally. BTGs average local cost of
funding is 102.6% of the CDI, while its average offshore cost of funding is 2.7% p.y.
Given that BTG has only wholesale funding sources, we consider its average cost of
funding to be quite positive. Time deposits are BTGs main source of funding, accounting
for 52% of its total funding base. The second most important funding source is the

BBI Equity Research Monday, June 4, 2012

issuance of securities, which make up 34% of BTGs total funding, comprising mainly
Letras Financeiras (63%), LCIs and LCAs (21%), and medium-term notes issued abroad

Figure 12: Balance Sheet Overview Asset Liability Management (1Q12)

Assets Liabilities & Equity

Cash and cash equivalents 4

Assets financed through

secured funding 59 Repo Financing

39 Secured Funding
Trading portfolio 49
Demand Deposits
25 Unsecured funding
Credit 15
2 Other liabilities
Illiquid assets 7 9 Net equity

Source: Company and Bradesco Corretora

Although BTGs capital ratios are above the Brazilian Central Banks minimum
requirements (BIS ratio of 16.2%, with 10.3% in Tier I capital, while the minimum required
is 11% for the total BIS ratio), BTGs Tier I capital is below the averages of its both its
local and international peers. Nevertheless, these figures do not include the IPO
proceeds, which will significantly improve the Tier I figure. We do not know by how much
the Tier I ratio will improve, because it will depend on how the new capital will be
allocated between Banco BTG Pactual and BTG Participations. It is important to note that
the dividend policy allows BTG to direct payments either from the bank or BTG
Participations to reach the 25% payout of combined earnings. This policy is quite positive,
as it allows BTG to retain earnings in the bank if BIS ratios ever become tighter.

Figure 13: Comparables BIS Ratios (1Q12)

2.4% 16.8%
16.2% 16.1% 15.6%
15.0% 14.3% 14.7%
3.6% 13.5% 3.6%
5.9% 3.0% 1.8% 3.8%
3.4% 2.5%

12.0% 12.5% 12.9% 13.2% 11.8%
10.3% 10.9% 11.1%

BTG Pactual Bradesco Ita Banco do Santander Santander Goldman Morgan Credit
Brasil Brasil Spain Sachs Stanley Suisse

Tier I Tier II

Source: Companies and Bradesco Corretora

Main Revenue Lines

BTGs business model is divided into 7 separate business units, coming from both Banco
BTG Pactual and BTG Pactual Participations. It is important to highlight that the revenue
line coming from BTG Pactual Participations is the principal investments line. Moreover,

BBI Equity Research Monday, June 4, 2012

BTG Pactual Participations is not an operational company; the investments are managed
by the asset management division in Banco BTG, which receives arms-length
management fees.

Since there is no controlling entity linking Banco BTG Pactual and BTG Pactual
Participations, there are no consolidated financial statements for BTG Pactual. Therefore,
the unit serves as a virtual holding company, and the combined adjusted income
statement in BRGAAP (unaudited) aggregates the numbers from both companies.

The revenues breakdown presented in the figure below is in line with the functional view
used by BTGs management to monitor the companys performance, and it is how BTG
reports its figures in its MD&A. We point out that each revenue line is net of transaction
and funding costs (including cost of net equity), when applicable.

Figure 14: Business Segments Revenues Breakdown and Description

% of 2009 % of 2010 % of 2011 % of 1Q12
Revenues Breakdown Revenues Revenues Revenues Revenues

Includes both trading and brokerage services for

Sales & Trading 23.9 27.2 31.6 35.1
energy, FICC, cash equities and derivatives

Working capital gains, i.e. accrual of interest on

net equity (shareholders' equity - permanent
Interest and Others 3.9 7.9 20.6 8.1 assets - tax credits). All other divisions' income is
net of opportunity cost

Includes all sorts of funds: fixed income, equities,

Asset Management 19.7 15.4 15.8 10.7
private equity, real estate and global hedge funds

Investment Banking 9.2 14.8 11.8 3.1 M&A Advisory, ECM and DCM

Includes not only corporate loans, but also: funds

Corporate Lending 2.7 10.4 11.4 6.4
(FIPs), letters of credit and maketable securities

Divided into Global Markets (funds funded by

Principal Investments 38.5 20.0 5.7 35.7 BTG); Merchant Banking (shares of companies)
and Real Estate (properties, malls, etc)

Advisory, financial planning services and

Wealth Management 2.1 4.4 4.7 2.3
investment products to high-net-worth individuals

Consumer finance bank, whose co-control was

PanAmericano - - -1.6 -1.3
acquired in Jan-11

Source: Company and Bradesco Corretora

Sales and Trading

BTG offers financial products and services to clients in local and international markets,
including market-making, brokerage and clearing services, as well as derivatives, interest
rate, foreign exchange, equities, energy and commodities transactions for hedging and
trading purposes.

One of the most important revenue lines for BTG Pactual is sales and trading, accounting
for 32% of revenues in 2011. Treasury operations and client execution in all major
markets and asset classes (especially in the local interest rate futures market) account for
the bulk of this revenue line. The sales and trading division is broken down into the
following segments:

FICC and FICC brokerage. Includes the client execution business (flow) and
treasury operations in the local fixed income, currency and commodity markets,
as well as the brokerage division linked to these operations. BTG was the
number 1 dealer in public debt offerings from the National Treasury in 2011.

BBI Equity Research Monday, June 4, 2012

Equities cash and derivatives and equities brokerage commissions.

Includes the client execution business (flow) and treasury operations in the local
equities markets, as well as the equity brokerage division. In 2011, BTG was the
sixth-largest equity broker in Brazil. Moreover, BTG was a leader in market
making in 2011, with market share of 43%.

Energy trading. At the end of 2010, BTG acquired Commex, becoming the
largest independent energy trader in Brazil.

Interest and Others

The interest and others line represents gains on the banks working capital (own equity
yielding local interest rates), and accounted for 21% of net revenues in 2011. We
highlight that each revenue line is net of transaction and funding costs (including cost of
net equity), when applicable.

Asset Management

BTGs asset management division offers a range of products including Brazilian and
international asset classes to local and foreign clients, private equity and infrastructure
funds, as well as general fund services (calculating NAVs, preparing fund accounting,
pricing securities, etc.). The asset management division is also responsible for managing
the merchant banking portfolio and the global market funds of BTG Participations
(Bermuda). Currently, BTG is Brazils largest independent fund manager and the sixth-
largest fund manager overall, with over R$85bn in AuM.

Figure 15: Asset Management Division Products

Brazil - Fixed Income & Equities Brazil - Specialist Funds Brazil - Fund Services Global Hedge Funds
R$ 72.5 billion (1) R$ 6.4 billion (1) R$ 34.8 billion (1) R$ 6.5 billion (1)
Brazil Fixed Income Brazil Private Equity External Managers Funds Global Hedge Funds
Money Market NAV Calculation
Index & Multi-Index Brazil Infrastructure Fund Accounting Global Fund of Funds
Rates & Credit Register and Transfer Agent
Brazil Real Estate Compliance breaches control
Brazil Equities Pricing
Long biased Custody reconciliation
Long / Short

Brazil Multi-Market

(1) as of December 2011.

