BR Advisory Partners Participações - Q2 2024

Transcript

Operator (participant)

Good day, everyone. Thank you for waiting. Welcome to BR Partners' video conference call to discuss second quarter 2024 results. We inform you that this video conference call is being recorded and can be accessed in the company's IR website, where you'll find the full package of our financial disclosure. During the presentation, all participants will be in listen-only mode. Later, we will have a Q&A session. To ask questions, click on the Q&A icon at the bottom of your screen and type in your question. If you prefer to use the microphone to ask questions, just let us know by message, and we will send you a request to enable your microphone.

We emphasize that the information contained in this presentation and forward-looking statements that might be made during the video conference call relating to BR Partners' business prospects, projections, and operating and financial targets, are based on the beliefs and assumptions of the company's management, as well as on information currently available. Forward-looking statements are not a guarantee of performance. They involve risks, uncertainties, and assumptions as they refer to future events, and therefore, depend on circumstances that may or may not occur. Investors should understand that general economic conditions, market conditions, and other operating factors may affect the company's future performance and lead to results that differ materially from those expressed in such forward-looking statements.

Today, we have the following officers present: Ricardo Lacerda, CEO; José Flávio Ramos, CEO of BR Partners Bank; Marcelo Costa, CFO; Danilo Catarucci, Managing Director and Head of Capital Markets; and Vinicius Carmona, IRO. Now, I will give the floor to Mr. Vinicius Carmona, who will start the presentation.

Vinicius Carmona (Investor Relations and Institutional Officer)

Good afternoon, everyone, and thank you for joining our earnings conference call for the second quarter of 2024. On Slide Two, we begin with the financial highlights. We are proud to have posted another record half year and quarter for revenue and net income. Total revenue was BRL 142 million in the quarter, up 3% quarter-on-quarter and 38% year-on-year. In the first half, revenue totaled BRL 280 million, up by 37%. Client revenues totaled BRL 112 million, growing 15% quarter-on-quarter and 52% year-on-year. In the first half, we recorded BRL 209 million, an increase of 57%.

Net income was BRL 52 million in Q2 2024, up 5% over Q1 2024, and 34% year-on-year. In the first half, net income totaled BRL 101 million, up 41%. ROAE reached 25% in Q2 and 24% year to date. Regarding operational highlights in investment banking, we announced nine deals since the beginning of the year, totaling a business volume of BRL 14.8 billion. In capital markets, we issued BRL 4.2 billion, distributed in 26 market operations. In wealth management, we hit the mark of BRL 3.3 billion in wealth under advisory, growing 21% compared to March. On Slide Three, we continue with other important highlights of the quarter.

We were awarded by The M&A Advisor, one of the most important media outlets in the industry, in three categories: Investment Bank of the Year in South America, Banker of the Year, rewarding our CEO, Ricardo Lacerda, and the award for Largest Cross-Border Deal of 2023, advising José Seripieri Filho on the acquisition of Amil. This award crowns our relentless efforts to remain one of the largest and most qualified investment banks in the country. In funding, we issued our first subordinated financial letter in the amount of BRL 160 million with a 10-year duration. This operation was an important milestone in our funding, since we had the opportunity to lengthen our liabilities and with an increasingly diversified operation and access to large institutional investors, which participated in this placement. Of course, this will also help our capital structure and strengthen our Basel ratio.

We would also like to take this opportunity to announce that Fitch Ratings has upgraded Banco BR Partners rating to AA on the grounds of the quality of the company's risk management, the success of our advisory business model, our Basel ratio, and discipline in capital allocation, as well as a track record of healthy profitability. This was another important achievement for the company's development across the board on all fronts. On Slide Four, I would like to highlight and explore the historical evolution of our ROAE and how we have managed to generate a relevant alpha in relation to the basic interest rate in different economic cycles.

