Business

BTG Pactual Head Esteves Resigns In Corruption Scandal

The corruption scandal in the Brazilian energy industry has officially claimed another casualty as BTG Pactual Chairman and CEO Andre Esteves resigned on Monday.

The announcement regarding Esteves’s resignation came after Brazil’s Supreme Court agreed over the weekend to a request by federal prosecutors in Brazil to keep Esteves in custody.

Billionaire Andre Esteves is one the richest men in Brazil, and is the controlling shareholder of Brazilian bank BTG Pactual. He was arrested late last week as the corruption investigation into state-controlled oil company Petróleo Brasileiro SA continues to expand.

An attorney for Esteves denies any wrongdoing by his client.

BTG Pactual shares
Chart via S&P Capital IQ

More on arrest on BTG Pactual CEO Andre Esteves

As reported by ValueWalk on November 25th, Esteves was arrested last Wednesday, but he was expected to be bailed out within a few days. The Brazilian Supreme Court, however, decided to keep Esteves in jail as a “preventive arrest.”

BTG announced that Persio Arida, who was chosen last week to head up BTG on a temporary basis, was on appointed Sunday as the new executive chairman. The BTG Pactual statement also noted that Marcelo Kalim and Roberto Sallouti had been appointed co-CEOs of the firm.

A spokesman for BTG declined to comment on Esteves’s preventive arrest.

The news of the Esteves arrest led to clients yanking money from hedge funds and other investments managed by BTG last week, and the bank’s stock was down over 25% total on Thursday and Friday.

BTG Pactual shares were down even further on Monday when it was revealed that the bank itself was under investigation regarding payment of bribes to lawmakers.

BTG Pactual has been working hard to reassure clients the bank was not impacted by the arrest of its CEO. Arida sen an email message to clients on Friday of last week pointing out that the bank was not under investigation.

In the corruption case, Brazilian federal prosecutors claim that Esteves and a Brazilian senator tried to block a corruption investigation of state oil firm Petrobras. According to the allegations, the pair tried to convince a suspect and potential witness in the Petrobras corruption case to change his mind about a plea bargain agreement. As in China, it is increasingly hard to determine whether the Brazilian Government is targeting  people like Esteves because they may have committed wrong doing, or if this is a witch-hunt or possibly a combination.

Some analysts weighed in earlier this week (before the CEO resigned, but had been arrested).

From November 25th, Goldman:

News

On November 25, Mr. Andre Esteves, the CEO and controlling shareholder of BTG Pactual, was arrested by the Federal Police. According to press reports, the arrest was part of the ongoing “Car Wash” probe, which is investigating corruption in Petrobras.

Analysis

It is unclear what the next steps are. According to press reports, the Federal Police are investigating whether Mr. Esteves made illegal payments. Mr. Persio Arida (a management committee member) has been named interim CEO of the bank. BTG Pactual has issued a press release stating it will collaborate fully and unrestrictedly with authorities.

Key risk

We have highlighted previously that one of the key risks for BTG Pactual is the reliance on its CEO. He is the main executive for the bank, perceived and responsible for driving the bank’s international expansion and product differentiation. We believe a prolonged absence would most likely hamper the bank’s ability to retain private-banking and asset management clients, affect cost and availability of funding (as signaled in Moody’s 11/25 statement), and hurt investment banking origination.

Deutsche Bank:

Andre Esteves was arrested this morning related to the ongoing Petrobras scandal. While it is too early to know the potential outcome of this, we think it creates significant uncertainty for BTG Pactual. According to Veja magazine, Persio Arida, chairman of the bank’s asset management division has been named as the acting CEO. While we think the bank has a well diversified business mix that can continue to operate with a relatively deep management team, we think Mr. Esteves’ importance to the business is critical, as founder, CEO, and its largest shareholder (~20%). Therefore, we downgrade to Hold.

Deep and experienced management team

Mr. Arida is co-head of the asset management unit and previously served as president of the Central Bank in 1995 and president of BNDES from 1993 to 1994. Mr. Arida has also been a board member of Unibanco and Itau and a director at Opportunity Asset Management. He joined BTG Pactual in 2008. In addition, Marcelo Kalim, CFO, has been with the bank since 1996, and Roberto Balls Sallouti, COO, has been with the bank since 1994, among others. The company also announced a buyback program of up to 23mn units, which represents 10% of the free float and 2% of total outstanding.

JPMorgan:

We have been cautious the stock for the most part since its IPO in April 2012, in part, because of the more limited financial disclosure versus peers and our unease with an investment case that seems dependent on the company finding opportunities to be very profitable in different market environments. True, the company has delivered a good track record posting healthy results in a challenging macro backdrop. However, to write the obvious, the arrest of Mr. Esteves could test investor trust in the company’s senior management. Reputational damage to the franchise. Though the more immediate concern is around funding availability and cost, the arrest does raise concerns that the reputational damage could negatively impact BTG’s client businesses (investment banking, asset management and wealth management) and counterparty confidence.

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