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BTG Pactual's resiliency tested again in latest corruption probe

Banco BTG Pactual SA, Latin America's largest investment bank, has spent much of the past four years recovering from a crippling corruption scandal; it is again now having to defend itself against accusations of illegal activity.

On Aug. 23, Brazilian federal police raided the bank's São Paulo headquarters and the home of founder and former CEO André Esteves on alleged irregularities in the purchase of oil fields from state-owned Petrobras. News of the raids instantly hammered the company's shares as it marked a sort of déjà vu moment of 2015, when then-CEO Esteves was arrested on charges of obstructing justice and the bank itself implicated in bribing a senior political leader. Both the current and previous charges are tied to Brazil's widespread and ongoing Lava Jato corruption probe.

The latest police raids "came as a big surprise," Luis Sales, equity analyst at Guide Investimentos, said in an interview, noting that after Esteves was cleared of the 2015 charges, "everyone thought it was a done deal."

Sales noted that the previous experience from 2015 likely fueled greater investor fears this time around, spurring an initial market overreaction. Shares plunged by about 31% in the first two trading sessions after the raids and have seen heightened volatility in the weeks since.

Part of the fear stems from the severe impact that the prior scandal had on the bank. While Esteves was forced to resign and relinquish his ownership stake, BTG saw an uptick in redemptions and had to divest a string of assets in order to stave off a liquidity crisis. Profits declined sharply, and its credit ratings sank to "junk" status.

But analysts note that BTG Pactual since has worked to revamp its business model, lessening its reliance on the confidence-sensitive market funds that caused its previous liquidity crunch.

"It's a completely different bank than it was in the past," Claudio Gallina, a senior director with Fitch Ratings, said in an interview. "They knew (funding) concentration was an important weak spot and that if they wanted to avoid any problem in the future they needed to work strongly on it."

Through its retail digital channel, BTG has managed to broaden its funding base and become less dependent on potential cash-outs form corporate clients. It has diversified its income streams, with a greater emphasis on asset and wealth management services, to produce more consistent earnings. It also significantly bolstered its liquidity ratio, doubling it to 231% as of June 30 from around 111% at year-end 2015.

"The bank prepared their balance sheet for this," Jean Lopes, a financial institution analyst with Fitch, noted.

That work had helped to reinvigorate investor confidence in BTG Pactual. The bank posted a second-quarter profit 50.2% higher than a year earlier, and prior to the August police raids shares were up nearly 170% year-to-date.

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That run-up has now abruptly stalled. And while the bank appears to be better placed to weather short-term stresses caused by the new investigation, analysts note that reputational damage is still a big risk.

The latest BTG probe stems from statements made by a former Brazilian finance minister, Antonio Palocci, who reportedly claimed in a plea bargain deal that the bank was involved in bribery that resulted in BTG Pactual being able to purchase oil fields in Africa for below-market rate prices in 2013.

BTG Pactual has vehemently denied the allegations, noting that an audit following the 2015 incident did not find any evidence of wrongdoing.

For investors, the biggest risk is whether the allegations prove to be true, or even worse than what reports currently suggest.

"The main thing is how effective Palocci's bargain is and whether what he is saying ends up being true," Guide Investimentos' Sales said. "We think it will not be as bad as it sounds."

Still, the fact that BTG Pactual now twice has been put under scrutiny on the public stage is bound to have an effect, Fitch Ratings' Gallina argued.

"It will have some form of impact on its business over the medium and long term," he said.

As of Sep. 9, US$ 1 was equivalent to 4.08 Brazilian reais.