In the pre-IPO period from 2020 to mid-2021, immediately after the COVID-19 pandemic, we experienced a bull market with a Selic rate that came close to 2%, and we lived through a unique period in our recent economic history with negative real interest rates. This scenario naturally led to a euphoria in the markets with abundant liquidity, low funding costs, in short, easy access to money... In this environment, we experienced a very strong level of corporate activity in all our business divisions, and especially in M&A and strategic capital markets. We sailed through the year with an ROAE of around 30% and reached a peak ROAE of 40% in June 2021, delivering a return well above the Selic rate, an alpha of 38 points. From the second half of 2021, we faced the opposite.

We entered a cycle of financial tightening, very much driven by local and global inflation after the pandemic. We saw an extremely restrictive monetary policy with a rapid rise in interest rates, which took many companies and sectors of the economy by surprise, and we experienced an environment of weak corporate activity from this moment onward, with rapid leverage of companies, expensive access to money, the cash of many companies being directed to pay interests. This obviously affected our advisory activity, and our client revenues lost momentum. Our ROAE reached 16%, but at all times, it was above the Selic rate and above the cost of capital estimated by analysts, which at the time was around 15%.

The proceeds we raised with the IPO were fundamental to navigating this bear market, because we were able to defend ourselves with significant capital revenue from our portfolio of private securities and CDI-indexed equity. In addition to our assertive decision to set up our restructuring team exactly at that time, which helped defend a significant part of the investment banking revenue from 2022 onwards and the company's own ROAE. But the message that I would like to convey is twofold, actually. Yes, and we tell this over and over to investors, we are a cyclical business, but we have managed to improve the recurrence of our business, counting mainly on the strength of our franchise over the years, and with diversification into new products and services, such as the profitable restructuring business, which I just mentioned, and the recently structured wealth management division.

So I believe that in positive cycles, as we have seen since Q3 2023, as you can see on the chart, we have been able to show our operating leverage and add significant value in relation to the Selic rate or to the cost of capital itself, currently estimated by analysts at around 14.5%. So we are back to generating a substantial alpha. But here, ROAE continues to be the company's main indicator and our number one priority. On Slide Five, client revenues accounted for 75% of our revenues in the first six months of the year, showing the company's operating leverage in people-intensive businesses.

When we find a more favorable market for our activities, and this is more evident, on the other hand, a tactical and more defensive use of capital in more difficult environments, such as what we faced in the six months of 2023, when capital revenues represented 35% of total revenues, compared to 25% now. On Slide Six, we present our business lines, starting with investment banking and capital markets. In IB, M&A activity continues to be more heated compared to 2023, with a more benign environment for converting strategic deals, as large companies have overall shown good operating results and good financial health. In this sense, for example, the company has been identifying consolidation opportunities in different economic industries. To mention just a few: energy, health, the financial sector itself, education, retail, among others. It's quite well-distributed.

It is also important to highlight that although M&A activities are back, the restructuring activity continues to be strong in the first half of 2024. In capital markets, the local debt market continues to be quite buoyant, even though the Selic rate has remained high at 10.5%. Of course, this level has frustrated the expectations that the market had at the beginning of the year. We have seen a great demand for funds for different purposes, for cash reinforcement, for renegotiation, debt restructuring, a little for corporate finance, deleveraging operations, such as sale and leaseback, and we see more opportunistic infrastructure debentures. Actually, I should stress that on the distribution side, we see strong demand from investors for credit products in the primary market, especially for incentivized products.

Talking about revenue, total revenue from this division was BRL 89 million in the quarter, up 15% and 60% quarter-on-quarter and year-on-year, respectively. In the first half, growth was 64%. On the next slide, number seven, we show that our sectoral operations remain well-diversified in IB, with retail, financial services, and energy standing out. With regard to the type of advisory services after last year, when we saw restructuring as the main highlight, now M&A is again accounting for 50% of the company's deals. In the quarter, we highlight the board advisory to BRB, our advisory to Amil in the structuring of the JV with Dasa, our advisory to Cruzeiro do Sul Educacional in the acquisition of FAPI, and also our advisory to the energy trader, Auren, in the purchase of Esfera.