Source: Company and Bradesco Corretora estimates

The asset management division represented 16% of BTGs net revenues in 2011. Like
the rest of the local asset management market, BTGs funds are mostly fixed income and
multi-asset hedge funds (of which a large portion is fixed-income position). This fact helps
explain the average fee of 37bps posted for 2011.

BBI Equity Research Monday, June 4, 2012

Figure 16: AuM and AuA Breakdown (R$bn)

120.1 7.0
6.8 6.8
96.8 7.3
4.2 37.1
4.3 34.2

71.8 79.4

Mar-11 Dec-11 Mar-12

Fixed Income and equities Fund services

Merchant banking and real estate f unds Global hedge f unds

Source: Company and Bradesco Corretora

Investment Banking

The investment banking division accounted for 12% of BTGs net revenues in 2011. BTG
operates in all the traditional investment banking segments, providing financial advisory
through its M&A division and capital market services division, including the issue of debt
and equity through its DCM and ECM divisions. BTG has a leading position in the
Brazilian M&A market, and is number 2 in both ECM and DCM in terms of volumes.

BTGs main competitors in the investment banking division are local investment banks
linked to large commercial institutions (Ita BBA and Bradesco BBI). Foreign competitors
leading positions have been eroding because of troubles with their parent companies

The investment banking division is a strong cross-selling tool to link with other platforms
of the bank, such as the wealth management division and the corporate lending division.
For example, after conducting a family business IPO, the selling companys owner is an
obvious target for BTGs wealth management department. The same thing happens with
corporate lending to companies, in exchange for commitment to hire BTG in future
potential debt or equity offerings.

Figure 17: Bloomberg Ranking 2011 ECM Figure 18: Bloomberg Ranking 2011 DCM
Volume # of Mkt Share Volume # of Mkt Share
Rank Bank (R$mn) Deals (%) Rank Bank (R$mn) Deals (%)
1 Itau BBA 3,342.8 23 27.7 1 Itau BBA 8,884.1 111 28.9
2 BTG Pactual 2,040.4 11 16.9 2 BTG Pactual 4,567.1 51 14.9
3 Bradesco BBI 1,788.5 10 14.8 3 Bradesco BBI 3,736.1 107 12.2
Source: Bloomberg Source: Bloomberg

Figure 19: Bloomberg Ranking 2011 M&A (US$bn)

30.8 29.1 28.3
14.8 14.7 12.9
Bof A



Credit Suisse
Itau BBA
BTG Pactual

Goldman Sachs

Source: Bloomberg

BBI Equity Research Monday, June 4, 2012

Corporate Lending

The corporate lending division offers financing, structured credit and loan guarantees to
companies, and accounted for 11% of revenues in 2011. BTGs corporate lending book
as of YE2011 was R$21bn, almost evenly split between loans, funds (comprising loan
portfolios acquired from third parties), marketable securities (debentures and shorter-term
notes) and letters of credit (guaranties).

Unlike large Brazilian commercial banks (Bradesco, Ita and Banco do Brasil), lending is
not among BTGs core businesses, although it is an important cross-selling tool with
investment banking, wealth management, merchant banking and the FICC distribution
desk. This factor is evident when we look at BTGs loan-to-equity ratio of 2.6x, compared
to large Brazilian banks average of 6.0x (5.7x for Bradesco, 5.6x for Ita and 7.0x for
Banco do Brasil). According to BTGs management, its maximum leverage ratio
(loan/equity) is 3.0x.

Figure 20: Total Banking Credit Portfolio (R$bn)

21,065 21,473

16,049 6,756
3,282 3,978
10,267 3,011 4,726
8,581 4,663
1,241 2,235 4,161 3,873 4,282
1,331 1,367
1,110 33 4,896 4,839 5,595 5,466 5,301
Dec-09 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Mar-12

Loans Funds (FIPs) Letter of Credit Marketable Securities

Source: Company and Bradesco Corretora

Figure 21: Credit Portfolio Breakdown by Industry

Retail (consumer) Oil & Gas

2% 3%
Sugar/Ethanol WM
(integrated co's, large 1% Others
caps) 16%

Food & Beverage Utilities
5% 20%

Metals & Mining


6% Funds
Infra- 9%
Structure Real Estate
8% (listed)

Source: Company and Bradesco Corretora

Principal Investments

Principal investments involve proprietary trading in global markets in a broad range of

financial instruments (EM equity, EM interest rates, global rates, US mortgage,
reinsurance, etc.) and a merchant banking and real estate division, comprising BTGs
own capital invested in local companies. The principal investments revenue line is
booked in the company in Bermuda (BTG Participations), and since the company has no

BBI Equity Research Monday, June 4, 2012

employees, the investments are managed by the asset management division of Banco
BTG Pactual.

Proprietary trading in global markets had US$1.6bn in AuM at YE2011, and management
has stated that in recent years, return on average assets has been 20%. Regarding the
merchant banking and real estate portfolio, the investments began in 2009, which
explains the fact that no significant disinvestment gains were posted for 2009-2011. The
merchant banking and real estate portfolio had a total of R$2.5bn in investments at book
value, including companies such as Brasbunker, CCRR, Estre Ambiental, etc.

BTGs network of contacts provides access to numerous attractive investment

opportunities and brings significant deal flow. BTG views Brazil as a structurally-positive
long-term investment environment, and specifically in commercial properties it believes it
will be able to benefit from a shortage of available office space in Brazil (with vacancy
rates at an all-time low), and an expected decrease in cap rates.

The principal investments line represented 5.7% of revenues in 2011, although in 2009
and 2010 this share was much greater (35.85% and 20%, respectively). This difference is
attributable to poor performance by the global markets segment in 2011, when assets
had poor performance worldwide.

Figure 22: Merchant Banking and Real Estate Portfolio

Direct or Indirect
Company Name Description
Ownership Stake
Provider of marine support services, offshore logistics, construction and repair
Brasbunker Participaes S.A. 12.92%
services and environmental protection solutions.
CCRR Participaes S.A. Industry leader in adhesives, labels and specialty paper markets in Latin America. 17.84%

