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BTG Bounces Back From Legal Woes to Become Brazil’s Best Stock

BTG Bounces Back From Legal Woes to Become Brazil’s Best Stock

(Bloomberg) -- Banco BTG Pactual SA lost $4 billion in market value in 48 hours in August, a rout that slashed as much as 40% off the stock price amid a probe complete with police cars parked on the sidewalks of the lender’s lavish Sao Paulo headquarters.

Investors that stuck with the stock have been rewarded by this year’s best rally in local markets.

The bank has surged 197% year-to-date, the biggest gain in Brazil’s benchmark stock index. Even after the jump left BTG shares hovering near a record high, analysts from UBS Group AG and Morgan Stanley say it could gain as much as 20% more as investors focus on how the bank can profit from all-time-low rates in its home country.

BTG Bounces Back From Legal Woes to Become Brazil’s Best Stock

“The bank could enjoy a multiyear period of strong earnings growth and profitability expansion, as reforms and policies continue to support sustainable economic growth and low interest rates,” Morgan Stanley analysts led by Jorge Kuri wrote in a report on Nov. 5, adding that BTG is one of their preferred names in Latin America.

The rally is not BTG’s first impressive comeback. Back in 2015, when the bank’s founder and biggest shareholder, Andre Esteves, was temporarily jailed as part of the long-running Carwash investigation, BTG faced a liquidity crisis that nearly brought it down. Esteves was later cleared of all charges, with the prosecutor’s office saying there was “no sufficient proof” against him. He has since returned as a senior partner.

In August, police searched the firm’s offices and Esteves’s home again, prompting another sell-off and leading Chief Executive Officer Roberto Sallouti to publicly reassure investors. Unlike in 2015, BTG didn’t see significant withdrawals after the news. The bank’s units -- a bundle of voting and non-voting shares -- have climbed almost 20% since.

BTG in Turmoil Anew as Andre Esteves Is Circled by Police Again

In October, the bank had another brush with authorities as a fund linked to it was targeted in an investigation on alleged leaks of Brazil’s benchmark rate decisions. BTG said it had no decision power or participation in the fund, acting simply as a trustee. Shares dropped, but recovered quickly.

UBS, which started coverage of the bank with a buy rating last month, said in a report that “negative news flow” from the investigations is a key risk that could trigger volatility. Still, UBS assigned a price target of 82 reais for BTG’s units, 17% higher than the current level.

The bet is that the investment-banking and asset- and wealth-management businesses can benefit from record-low interest rates in Brazil and the reform agenda of President Jair Bolsonaro. Investors have been flocking to higher yielding products, boosting the nation’s fund industry, while companies have sped up capital markets activities, leading to record-high local bond issuance.

The enthusiasm around BTG’s digital investment platform, which it’s turning into a retail bank for high-income individuals, also fuels optimism. UBS says it alone could be worth 10 billion reais.

“I’m very confident we will be able to capture growth, both in Brazil and in Latin America,” said Joao Dantas, BTG’s chief financial officer, in an interview after third-quarter results were released last month. “Our platform benefits a lot from this new Brazil -- with synergies between investment banking and loans, wealth and asset management and so on.”

To contact the reporters on this story: Vinícius Andrade in São Paulo at vandrade3@bloomberg.net;Felipe Marques in Sao Paulo at fmarques10@bloomberg.net

To contact the editors responsible for this story: Brad Olesen at bolesen3@bloomberg.net, Julia Leite, Steve Dickson

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