We also highlight, more recently, the deal in which we advised Prisma in a real estate operation. On Slide Eight, we show the evolution of debt issuances in the capital markets. We issued BRL 2.1 billion in debt in the quarter, totaling BRL 4.2 billion in the first half year, an increase of 148% compared to last year. Also noteworthy was the increase in the average ticket, which reached BRL 162 million in the first six months, compared to BRL 100 million last year, which was a big improvement. And also, I think it is important to mention the increase in the number of operations. We structured and distributed 26 issuances in the first six months of the year, an average of 4.3 operations per month.

Actually, this would be the equivalent of one operation being settled per week, so we have a very healthy flow. Now I turn the floor to Marcelo, who will now continue the presentation.

Marcelo Costa (Managing Director of Treasury, Sales, and Structuring)

Good afternoon, everyone. It is a pleasure to be here again. On Slide Nine, let's talk about the results of treasury, sales, and restructuring. The division posted revenues of BRL 18.8 million in the quarter, up 8.4% compared to the previous quarter. Year to date, the division posted revenues of BRL 36.2 million, growing 27% over the first half of 2023. In this quarter, we continued to see good dynamics in the operations of this division, mainly due to a more active capital markets, where we found good opportunities for structuring debt swaps with our clients.

In the FX market, we saw strong demand for foreign exchange hedging, driven by the volatility of the markets during the quarter. In the commodities market, in turn, in addition to a more heated market, we expanded our portfolio of hedging products, entering two new sectors: energy, oil and oil byproducts, and metals. The next slide shows the evolution of our wealth management platform. Total revenue from asset management, which includes wealth management and the investment division, reached BRL 3.4 million, a significant jump on a quarterly and annual basis. It is worth noting that we received the fees for a relevant part of our wealth management portfolio on a half-yearly basis, which led to a higher result in Q2 2024.

As of July, we started accounting for wealth management fees on a quarterly pro rata basis in order to avoid the concentration of revenues at the end of each half year. In the quarter, the net new money, NNM, for wealth management was BRL 571 million, totaling BRL 3.3 billion on the platform. When we consider FIPs as well, we have BRL 3.7 billion in asset management. In terms of capital revenues, total revenue amounted to BRL 30.5 million in the quarter. The drop quarter-on-quarter is due to the effect of the revaluation of FIPs, which historically takes place in the first quarter of each year.

In the first half of the year, we see that even though the average Selic rate, rate for the period dropped from 13.75% in the six months of 2023 to 11% in the six months of 2024, capital revenues remained stable at BRL 17 million because we improved the profitability of our private securities portfolio. Slide 11 shows our financial and operating performance. We once again achieved a record net income for the half year, reaching BRL 101 million, which represented growth of 41%. We also managed to increase our net margin to 36% in the first half. The company's ROAE showed substantial progress and reached 24% in the half year, compared to 17.8% last year.

In terms of efficiency indicators, we achieved an efficiency ratio of 44% in the first half, slightly higher than last year's 41.6%, stemming mainly from higher commercial expenses with commissions and fees. The comp ratio, compensation ratio reached 27.5%, within the range that the company believes to be a healthy level, especially considering the recent increase in headcount and the structuring of the wealth management team. Finally, we posted client revenues per MD of BRL 21 million in the first six months, an average of BRL 10.5 million per quarter, higher than what we saw in 2023. Even considering two more MDs compared to the previous year, which reinforces our ability to promote operating leverage in positive market moments.

On Slide 12, we show the growth of our private securities portfolio and bridge loans, which totaled BRL 2.3 billion at the end of June 2024. This is a reduction of 10% over the last quarter, as we saw a good opportunity to place some securities on the secondary market to partner investors at a time of greater market appetite for incentivized credit products. This dynamic reinforces the tactical use of our balance sheet and is also important for capital management and Basel ratio, freeing up space to co-invest in new securities structured by our DCM. Year to date, the portfolio grew by 20%, and this is a reflection of the greater activity of the capital markets division, in line with our strategy of using capital intelligently and more actively in the debt issuances that we structure and co-invest in with our investors.