Estre Ambiental S.A. One of the leaders in Brazilian waste collection, treatment and disposal sectors. 6.78%
STR Projetos e Participaes em STR is a holding company which owns 100% of Petra Energia (oil and gas
Recursos Naturais S.A. segment), and 100% of Vicenza Minerao (mineral exploration).
Integrao Transmissora de 695 kilometers of strategically important transmission lines in Brazils electric
Energia S/A power grid located in the States of Gois and Tocantins.
Geradora de Energia do Amazonas A thermal power plant with an installed capacity of 85.4MW located in the north of
S/A Brazil (in operation since 2006).
164MW of installed capacity in the State of Esprito Santo (in operation since
Termeltrica Viana S/A 4.61%
January 2010) with a load factor of 96.8%.
Thermal power plants located in the State of Maranho, with installed capacity of
Geradora de Energia do Norte S/A 1.15%
331.74MW (in operation since January 2010).
Pequena Central Hidreltrica Rio Small hydroelectric power plant with installed capacity of 11.52MW located in the
do Brao S.A. State of Rio de Janeiro (in operation since February 2011).
Gas power plant with 204MW of installed capacity located in the State of Esprito
Linhares Gerao S/A 3.61%
Santo (in operation since December 2010).
Explores opportunities in renewable energy, with a portfolio totaling 4,438MW
CPFL Renovveis (current) 0.35%
comprised of small (up to 30MW) and medium (up to 200MW) sized plants.
Sant Alimentao e Servios S.A. Company in food industry specializing in the outsourcing of industrial kitchens. 2.74%
Fleet outsourcing company focused on the private sector in the northeast region of
Gratcia Produtos Alimentcios S.A. 1.05%
Brazil and also operates car rental and fleet management businesses.
Specialty food company manufacturing snack foods with strong market presence
MAIS Participaes S.A. 3.69%
in the State of Pernambuco and other northeastern states of Brazil.
Formed following the joint investment of Banco BTG Pactual and WTorre
One Properties S.A. Properties S.A., focused on the development, acquisition, leasing and sale of 45.97%
commercial and industrial/logistics real estate properties in Brazil.
A real estate development company focused on commercial development and
BW Properties S.A. long-term real estate investments. It was formed following the joint investment of 67.49%
Banco BTG Pactual and WTorre Properties S.A.
ACS Omicron Empreendimentos Residential real estate project in So Paulo selling 50m apartments at an
Imobilirios S.A average price of R$450 thousand each.
Maxcasa XIX Empreendimentos Residential real estate project in So Paulo selling 70m apartments at an
Imobilirios S.A average price of R$600 thousand each.
A commercial real estate project in Rio de Janeiro selling spaces for stores,
Warehouse 1 Empreendimentos
storage and other commercial purposes ranging in size from 25m to larger 35.00%
Imobilirios S.A.
warehouse spaces.
Source: Company and Bradesco Corretora estimates

BBI Equity Research Monday, June 4, 2012

Wealth Management

BTGs wealth management division provides investment advisory and financial planning
services, and currently serves only High Net Worth Individuals (HNWI) with financial
assets over R$10mn. This is higher than the average for peers in Brazil, such as Itas
wealth management division, which has a financial asset requirement of only R$1mn.
Total WuM (Wealth under Management) is currently R$38.9bn, having posted a CAGR of
45.2% for 2008-2011. According to management, this strong growth is partially
attributable to the fact that BTG benefited from the merger of Ita and Unibanco. As
Unibanco had a very strong wealth management division, the merger resulted in BTG
gaining a portion of Unibancos former clients. In 2011 the wealth management division
accounted for approximately 5% of BTGs net revenues.

BTG has a broad footprint in Brazil, with offices in So Paulo, Rio de Janeiro, Recife,
Belo Horizonte, Porto Alegre, Braslia, Salvador and Curitiba, as well as an international
team in New York. The acquisition of Bankred, a Swiss wealth management platform in
2012, added to the range of services BTG can offer its local clients.

Figure 23: Growth of WuM (R$bn)



2008 2009 2010 2011 1Q11 1Q12

Source: Company and Bradesco Corretora

Banco Panamericano

Banco Panamericano (BPNM) is a commercial and consumer bank that BTG co-controls
(37.6% stake) with Caixa Economica Federal. BPNM focuses on automobile loans, direct
consumer loans, payroll loans, middle-market loans and mortgages to individuals and

In Nov. 2010, the Brazilian Central Bank (BCB) pointed to various accounting
inconsistencies related to BPNM, and began a full investigation of the banks books.
Shortly afterwards, in Jan. 2011 (with BCB approval), BTG Pactual signed an agreement
to purchase Grupo Silvio Santos 37.64% stake for R$450mn (to be paid by 2028).

In our view, BTGs acquisition of Panamericano was an attractive investment opportunity,

and BTG was able to benefit from its fast decision-making process to close a deal. BTGs
rationale for acquiring BPNM included the large amount of tax credits (R$2.3bn),
stemming mainly from accounting losses resulting from the fraud, as well as a long-term
financing agreement with Caixa Economica Federal and potential partnerships in the
mortgage business, as Caixa is the countrys largest mortgage originator.

BPNM has a long-term financing agreement with Caixa Economica Federal entailing
R$8bn in credit assignments without recourse and R$2bn in interbank deposits. In Jan.
2012, BPNM proposed a capital increase to complete its growth plan, carrying out
BBI Equity Research Monday, June 4, 2012

acquisitions and benefiting from tax credits under Brazilian regulations and, meanwhile,
carried out an indirect acquisition of 100% of Brazilian Finance & Real Estate S.A. for
R$940mn to increase its housing business.

Figure 24: Panamericanos Shareholder Structure Figure 25: Panamericanos Recent Stock Performance
Free Float
37.6% 36.6% 25.8%
Jun-11 Aug-11 Oct-11 Dec-11 Jan-12 Mar-12 May-12

Ibovespa Panamericano
Source: Company and Bradesco Corretora Source: Bradesco Corretora and Bloomberg

Revenues Model and Estimates

Sales and Trading

BTG Pactuals most important business line is sales and trading, which represented more
than 30% of the banks total revenues in 2011. Nonetheless, this line is also the toughest
to forecast, because of its high correlation to the various asset classes being traded,
either by BTGs treasury, or targeting client flow and execution. Besides market prices, an
important factor for this revenue line is market volume, which impacts client-driven

The most common method of forecasting trading revenues or any other line directly
linked to market risk is to use the trading lines VaR (Value at Risk) metric. Calculating
revenues per unit of VaR, and assuming the bank will either increase or decrease its
exposure/risk (assessing VaR going forward), is a common way to forecast trading
revenues. We point out that BTG does not disclose the VaR by revenue line, but only the
aggregate VaR for the bank.

Figure 26: Aggregate Average Daily VaR (95% confidence interval)

VaR 2009 2010 2011 4Q11 1Q12
Avg VaR as percentage of Equity 0.57% 0.49% 0.59% 0.81% 1.03%
Nominal VaR (R$ mn) 27.2 33.5 53.3 65.6 92.1
Source: Company and Bradesco Corretora

In our view one of BTGs main competitive advantages is its ability to attract talent.
Although unpredictable, in our opinion BTG is likely to continue delivering consistent
gains on treasury and client execution in the coming years. Moreover, we expect the
brokerage division to continue posting solid numbers going forward, despite currently
accounting for less than 10% of the sales and trading revenue line. Both equity and
derivatives brokerage fees are considered in the sales and trading line.

Figure 27: Sales and Trading Estimates

2010A 2011A 2012E 2013E 2014E
Sales and Trading Revenues (R$mn) 659 1,012 1,448 1,779 1,957
Growth YoY(%) 17% 54% 43% 23% 10%
Source: Company and Bradesco Corretora estimates

BBI Equity Research Monday, June 4, 2012

Interest and Other

As the interest and other line represents gains on BTGs working capital (own equity
yielding local interest rates), as a proxy we forecast this line as the banks average equity
multiplied by the expected Selic rate. Therefore, the main growth drivers for this line are
retained earnings, as well as the nominal Selic rate. We point out that temporary hedging
effects can distort this line, especially, on a QoQ basis.

