Moody's Investors Service today affirmed Banco BTG Pactual S.A. (BTG Pactual)'s standalone bank financial strength rating (BFSR) of D+, which maps to Baa3 in the global scale. In addition, Moody's affirmed the long-term global local and foreign currency deposit ratings of Baa3, as well as the Aaa.br deposit rating in the Brazilian national scale. At the same time, Moody's affirmed BTG's Grand Cayman Branch's long-term foreign currency senior unsecured and subordinated debt ratings of Baa3 and Ba1, respectively. The short-term ratings remained unchanged. The outlook on all ratings is stable.
The rating action follows the announcement that BTG Pactual entered a binding agreement to acquire 100% shares of BSI Group SA (unrated), including Swiss private bank BSI AG (BSI, Baa1 stable; C-/baa1 stable), from Assicurazioni Generali S.p.A. (Baa1 stable). The announcement was made on 14 July 2014, and the transaction is subject to final approval by regulatory authorities in Brazil and Switzerland.
The following ratings assigned to Banco BTG Pactual S.A. were affirmed:
- Bank financial strength rating - D+, stable outlook
- Long-term global local currency deposit rating of Baa3, stable outlook
- Long-term foreign currency deposit rating of Baa3, stable outlook
- Long foreign currency senior unsecured debt rating assigned to MTN program of (P)Baa3, stable outlook
- Brazilian long-term national scale deposit rating of Aaa.br
The following ratings assigned to Banco BTG Pactual S.A., Grand Cayman Branch were affirmed:
- Long-term foreign currency senior unsecured debt rating assigned to MTN program of (P)Baa3, stable outlook
- Long-term foreign currency senior unsecured debt rating of Baa3, stable outlook
- Foreign currency subordinated debt rating of Ba1, stable outlook
In affirming BTG Pactual's Baa3 rating with a stable outlook, Moody's acknowledges the benefits that the BSI acquisition will bring to revenue synergies, earnings stability, and business diversification, although it will consume capital that will need to be replenished. The acquisition is in line with BTG Pactual's international expansion strategy and it will provide opportunities to enhance the group's fee-based business contribution that accounted for 27% of total revenues in 1Q14. BSI will contribute $100 billion to BTG Pactual's assets under management, which were $115 billion in the first quarter 2014, and will add an ample client base as well as European distribution capabilities to complement BTG Pactual's strong asset-origination platform. Upon conclusion of the transaction, BTG Pactual's consolidated asset size will increase by roughly $28 billion.
Moody's said that the combination with BSI offers BTG Pactual only modest cost synergies because of high regulatory costs in the Swiss market and high operating expenses primarily in the form of personnel expenses.
BSI's lower profitability on a risk-adjusted basis compared to BTG Pactual's will reduce the Brazilian bank's consolidated performance metrics as the transaction materializes. BTG Pactual will also be faced with increasing competition in the Swiss private banking industry from global banks, which will require fast evolution in management's depth and international corporate governance. However, the Swiss bank's future profitability will benefit from lower credit costs and technology investments given its recent push to upgrade its systems. The deal is also shielded from potential fines resulting from the outcome of BSI's participation in the US-Swiss tax program.
Moody's noted that the CFH1.5 billion acquisition is BTG Pactual's largest investment to date, and it will reduce its capitalization ratio by more than 250 basis points, according to Moody's estimates, from 17.1% reported in 1Q14. BTG Pactual will pay CFH1.2 billion or 80% of the purchase price in cash, and will issue BTG stock units for the remaining CFH300 million. The Brazilian firm's strong internal capital generation capacity will help cover the cost of this acquisition, to the extent that BTG Pactual retains a higher level of earnings. In the absence of additional capital, however, BTG Pactual's organic growth and international expansion plans could be curtailed. The stable outlook on the ratings, therefore, incorporates Moody's expectation that capital will be restored to current levels within the outlook horizon.
Moody's notes that the Baa3 global local- currency deposit rating assigned to Banco BTG Pactual derives from the standalone credit assessment of baa3 (mapped from the D+ BFSR), and therefore, it does not benefit from uplift due to systemic support.