Also, in the first graph, we present the bank's leverage, which stood at 3.1x at the end of June. With regard to Basel ratio, we ended June with a healthy ratio of 18.1%. We are comfortable and have room to continue allocating capital strategically and helping to grow our derivatives activities and the private securities portfolio over the coming quarters, following our business plan. On Slide 13, we show the evolution of the company's shareholders' equity, which stood at BRL 846 million in June 2024. The shareholders' equity of BR Partners Bank totaled BRL 732 million. On the bottom of the slide, we present the evolution of the company's funding.

We reached funding of BRL 3.4 billion in June 2024, with an average term of funding of 355 days, a healthy level, given the nature of our assets. We would also like to mention that in July, we issued a subordinated financial letter for the first time in our history. We raised BRL 160 million with a duration of 10 years from large institutional investors. This funding is an important milestone and is a recognition that we have managed the bank responsibly and with assertive risk metrics. Considering this issuance, our duration would rise to 510 days. With this, I reinforce that we continue to maintain a very comfortable levels of liquidity.

Finally, on Slide 14, we announced that the board of directors has approved the payment of interim dividends, referring to the second quarter of 2024. Dividends to be paid on August 29th will be BRL 0.30 per unit, totaling BRL 31.5 million, representing an accumulated dividend payout of 62%. With that, the dividend yield is 8.4%. Thank you very much for your attention so far, and now's the time for you to ask questions and clear your doubts. Thank you very much.

Operator (participant)

We will now begin the question and answer session. To ask questions, click on the Q&A icon at the bottom of your screen and type your question to get in line. When you're announced, a prompt to enable your microphone will appear on the screen, and then you must open your mic to ask questions.

We recommend that you ask your questions all at once. Our first question comes from Matheus Guimarães, Sell Side XP. Matheus, your audio is enabled. Go ahead.

Matheus Guimarães (Equity Research Analyst)

Hello, good afternoon. Thank you for the opportunity to ask questions, and again, congratulations on the results. My question is about return on shareholders' equity. This quarter, you had a lower tax rate. On the other hand, you're still running the bank with a Basel ratio slightly higher. Perhaps if we were to adjust for that, even Itaú has been speaking about possible adjustments to that line, and the ROAE would be slightly higher. So looking forward at the coming quarters and coming years, actually, considering what Vinicius mentioned-... regarding the ability to generate alpha and protect your business from the cyclical nature of the bank.

Do you think that looking forward, that this mid to long-term ROAE, in your opinion, would continue to increase, would be flat? Where do you see the, the company's ROAE?

Vinicius Carmona (Investor Relations and Institutional Officer)

Hello, Matheus. Good afternoon. Thank you for your question and for joining us. Exactly on that slide, we tried to show you how in this more recent cycle that has started, where companies started to show better operating results compared to last year, with deleveraging, with fewer financial expenses, how all that has an immediate effect on our client business, particularly M&A, capital markets, and in treasury. Indeed, we have seen quite a benign scenario. And looking forward to, to the rest of 2024, we see continuous activity in the capital markets. It remains heated in M&A. We continue to be involved in large projects that came back now with more momentum this year.

Just for your information, last year, we saw exactly the opposite. We saw the companies with greater leverage, sometimes with a healthier EBITDA margin. But when we would look at the net margin, it was close to zero. So the companies were working to pay interest. And of course, the focus of the C-suite of the companies was to do their homework, tidy up the house in more strategic topics, inorganic growth, like M&A, would be a second priority. But this year, we have seen exactly the opposite. The companies are more balanced, and these strategic topics come back to the agenda. We have seen quite a strong level in IB and in capital markets because that's where the money is now.

We see the stock market still closed, and this gives us some safety margin for us to pursue an ROAE well above the cost of capital estimated by the analysts. And what we perceive, and we tell the market, is that we want to have an ROAE above 20%. In this quarter, we managed to get to an ROAE of 25%, the highest level, actually, since the IPO. And if we find good market conditions ahead of us, we'll continue to pursue something more, something-- an ROAE greater than 20%.