It is important to note that up until 2010, the bank did not fully hedge its operations to the
BRL (as its local peers do). By over-hedging, the bank sells dollars in the futures market,
which increases exposure to the Selic rate. Furthermore, the private placement in Dec.
2010 raised BTGs capital to US$1.8bn. As a result, these two effects help explain BTGs
substantial variation in growth in the interest and other line in 2010 and 2011.

Figure 28: Estimates for Interest and Other Line

2010A 2011A 2012E 2013E 2014E
Interest and Other Revenues (R$ mn) 191 659 1020 1327 1970
Growth YoY(%) 110% 245% 55% 30% 49%
Avg Interest Bearing Equity 6,242 7,943 10,847 14,503 17,475
Accumulated SELIC 8.85% 8.98% 10.25%
Source: Company and Bradesco Corretora estimates

Asset Management

In order to forecast BTGs asset management activities, we broke down the division into 4
categories: Brazilian fixed income and equities, fund services, private equity and real
estate, and global hedge funds. The main idea was to forecast growth of AuM (Assets
under Management) and determine revenues as a result of the average fees and average
AuM. It is important to note that the average fees included both base and performance

The asset management divisions growth drivers are therefore the increase in AuM and
the evolution of average fees. In our view, due to greater competition and a drop in
nominal interest rates, the divisions average fees should show a downward trend going
forward. Regarding the prospects for growth in AuM, we believe that BTG has a solid
reputation in the various fund classes (fixed income, currency, multimarket, equity, private
equity, global, etc.), and it has been able to deliver sustainable above-average historical
returns on its funds. Therefore, the division should experience no difficulty in improving its
market share in this highly-competitive market.

Moreover, Brazil is at the beginning of a financial deepening phase, in which lower

unemployment and more stable inflation should lead to an increase in household savings.
We believe this is likely to result in a search for more developed investments, and should
contribute to the overall growth of the hedge fund market in Brazil.

BBI Equity Research Monday, June 4, 2012

Figure 29: Asset Management Estimates

2010A 2011A 2012E 2013E 2014E
Asset Management Revenues (R$ mn) 375 507 744 927 1,067
YoY Growth (%) -19% 35% 47% 25% 15%
Brazil FI and Equities 230 288 332
Fund Market In Brazil (R$ bn - Anbima) 1757 1931 2240 2548 2841
Share (%) 4.0% 3.7% 3.9% 4.4% 4.7%
Avg Fees 0.29% 0.29% 0.27%

Fund Services 52 68 75
AuM (R$bn) 34 51 62 75
Avg Fees 0.12% 0.12% 0.11%

Private Equity and Real Estate 158 188 215

AuM (R$bn) 7 9 11 13
Avg Fees 1.9% 1.9% 1.8%
Global Hedge Funds 303 382 446
AuM (R$bn) 7 10 12 14
Avg Fees 3.7% 3.6% 3.5%
Source: Company and Bradesco Corretora estimates

Investment Banking

To forecast BTGs investment banking revenues, we have broken down the division into 3
main activities: M&A, ECM (equity capital markets) and DCM (debt capital markets). As
the divisions revenues are a product of these 3 variables, the main idea is to forecast the
overall market growth for these activities, as well as BTGs expected market share and
average fees charged.

As the M&A, ECM and DCM markets in Brazil are highly competitive (considering local
banks such as Bradesco BBI and Ita BBA as well as the local operations of international
banks such as Credit Suisse, JP Morgan, etc.), we expect BTGs average fees to
decrease going forward. Meanwhile, BTGs market share is also likely to shrink (although
both its fees and market share should only decrease at a slow pace).

To forecast the overall ECM market, we have estimated the number of IPOs that we
expect in a given year and multiplied this number by the expected volume per
transaction. As a large number of smaller companies already have access to the equity
capital markets, we expect the number of IPOs per year to continue to increase, while
average ticket of deals should decrease.

For DCM, the situation is quite similar, as we expect significant growth in the number of
companies accessing the debt markets, as it is a cheaper option than bank loans.
Likewise, average ticket is likely to decrease.

BBI Equity Research Monday, June 4, 2012

Figure 30: Investment Banking Estimates

2010A 2011A 2012E 2013E 2014E
Investment Banking Revenues (R$mn) 358 377 503 509 581
YoY Growth (%) 66% 5% 33% 1% 14%

M&A Revenues 301 274 318

M&A Market (Anbima R$ bn) 110 94 131 176 211
Expected Market Share 30.0% 29.0% 29.0%
Average Fee 0.8% 0.5% 0.5%

ECM Revenues 150 171 185

ECM Market (Total IPO Volumes R$ bn) 152 15 35 43 49
Avg Volume per Transaction (R$mn) 1,725 671 1,426 1,193 1,133
Expected Market Share 60.0% 60.0% 59.0%
Expected Role 31.0% 30.0% 30.0%
Average Fee 2.2% 2.2% 2.2%

DCM Revenues 52 63 78
DCM Market Issuance (Anbima R$bn) 75 83 89 107 127
Avg Volume per Transaction (R$mn) 312 259 330 310 294
Distribution/Issuance 33.2% 34.6% 42.1% 44.1% 46.1%
Expected Market Share 14.0% 14.0% 14.0%
Average Fee 1.1% 1.0% 1.0%
Source: Company and Bradesco Corretora estimates

Corporate Lending
We expect BTG to post significant growth in its overall credit portfolio going forward (47%
for 2012), for two main reasons: i) BTGs current book is relatively small (R$21.4bn in
1Q12), making it easier to gain market share; and ii) we expect part of the IPO proceeds
to go towards increasing this credit line. The banks management has guided that
leverage will not exceed 3.0x (credit/equity), compared to 2.3x in 1Q12. Indeed, we
believe that management will rapidly raise this ratio to around 2.6x in the coming years
(its peers such as Bradesco and Ita operate with ratios of 6.5x).

We have broken the corporate lending book into 4 segments (loans, funds, letters of
credit, and marketable securities). We estimated the loan growth for each of the
segments separately, and calculated what we expect to be the average spread for each
segment. Regardless of the segment, we expect a downward trend for spreads going
forward, reflecting greater competition and declining nominal interest rates. It is important
to note, as well, that we are considering spreads that already take delinquency into
account, and thus the estimated revenues from corporate lending is net of loan loss

Figure 31: Corporate Lending Estimates

2010A 2011A 2012E 2013E 2014E
Corporate Lending Revenues (R$ mn) 251 366 561 790 942
YoY Growth (%) 297% 46% 53% 41% 19%

Total Banking Book 21,065 30,901 42,149 51,291

YoY Growth 47% 36% 22%
Implied Overall Spread 2.5% 2.2% 2.2% 2.0%
Leverage (Credit/Equity) 2.5 2.3 2.7 2.7
Source: Company and Bradesco Corretora estimates

BBI Equity Research Monday, June 4, 2012

Principal Investments

The most important revenue source in the principal investments line is global market
revenues. The bank ended 2011 with R$3.1bn in proprietary AuM, and we expect a large
part of the proceeds from the IPO to be used to strengthen this proprietary trading line,
which explains the strong growth that we expect in AuM for 2012. BTGs management
has guided that its traders have historically delivered ROAA of over 20% (although this
seems quite high, we still do not know what kind of leverage is implied in such returns).
We are expecting a return of 29.4% for 2012 given 1Q12s strong performance in terms
of revenues from global markets. Nonetheless, we have adopted a more conservative
estimate going forward due to this lines highly volatile nature. As a result, we expect
ROAA of 18% in the coming years.

The merchant banking divisions revenues come mainly from MtM (marking to market)
gains, as every investment is booked at book value, and disinvestment gains when the
companies are sold. We separated the division into merchant banking and real estate,
because the real estate assets make up the bulk of the investments. Other revenue
sources include: received dividends from invested companies and rent from real estate
portfolios (which are small compared to the potential gains from MtM and

Given that the merchant banking portfolio is relatively new, most of the investments are
dated from late 2008, 2009 and 2010, and there have not been significant disinvestment
gains so far. For instance, a typical private equity fund usually takes as long as 7 to 10
years to disinvest. In our view, the R$2.5bn portfolio (book value) has considerable
potential as investments begin to mature. In our forecasts, we do not assume any gains
from disinvestments in 2012, but instead we assume an annual gain of R$750mn in 2013
and subsequent years. Nonetheless, we stress that disinvestment gains are difficult to
forecast, mainly because they depend on conditions in capital markets or private

Figure 32: Principal Investment Estimates

2010A 2011A 2012E 2013E 2014E
Principal Investments Revenues (R$mn) 484 182 1,152 1,736 1,746
YoY Growth (%) -46% -62% 534% 51% 1%
Global Markets 1,088 910 946
AuM (R$ bn) 4.3 4.8 5.7
Return Over Avg AuM 29.4% 20.0% 18.0%

Merchant Banking 20 395 395

Portfolio (R$ mn) 727 727 727 727
Disinvestment Gains - 375 375
MtM Gains - - -
Dividend Gains 20 20 20

Real Estate 44 431 405

Portfolio (R$ bn) 1,690 1,690 1,690 1,690
Disinvestment Gains - 375 375
MtM Gains - - -
Cost of capital (Nominal) 7.1% 7.2% 8.2%
Return on the portfolio 10.0% 10.0% 10.0%
Source: Company and Bradesco Corretora estimates

Wealth Management

BTG Pactuals asset management division is highly recognized for its top performing
funds, which are a valuable marketing tool for expanding the wealth management
divisions WuM. Moreover, like the asset management division, BTGs wealth

BBI Equity Research Monday, June 4, 2012

management services should benefit from the financial deepening currently under way in
Brazil, which should be sustained in the coming years. We believe growth in WuM should
remain at levels of above 20% in the coming years. Regarding fees (which includes both
base fees and performance fees), we anticipate BTG gradually reducing them going
forward, due to greater competition and lower interest rates.

Figure 33: Wealth Management Estimates

2010A 2011A 2012E 2013E 2014E
Wealth Management Revenues (R$mn) 107 150 186 225 267
YoY Growth (%) 115% 40% 24% 21% 18%
WuM (EoP) R$bn 31 39 49 59 71
YoY Growth (%) 25% 24% 25% 22% 20%
Fee (ROAA %) 0.43% 0.42% 0.41%
Source: Company and Bradesco Corretora estimates

Banco Panamericano

BTGs stake in Banco Panamericanos revenues appears to be net of the invested

capitals cost of equity. BTGs invested capital jumped from R$450mn to ~R$1,126.8mn
because of Banco Panamericanos proposed capital increase (R$1.8bn) to acquire
Brazilian Finance & Real Estate, and we are assuming that BTG will not be diluted
(maintaining its 37.6% stake in the company). For cost of equity/funding, we are
assuming 103% of the Selic rate.

Although Panamericano is currently delivering low ROAE levels, it is still undergoing

restructuring after the discovery of fraud back in 2010, when the bank was owned by
Grupo Silvio Santos. Panamericanos management has guided that the bank will be able
to deliver returns of 17%-18% in 3 or 4 years. In our view, this kind of return is feasible as
the bank has all the necessary incentives to recognize the current R$2.3bn in tax credits
as required (arising mainly from past losses related to the fraud). In addition, it has an
agreement with Caixa Economica Federal requiring Caixa to buy up to R$8bn in credit
assignments without recourse. That means that Panamericano only has to originate
enough loans and sell them to Caixa, and as the loans are without recourse, revenues
are recognized at the time of sale, instead of being differed over the lifetime of the loan
(which would occur in a sale with recourse).

According to our numbers, Panamericano should reach ROAE levels above 17% only by
2016, which may seem conservative. Nonetheless, Panamericanos revenues are still not
particularly significant in relation to BTGs total revenues.

Figure 34: Banco Panamericano Estimates

2010A 2011A 2012E 2013E 2014E
Panamericano (52) (6) 80 91
Panamericanos total net Income 67 183 446 578
ROAE 6.8% 10.4% 12.3%
BTG Share in Panamericano 37.6% 37.6% 37.6% 37.6%
BTGs Invested Capital 450 1127 1127 1127
Ke (BTG) -75 -87 -127
Source: Company and Bradesco Corretora estimates

Based on our estimates for each of BTGs business lines, we estimate net revenues of
R$5,608mn for 2012, with a CAGR of 39.1% for 2011-2014.

BBI Equity Research Monday, June 4, 2012

Figure 35: Estimated Net Revenues





2011A 2012E 2013E 2014E

Source: Company and Bradesco Corretora estimates

Operating Expenses Model and Estimates

BTGs main operating costs are related to personnel. Including bonuses and salaries,
personnel expenses account for up to 57% of operating expenses (of which bonuses
account for 69% of that figure). The other costs are general and administrative expenses,
tax expenses, goodwill amortization (BTG has a small amortization figure of ~R$30mn
p.a. related to the acquisition of Commex, its energy trading unit) and retention expenses
(following BTGs purchase of Pactual from UBS in 2009). The figure below shows a
breakdown of BTGs operating costs.

Figure 36: Breakdown of Operating Costs (2011) R$mn

13.5% Bonus

2.3% Retention Expenses

Salaries and Benefits

Administrative and
Other Expenses
Goodwill Amortization

3.0% Tax Expenses


Source: Company and Bradesco Corretora estimates

BTG has clear parameters set for bonus payments, which are always 25% of adjusted
operating results. The banks adjusted operating results are composed of net revenues,
excluding the interest and other line, as well as salaries and other administrative
expenses. In our view, this type of variable payment is quite positive for BTG as it
depends on the banks actual revenues.

Regarding personnel and other G&A expenses, we do not expect BTGs headcount to
rise much in the coming years, although some expansion is expected in 2012 and 2013,
especially if we take the acquisition of Celfin into account, along with a probably more
aggressive Latam expansion strategy. Thus, we expect BTGs current headcount of
1,357 (as of 1Q12) to expand by ~17% in both 2012 and 2013, after which the rate of
expansion should decrease significantly, to around 9%. Excluding this organic growth
impact, G&A and personnel expenses going forward should grow in line with inflation.