Matheus Guimarães (Equity Research Analyst)

Excellent. Very clear. Thank you very much, Vinicius.

Operator (participant)

Our next question from Ricardo Buchpiguel, sell-side BTG Pactual. Ricardo, your audio is enabled.

Ricardo Buchpiguel (Equity Research Associate Director)

Good afternoon. Thank you for the opportunity to ask questions. I have two. First, the DCM environment was quite overheated in this first half of the year.

We saw spreads compression, and so I would like to understand the thinking about demand from investors. Do you expect these volumes to follow a similar trend in the second half of the year, or do you expect a reduction in volumes looking forward? That's number one. Second question: I'd like to understand more your business, your restructuring business. If you could give us more color on the pace of growth of this business in recent years, and how it compares, for example, with the market, and a little bit of the outlook, the future outlook. I'd like to understand, how far are you from your fair share? And how to grow this line in the future, which used to be very relevant over time. Thank you.

Vinicius Carmona (Investor Relations and Institutional Officer)

Thank you for the question. Speaking about the capital markets, the first half indeed was quite overheated with the closing of the spreads and demand from investors. In Q3, so far, we have maintained the pace of the previous quarter, and the pipeline also points in that direction. So we understand that if the macroeconomic conditions remain stable, with no new facts or external events, the trend is that the pace be maintained. In the third quarter, we have good visibility. Until part of the fourth quarter, we have some visibility. So we believe that the likelihood is high that we'll maintain the pace that we have had so far this year. About restructuring, Ricardo, you asked us to give you more color on how we worked over time.

Well, we used to do restructuring since BR Partners began, but it was a more of a side business as part of IB, rather than a focused business. In mid-2021, soon after the IPO, we identified an opportunity in this business line, and we saw that the market was getting worse, given the rise in interest rates, which was dramatic, from 2% to almost 13% interest rates. That's when we decided to focus more on this business, and we hired a dedicated team for that, with experts in this kind of advisory of restructuring. So we started in 2021, in the end of the last quarter of 2021. And that mosquito that was flying, we aimed at it, and we got it right. So we had the team prepared, the problems started appearing. We were able to work in important restructuring cases.

You know the name, I don't have to talk about it. Even with the market as it is, we still have a great legacy of restructuring, and restructuring doesn't happen only when the market is poor. There is also reprofiling of liabilities. There are themes related to shareholders, deals just like Banco Nacional that was pending for 30 years. We're working on a lot of things that we are announcing, and we believe that this is one more service as part of the advisory services in our IB division. We're investing in this area. We believe we still have a long journey ahead of us. You asked about market share. This is not normally...

There's no ranking like Anbima or Bloomberg's for that, but the important thing is that we are present in the most important deals, and we are solving the problems of our clients, investors, and shareholders.

Ricardo Buchpiguel (Equity Research Associate Director)

Okay, super clear. Thank you very much.

Operator (participant)

Next question from Pedro Leduc, Itaú BBA. We will enable your mic, Pedro. Go ahead.

Pedro Leduc (Equity Research Analyst)

Good afternoon. Thank you for the presentation and for the opportunity to ask a question. Congrats to the whole team for the results. One, you posted a strong revenue. With it, we also had some administrative expenses. You mentioned that this is related to commissions, et cetera. Perhaps you could elaborate a little bit more about that, so that we can understand what lines are driving this kind of expense, so we can think about expenses vis-à-vis the revenues, so that we can, we can work on our model.

This is my first question. The second is about the loan book that was adjusted down, the portfolio of securities that you carry. I guess that you could have a portfolio turnover, you could monetize it, but I'd like to understand if this is related to some strategic deal and how we should model this in the end of the year. Thank you very much.

Vinicius Carmona (Investor Relations and Institutional Officer)

Pedro, thank you for the question. As regards commissions, of course, commissions are related to revenue. It's an expense related to origination cost, but there's not a one-to-one rule. It's not the kind of deal where you're going to pay more or less. It's, it's really a case by case, and it's very opportunistic. For some deals, you pay more; for some deals, you pay less. It really depends on the market moment, the type of deal, the type of originator, among other factors.