BBI Equity Research Monday, June 4, 2012

On the whole, we see BTGs operating expenses as currently being under control, and
not a matter for concern. On the contrary, as we mentioned earlier, BTG is one of the
banks with the highest productivity levels (lowest compensation ratio and highest
revenues per employee). We estimate operating costs reaching R$1,921m in 2012, with
a CAGR of 26.3% for 2011-2014.

Figure 37: Estimated Operating Expenses




2011A 2012E 2013E 2014E

Source: Company and Bradesco Corretora estimates

Net Earnings Estimates

We estimate BTG posting adjusted net earnings of R$2,713mn for 2012 and R$3,599mn
for 2013, representing ROAE of 25.0% and 24.8%, respectively, with a net margin of over
48.0% for both 2012 and 2013.

Although management guided that BTG can deliver sustainable ROAE levels of between
25% and 30%, we are adopting a more conservative stance in light of the banks high
dependence on trading gains and client flows, which are subject to significant market risk.
Nonetheless, even adopting this conservative stance, we believe that BTG can deliver
returns above those of its local large-cap peers. The banks high level of returns and
margins are due to its high productivity, as highlighted in this report.

Figure 38: Estimated Earnings, Returns and Margins

$10, 000

48.4% 48.8% 50.2%

43.5% 42.9% 45.0% 50. 0%
$9, 000

25.4% 25.4% 25.0% 24.8% 24.8%

$8, 000

$7, 000 18.1% 30. 0%

$6, 000

10. 0%

$5, 000
$4, 000
$3, 000
$2,713 - 10. 0%

$1,020 $1,040
$2, 000
- 30. 0%

$1, 000

$0 - 50. 0%

2009A 2010A 2011A 2012E 2013E 2014E

Adjusted Net Income Adjusted ROAE (%)

Net Margin (%)

Source: Company and Bradesco Corretora estimates

BBI Equity Research Monday, June 4, 2012

Key Figures (Annual)

(In BRL million except for % and ratios) 2011 2012E 2013E (In BRL million except for % and ratios) 2011 2012E 2013E
P&L and Balance Sheet Data Efficiency Ratios
Net Revenues 3,201 5,608 7,373 Number of Employees 1,311 1,526 1,786
Investment bank ing 377 503 509 Efficiency Ratio 39.5% 33.6% 32.7%
Corporate Lending 366 561 790 Revenues per employee 2.4 3.7 4.1
Sales and Trading 1,012 1,448 1,779 Total Assets per employee 85.8 94.7 89.3
Asset Management 507 744 927 Compensation ratio 24.9% 23.1% 23.2%
Wealth Management 150 186 225 Total expenses/total assets -1.2% -1.3% -1.5%
Panamericano -52 -6 80 Dividend Policy
Principal Investments 182 1,152 1,736 Total Dividends 455 678 900
Interest and Other 659 1,020 1,327 Dividend per share 0.57 0.77 1.02
Net Income 1,922 2,713 3,599 Payout ratio 25% 25%
EPS 2.40 3.07 4.08 Capital/Liquidity Ratios
Adjusted Net Income 1,440 2,713 3,599 Loans/Deposits 37.5% 50.3% 50.3%
Adjusted EPS 1.80 3.07 4.08 Loans/Total Fundings 22.3% 30.5% 31.7%
Total Assets 112,489 144,480 159,479 Loans/Equity 62.1% 76.8% 89.9%
Avr Total Assets 107,772 128,485 151,980 Loans/Assets 4.7% 7.0% 8.9%
Risk Weighted Assets (RWA) 31,055 46,153 62,952 Deposits/Assets 12.6% 13.9% 17.8%
Total Deposits 14,138 20,072 28,334 Equity/Assets 7.6% 9.1% 9.9%
Total Net Funding 23,722 33,077 44,930 BIS II ratio 17.7% 14.8% 13.1%
Total Loans 5,301 10,100 14,256 TIER I 11.0% 10.5% 9.8%
Avr Total Loans 4,716 7,700 12,178 TIER II 6.6% 4.3% 3.3%
Shareholders' Equity 8,540 13,154 15,853 Profitability ratios
BV Per Share 10.68 14.90 17.96 Net Margin % 45.0% 48.4% 48.8%
Growth % Pre-tax margin % 58.2% 65.7% 66.9%
Net Revenues 32.0% 75.2% 31.5% Net Revenues/Avg Total Assets 2.8% 3.9% 4.6%
Net Income 70.5% 41.2% 32.7% ROAE % 24.2% 25.0% 24.8%
EPS 70.5% 27.9% 32.7% ROAA % 1.8% 2.1% 2.4%
Adjusted Net Income 38.5% 88.4% 32.7%
Adjusted EPS 38.5% 70.7% 32.7%
Total Assets 9.2% 28.4% 10.4%
Avr Total Assets 40.6% 19.2% 18.3%
Risk Weighted Assets (RWA) 48.6% 36.4%
Total Deposits 33.7% 42.0% 41.2%
Total Net Funding 53.7% 39.4% 35.8%
Total Loans 28.3% 90.5% 41.2%
Avr Total Loans 26.4% 63.3% 58.2%
Shareholders' Equity 16.2% 54.0% 20.5%
Valuation Ratios Other Information
P/E 10.7 8.3 6.3 Last Price 25.60
P/BV 2.6 1.7 1.4 Target Price 36.3
Dividend Yield 2.0% 3.0% 4.0% Number of Shares 882.8
Target P/E 16.7 11.8 8.9 Market Cap (R$bn) 22,600
Target P/BV 3.8 2.4 2.0
Source: Company and Bradesco Corretora estimates

BBI Equity Research Monday, June 4, 2012

Key Figures (Quarter)

(In BRL million except for % and ratios) 4Q11 1Q12 (In BRL million except for % and ratios) 4Q11 1Q12
P&L and Balance Sheet Data Efficiency Ratios
Net Revenues 959 1,603 Number of Employees 1,311 1,357
Investment bank ing 46 50 Efficiency Ratio 40.0% 32.6%
Corporate Lending 119 102 Revenues per employee 0.7 1.2
Sales and Trading 214 562 Total Assets per employee 85.8 98.9
Asset Management 153 171 Compensation ratio 23.7% 25.5%
Wealth Management 41 37 Total expenses/total assets -0.3% -0.4%
Panamericano -8 -21 Dividend Policy
Principal Investments 108 572 Total Dividends 0 0
Interest and Other 286 130 Dividend per share nd
Net Income 1,054 786 Payout ratio 0%
EPS 1.32 0.98 Capital/Liquidity Ratios
Adjusted Net Income 1,054 786 Loans/Deposits 37.5% 50.3%
Adjusted EPS 1.32 0.98 Loans/Total Fundings 22.3% 32.3%
Total Assets 112,489 134,164 Loans/Equity 62.1% 81.4%
Avr Total Assets 123,327 Loans/Assets 4.7% 5.7%
Risk Weighted Assets (RWA) 31,055 32,071 Deposits/Assets 12.6% 11.2%
Total Deposits 14,138 15,081 Equity/Assets 7.6% 6.9%
Total Net Funding 23,722 23,526 BIS II ratio 17.7% 16.2%
Total Loans 5,301 7,588 TIER I 11.0% 10.3%
Avr Total Loans 6,444 TIER II 6.6% 5.9%
Shareholders' Equity 8,540 9,318 Profitability ratios
BV Per Share 10.68 10.55 Net Margin % 109.9% 49.0%
Growth % Pre-tax margin % 60.4% 66.7%
Net Revenues 17.1% 67.2% Net Revenues/Avg Total Assets 0.9% 1.2%
Net Income 221.3% -25.4% ROAE % 35.2%
EPS nd nd ROAA % 0.6%
Adjusted Net Income 221.3% -25.4%
Adjusted EPS nd nd
Total Assets 19.3%
Avr Total Assets
Risk Weighted Assets (RWA) 3.3%
Total Deposits 6.7%
Total Net Funding -0.8%
Total Loans 43.2%
Avr Total Loans
Shareholders' Equity 9.1%
Source: Company and Bradesco Corretora estimates

BBI Equity Research Monday, June 4, 2012

Analyst Certification
Each analyst responsible for the preparation and content of this report hereby certifies, pursuant to SEC Regulation AC and applicable law s and regulations of other jurisdictions, that:
(i) the view s expressed herein accurately and exclusively reflect his or her personal view s and opinions about the subject company(ies) and its or their securities;
(ii) no part of his or her compensation w as, is, or w ill be paid directly or indirectly, related to the specific recommendation or view s expressed by that analyst in this report; and
pursuant to Brazilian securities exchange commission (Comisso de Valores Mobilirios CVM) Instruction 483/10:
the recommendations indicated in this report solely and exclusively reflect his or her personal opinions, and w ere prepared independently and autonomously, including in relation
to Bradesco Corretora and its affiliates ;
(ii) his or her compensation is based on the profitability of Bradesco Cooretora and its affiliates, w hich includes investment banking revenues;

Company disclosures pursuant to Brazilian securities exchange commission (Comisso de Valores Mobilirios CVM) Instruction 483/10:
(i) Banco Bradesco S.A. beneficially ow ns 5% or more of equity securities issued by Cielo and Odontoprev. Bradseg Participaes, a subsidiary of Banco Bradesco, indirectly ow ns
5% or more of equity securities issued by Fleury. BRADESPAR, w hose controlling group is comprised of the same shareholders that control Banco Bradesco S.A., indirectly ow ns 5%
or more of equity securities issued by VALE.
(ii) gora, Bradesco Corretora, BBI and Bradesco Group companies have relevant financial and commercial interests in relation to the subject company(ies) or the subject security(ies).
(iii) Banco Bradesco BBI S.A. is acting as an underw riter in a public offering of equity securities of Brazil Pharma,CPFL Energias Renovveis, LDC Bioenergia, Suzano Papel e Celulose,
VIX Logstica and as an intermediary institution in the tender offer of Marisol. gora and Bradesco Corretora are participating in the public offering of shares of Fundo de ndice ICO2.
(iv) Bradesco BBI have managed or co-managed a public offering of equity and/or debt securities for the follow ing companies w ithin the past 12 months: Abril Educao, Anhanguera
Educacional, Banco do Brasil, BNDES Participaes, Bradespar, Brasil Telecom, Brazil Pharma, Br Properties, Banco BTG Pactual, BTG Pactual Participations Ltd, Celpa, Claro, Comgs,
CPFL (Brasil, Gerao, Paulista, Piratininga e Santa Cruz), Cremer, Cyrela Brazil Realty, Editora Abril, Editora e Distribuidora Educacional, Egesa, Eletropaulo, Embratel, FIDC Chemical VI,
Fleury, Gafisa, Iguatemi, Kroton Educacional, Localiza, Marfrig, Mills, MRV, Multiplan, OAS, OGX, Petrobras, Prosegur, QGDI, Qualicorp, Restoque (Le Lis Blanc), RGE, Rodoanel, Sonae
Sierra, Tecnisa, Ultrapar, Unidas, Viaoeste e VRG. BBI also acted as a financial advisor for Fleury in the deal w ith Labs D'Or and for JSL in the acquisition of Rodovirio Schio Ltda.
(v) gora and/or Bradesco Corretora participated in the public offering of equity and/or debt securities for the follow ing companies w ithin the past 12 months: Abril Educao,
Anhanguera Educacional, BNDES Participaes, Brazil Pharma, BR Properties, Banco BTG Pactual, BTG Pactual Participations Ltd, EDP Energias do Brasil, Fibria, International Meal
Company, Kroton Educacional, Locamrica, Magazine Luiza, Mahle Metal Leve, Minerva, Qualicorp, Technos, TIM and Unicasa.
(vi) Bradesco Corretora receives compensation for making a market in the equity securities of Alpargatas (ALPA4) and Odontoprev (ODPV3), and in the fixed income securities of

Important Disclosures
Company-specific regulatory disclosures
Bradesco Corretora and/or its affiliates beneficially ow n one percent or more of any class of common equity securities of the subject company(ies). This position
reflects information available as of the business day prior to the date of this report;
Bradesco Corretora and/or its affiliates have managed or co-managed a public or Rule 144A offering of the subject companys(ies) securities in the tw elve months
x 2
preceding the date of this report;
Bradesco Corretora and/or its affiliates have received compensation for investment banking services from the subject company(ies) in the tw elve months preceding the
x 3 date of publication of the research report and/or expects to receive or intends to seek compensation for investment banking services from the subject company(ies) in the
three months follow ing the date of this report;

4 Bradesco Corretora and/or its affiliates w ere making a market in the subject companys(ies) equity securities at the date of this report;

5 Any other actual material conflict of interest of Bradesco Corretora and/or its affiliates know n at the date of this report.

Bradesco Corretora research ratings distribution

Rating Definition Coverage BR
Outperform Expected to outperform the Ibovespa by more than 10%. 53% 100%
Market Perform Expected to perform in the range of 10% above or below the Ibovespa. 38% 100%
Underperform Expected to underperform the Ibovespa more than 10%. 1% 100%
Under Review This indicates that both the target price and the rating are currently being revised. 4% 100%
Restricted The analyst cannot express his/her view s on the company. 5% 100%

(1) Percentage of companies under coverage globally w ithin this rating category. As of 06/04/12 Bradesco Corretora had 110 companies under coverage globally.
(2) Percentage of companies w ithin this rating category for w hich [investment banking] services w ere provided w ithin the past 12 months.