What we like to highlight here is that even if we look at this as a revenue reducer, revenue continues to grow, and quite strongly. As regards the securities portfolio, I should say that this was opportunistic. We always stress that our portfolio is used in a very opportunistic way. When there's a demand, we'll have a portfolio turnover to produce or originate more deals, to have more revenues from capital markets or from sales and trading. So the reduction in the portfolio is a reflection of some bridge loans we had last year, and that we sold to market and some trading opportunities that arose. So growth or reduction depends on these opportunities that we find.

As mentioned in some prior questions, the spreads closed quite a lot, and when the spreads start closing below our cost of funding, we realize the gain, and we move to the next operation, to the next deal. And Pedro, let me add to that, just to bring you some numbers to Danilo's explanation. Starting with commercial expenses, we'll look at the whole, how much we're actually making in the operations. If we get these commercial expenses, and if we consider them a revenue reducer, because of course, they are directly linked to the settlement of these deals, in the six months of 2024 compared to six months of 2023, even after these expenses, client revenues would have grown BRL 40 million or 43%.

So indeed, we're able to grow the top line in a much faster speed, and it is only natural that with the increased business volume, these expenses would increase. You mentioned the modeling for the portfolio. Today, we have a leverage of 3.1x. It will really depend on what Danilo mentioned, how we see market opportunities. But I believe that working with a leverage between 3.5-4x, this is what we had forecast in the beginning of the year. It would make sense for this portfolio that we carry.

Pedro Leduc (Equity Research Analyst)

Excellent. Thank you very much....

Operator (participant)

Next question from Brian Flores, Citi. Brian, we'll enable your microphone so you can begin. Go ahead.

Brian Flores (VP of Equity Research)

Thank you very much for the opportunity. Congratulations on the results. I have two questions. Perhaps a follow-up on capital. In terms of the reference, shareholders' equity has grown quite a lot.

I know you, you said you have some plans to allocate that capital, but I would like to ask, what is- with the profitability you saw in the first half, and it seems that the pipeline remains good for the rest of the year, in your budget, do you have a change in mind for the pol- for the dividend policy looking forward?

Vinicius Carmona (Investor Relations and Institutional Officer)

Well, Brian, thank you for the question. Dividend payout policy, well, we have been following... Well, we have been putting into practice since last year. We are distributing about 60% of dividends, a round number. Of course, there is an issue we are going to analyze in the second half, which is taxation. Our capital and our leverage, again, they're very tactical for us. We are not a bank with 11%, 12%, 13% Basel Ratio.

Our Basel ratio will be close to 18%, perhaps 17%, 16%, with the balance sheet including our businesses of treasury, derivatives, and capital markets. So we are not really worried about deploying our balance sheet in order to grow assets. Assets grow because we're growing the fees of our business. The asset grows because we're bringing in new clients for our derivatives division, so this is how we use the balance sheet. Investors can continue to expect that our capital base will be very solid. There will not be a surplus of capital because, of course, we're growing the business. We are in a good ramp-up now. We are halfway through, but we look at this much more technically in terms of where we want to get in the long run, rather than deploy to have a quick Basel ratio for the balance sheet.

Marcelo Costa (Managing Director of Treasury, Sales, and Structuring)

I'd like to add to that, speaking about our strategy of having this subordinated financial letter funding in July, subsequent to the disclosure of our results. This was a very important operation for us. We were able to access a base of institutional investors that we did not have access to before, for a 10-year duration, and this operation is going to be part of our Tier 2 capital. With this operation, we expect a growth of approximately 3% in our Basel ratio. But it is exactly what Zé mentioned. We have been using the balance sheet tactically. The derivatives business, until then, due to a matter of duration of the derivatives portfolio, which is not that long, is now generating recurrent revenues using the same capital allocation, but we want to grow that business.