Bradesco Corretora ratings

Bradesco Corretora ratings are constantly revised and any temporary inconsistencies betw een the upside potential that gave rise to any such rating and the upside potential in
connection w ith the target price are at all times deliberate. The official rating shall prevail.
Any differences betw een the rating and the target price may occur especially due to the analysts expectations to the effect that any short/medium term factors that cannot be priced-in
yet might lead to inconsistencies betw een Bradeco Corretora valuation and the stock behavior. The factors Bradeco Corretora considered include, but are not limited to: Any
expectations in connection w ith quarterly results, market conditions, ow nership issues and any expectations involving mergers and acquisitions.
The ratings reflect only the analysts expectation on the future performance of the relevant stock. A Outperform rating does not necessarily represent that the analyst approves of
the company and its management w hilst a Underperform rating does not necessarily means that the analyst has a negative view on the company. Within Bradeco Corretora coverage
universe there are sound companies, w ith good fundamentals as per the market consensus, and fair priced stock, and w ould not be Bradeco Corretora investment pick.

Price target and rating history

Price target, rating history chart(s), valuation/method used to determine price target, and our policy for managing conflicts of interest in connection w ith investment research are
available upon request. You may obtain this information by contacting your representative or by sending an email to

BBI Equity Research Monday, June 4, 2012

Additional Disclosures
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accurate or complete, and should not be relied upon as such.
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statements regarding future prospects may not be realized.
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Bradesco Corretora Research Team
Research Director Dalton Gardimam dalto n@bradesco 55 112178 4275

Econom ics
Dalton Gardimam 55 112178 4275 dalto n@bradesco Denis Blum 55 112178 4224 denis@bradesco
(Chief Eco no mist) (Senio r Eco no mist)

Roman Goossens, CFA 55 112178 5468 ro man@bradesco

(Eco no mist)

Raquel Erzinian 55 112178 5319 raquel@bradesco

(Eco no mist)

Head of Equity Research

Carlos Firetti, CFA 55 112178 5363 carlo sfiretti@bradesco

Banking and Financial Services Telecom , Media and Technology

Carlos Firetti, CFA 55 112178 5363 carlo sfiretti@bradesco Luis Azevedo 55 112178 5321 luis.azevedo @bradesco

Rafael Frade, CFA 55 112178 4056 rafaelf@bradesco Tales Freire 55 112178 4527 tales@bradesco

Bruno Chemmer, CFA 55 112178 4903 bruno .chemmer@bradesco

Gustavo Lbo 55 112178 5329 gustavo lo bo @bradesco Education

Healthcare Luis Azevedo 55 112178 5321 luis.azevedo @bradesco

Rafael Frade, CFA 55 112178 4056 rafaelf@bradesco Tales Freire 55 112178 4527 tales@bradesco

Carlos Firetti, CFA 55 112178 5363 carlo sfiretti@bradesco Consum er Goods and Retail

Oil & Gas, Petrochem icals and Sugar & Ethanol Ricardo Boiati 55 112178 5326 rbo iati@bradesco

Auro Rozenbaum 55 112178 5315 auro @bradesco Alan Cardoso, CFA 55 112178 5317 alancardo so @bradesco

Bruno Varella 55 112178 5310 bvarella@bradesco Pedro Bueno 55 112178 4272 pedro .bueno @bradesco

Gabriel Levinho 55 112178 5469 gabriel.levinho @bradesco Steel, Mining, Pulp & Paper

Raphael Biderman 55 112178 5313 rbiderman@bradesco

Transportation, Logistics, Malls and Sm all Caps Alan Glezer, CFA 55 112178 5466 alanglezer@bradesco

Edigimar Maximiliano Jr. 55 112178 5327 maximiliano @bradesco Electric Utilities, Water

Luiz Peanha 55 112178 5324 pecanha@bradesco Vladimir Pinto 55 112178 5323 vladimir.pinto @bradesco

Hom ebuilding Marcelo S 55 112178 4273 marcelo .sa@bradesco

Luiz Mauricio Garcia 55 112178 4223 lmgarcia@bradesco Fixed Incom e

Alain Nicolau 55 112178 5316 alain@bradesco Altair Pereira 55 112178 4279 altair@bradesco

Caio Lombardi 55 112178 4225 lo mbardi@bradesco

Bradesco Corretora CTVM S.A. So Paulo

Sales - 55 11 3556 3001 Sales Trading - 55 11 3556 3001

Juvenal Neves juvenal@bradesco Head of Trading
Tiago Valent tiago valent@bradesco Orlando Cardoso o rlando cardo so @bradesco

Sales - Fixed Incom e - 55 11 2178 6959 Traders

Fernanda Weber Bratz fernanda@bradesco Cssio Garcia cssio @bradesco
Lucila Sakakura lucila@bradesco Fbio Brisola fabio @bradesco
Gustavo Ize gustavo pereira@bradesco

Sales - Local Fixed Incom e - 55 11 3556 3005 Ingrid Amorim ingrid@bradesco
Rogrio Queiroz ro gerio @bradesco Julio Cesar Rossi cesarro ssi@bradesco
Dauro Zaltman dauro @bradesco Luiz Felipe Daud Munhoz luizfelipe@bradesco
Denise Chicuta denise.chicuta@bradesco Mauricio Sanchez mauricio @bradesco
Patricia Cruz Bilezikjian, CFA patricia.bile@bradesco Peter Gil peter@bradesco
Silene Zinhani silene@bradesco
Agnaldo Ishikava agnaldo @bradesco Stock Loans Desk - 5511 3556 3001
Douglas Vieira Corazza do razza@bradesco Marcio Aguiar marcio @bradesco
Eduardo Tosin Bueno eduardo .bueno @bradesco Wilson Pereira wilso n@bradesco
Joao Batista Tamassia Santos Junior jo o .batista@bradesco
Marcelo Matias Boneri bo neri@bradesco BM&F Trading Desk - 55 11 3556 3350
Paulo Silva do Carmo paulo .carmo @bradesco Jos Lzaro Ferreira - Head lazaro @bradesco
Pedro Fonseca de Souza pedro .fo nseca@bradesco Lilian Osti - Commercial Manager lilian.o sti@bradesco
Roberto Vinicius Vasco Moura ro berto .mo ura@bradesco
Sandoval Marcos Iorio sando val@bradesco

Institutional Sales Team - USA & UK

Bradesco Securities, Inc. New York (FINRA/SIPC Member) Bradesco Securities UK, Ltd
Sales 01 212 888 9141 Sales 44 207 382 0070
Marcelo Cabral mcabral@bradesco m Robert Hulme rhulme@bradesco m
Alison Melton aliso n@bradesco m Roland Campbell ro land@bradesco m
Jason Myers jaso n@bradesco m Susanne Linhardt slinhardt@bradesco m
Dirk Schnitker dirk@bradesco m
Randall Smalley rsmalley@bradesco m

Sales - Fixed Incom e 01 212 888 9141 Sales - Fixed Incom e 44 207 382 0074
Shinichiro Fukui shin@bradesco m Guilherme Zraick gzraick@bradesco m

Robert Callahan bo bcallahan@bradesco m Fernanda Jordan fjo rdan@bradesco m

Brent Matson brent@bradesco m Joo Paulo Loyola jplo yo la@bradesco m

Sales Trading 01 212 888 9141

Robert Vespa ro bert@bradesco m
Christopher Barresi cbarresi@bradesco m

Av. Paulista, 1450 7 andar

CEP: 01310-917 So Paulo SP