We have been working intensely on this, and as Vinicius mentioned during the presentation, we were upgraded by Fitch Ratings in Q2. This is quite helpful for us in two fronts. First, as a counterparty risk of large corporates. More and more of these upgrades help us have access to large corporates, which are the majority, recurrent issuers in the capital market. Secondly, it has helped us a lot to reduce our funding costs, and also in lengthening our liabilities. I think that the subordinated financial letter is an example of that. With that, we open up some room to have a better spread, a better return on our assets, and we can tactically see a better profitability, profitability, which, at some moments, will help us leverage our balance sheet even further.

Brian Flores (VP of Equity Research)

Super clear. Thank you very much. If I may ask a second question about wealth management, because it seems that perhaps you can confirm this, but assets under management is advancing better and faster than what you had anticipated, and also given market conditions. So, I'd just like to ask, in your view, what is creating this traction, and what can we expect looking forward? Thank you.

Vinicius Carmona (Investor Relations and Institutional Officer)

Brian, thank you for the question. Well, actually, to be frank, we didn't create any expectation or a target in terms of what we would like to achieve in one, two, or three quarters. We will complete the first year of wealth management in November, because that's when we had our first client.

As you know, we brought in a very senior team, people who have been in this business for a long time, and we have our origination team, all of us, and we have been working on that business as well... and when the base is very low, any growth seems to be very, very substantial. We're happy with the business. We have started bringing in some money. It's a very interesting return for us, for us as partners, as shareholders, as you are. Because this is recurrent revenue, return on capital is almost infinite because it doesn't use capital, and it is a very hard business. It's very competitive. Everyone is doing wealth management.

There are many independent players, large players, foreign players, but we got into this market to be, to be relevant in a period of time that it takes to build the business, as we built other divisions of products and services that, that we provide. It's a purely advisory business that we're providing. And we believe that in an interesting timeframe, we will be able to be relevant also with this product here at BR Partners.

Brian Flores (VP of Equity Research)

Perfect, thank you very much.

Operator (participant)

Next question from Evandro Medeiros, sell-side, Suno Research. Evandro, go ahead.

Evandro Medeiros (Equity Research Analyst)

Good afternoon. Congratulations on the results. My question is a very straightforward and short one: What have you been observing in the health of the clients' balance sheets, and what explains the significant increase in the average ticket of issuances?

Vinicius Carmona (Investor Relations and Institutional Officer)

Excellent. Thank you for the question. Here's what I can tell you. Regarding the company's balance sheets, the best answer is that unlike last year, in the first half of 2023, when you looked at 2022... You looked at the balance sheet at the start of 2023, and you looked at the balance sheet for 2022, and we didn't see the reflection of the whole cost increase of the cost of increase in the Selic rate reflected in the balance sheet of the companies, and that's why there was some asymmetry of information and a relevant increase in corporate risk. This year it is the opposite. In the first half of this year, the companies are reporting balance sheets already showing the adjustments made in the prior year. The sectors affected by cost increase or any other reason were already well-priced, with an improvement outlook.

So although that expectation of reduction to a high single digit of Selic, although it did not come to reality, there was a relevant reduction from about 14% to 10.5% currently. So the expectation today is much more positive, much better than last year, and the balance sheets have started to reflect the adjustments that should be made. Unlike other crises we had in the past, a good part of the segments, a good part of the segments were not so impacted in their top line. They were more impacted in their operating income, and the margins remained kind of stable. What deteriorated was the bottom line. But still, today, when we look at the balance sheets of the companies, we already see a significant improvement compared to what we saw last year.

As for the average ticket of our issuances, again, I think it's a more opportunistic matter here. We ended up having some opportunities, some deals that were greater than the average we had last year, so we ended up increasing the average ticket. There was no strategy change or no change in the focus that would justify that increase in the average ticket. It was an opportunistic matter, things that happened.

Evandro Medeiros (Equity Research Analyst)

Perfect. It's very clear. Thank you very much.

Operator (participant)

As a reminder, if you want to ask questions, you should click on the Q&A icon at the bottom of your screen and write your question to get in line. When announced, a request to enable your microphone will appear, and then you should enable your mic to ask questions. We think it's better if you ask all questions at once.

I got a question from one investor: Could you explain why M&A is a hot segment at this point?

Vinicius Carmona (Investor Relations and Institutional Officer)

Thank you for the question. I guess that here we have a number of factors, starting with the cost of debt and cost of interest, that is low. The Selic is still high, 10.5%, but we, we have to consider that it used to be 13.75%, so it's about 25% reduction in the cost of debt. And as Danilo mentioned, this has already shown a deep change in the balance sheet of the companies in terms of their capacity to de-leverage, to improve their margins. So there's some... A part of that, a part of this improvement comes from that. And last year, we had the top executives very much focused on sorting their internal issues-...

But now that the operating results are improving, they have more room to think about M&A, more strategic topics, and also the last window of IPOs and follow-ons. That's when we can foster the M&A activity. That was in 2021. So in years 2022, 2023, the pipeline was held back. But now that the corporate environment has improved a little, these topics are back on the agenda. So I would say it's a mix. It's a combination of different micro factors related to the companies and macroeconomic factors. But indeed, we see a very overheated market and quite diversified in different sectors. Like we mentioned in the presentation, we have seen things happening in energy, retail, real estate, in financial services. So we see a lot of activity and in multiple sectors.

Operator (participant)

Our next question comes from Larissa Quaresma, sell-side Empiricus. Larissa, we will enable your mic, so you can proceed.

Larissa Quaresma (Equity Research Analyst)

Hello, everyone. Good afternoon. I'd like to congratulate you on the results. I was quite surprised with the gain in profitability, the growth of the client franchises. Congratulations. I would like to hear your opinion about the deterioration we saw in the international environment in recent days, and how this has reflected in your pipeline of deals, and if- in your estimated probability of closing deals, and how this was in the past? Because we know that if there is a deterioration in the Brazilian environment, that would have a bigger impact. But I'm, I'm focusing now on the international environment. At least in the stock exchange, we are kind of doing okay, we are unscathed. Excellent.

Vinicius Carmona (Investor Relations and Institutional Officer)

Let's speak about our end. In terms of the DCM and also M&A, in the very short term, I think it will impact us very little. What gets in the way is volatility, because when there is a lot of volatility, we lose the price reference, and with that, obviously, investors end up charging a higher price. Given the lack of assurance regarding the pricing of the operations or in an M&A deal, when the environment is very volatile, decision-makers end up procrastinating or delaying their decisions, waiting for a better moment to have more visibility when they make their decisions. Now, of course, if abroad, this deterioration is a trend of reducing U.S. interest rates, this tends to help Brazil. It will give a relief for our foreign exchange and for our domestic interest rate, but it will depend on other factors, of course.

So we see that in the short term, this deterioration has very little impact on our business, but if this great volatility persists, it should disturb the generation of a new pipeline and the pricing of new assets. I'd like to remind you that there's a lot of short-term volatility linked to the carry trade of Japan against the emergent countries. Once we remove that pollution from the market, the United States are ready to lower their interest rates, so I guess that we can have a more constructive environment with less volatility, as Danilo said, so that entrepreneurs and the business community can have a kind of a more long-term visibility. But I think that these short-term moves do not impact our business a lot, because we don't have anything that depends on directional risk.

Larissa Quaresma (Equity Research Analyst)

Excellent. It makes sense. Thank you very much. It was super clear.

Operator (participant)

Thank you. Again, as a reminder, if you want to ask questions, you can click on the Q&A icon at the bottom of your screen and type in your question to get in line. The question and answer session is now closed. Now, we would like to turn the floor over to the management for their closing remarks.

Vinicius Carmona (Investor Relations and Institutional Officer)

Well, it's been a pleasure talking to all of you again. We'll continue in this crazy pace to continue to bring good results to our investors, and we are always available to speak with you face-to-face or online, any way you prefer. We're always available. Take care.