BTG Pactual's Strategic Merger with Banco Pan: A Case for Undervalued Banking Assets in a Volatile Market

In a market characterized by volatility and shifting investor sentiment, the proposed merger between Banco BTG Pactual and Banco Pan has emerged as a compelling case study in identifying undervalued banking assets. The 30% premium share-swap offer-granting Pan shareholders 0.2128 BTG units per Pan share-signals a strategic consolidation aimed at streamlining operations and enhancing scale, according to a Valor report. With BTG already controlling 76.9% of Pan's shares since 2021, the merger represents a calculated move to unify two entities under a single listed entity, potentially unlocking synergies in cost efficiency and capital access, per MarketScreener data.

Valuation Metrics: A Tale of Two Banks

BTG Pactual's financial metrics paint a picture of a well-capitalized institution with robust profitability. As of October 2025, the bank trades at a trailing P/E ratio of 18.10 and a forward P/E of 10.60, significantly outperforming the Brazilian banking sector's average P/E of 7.5x, according to a Simply Wall St analysis. This premium valuation is supported by strong earnings: BTG reported a net income of BRL 12.37 billion over the past 12 months and a return on equity (ROE) of 20.34%, underscoring its ability to generate shareholder value, according to StockAnalysis data.

Banco Pan, meanwhile, presents a mixed picture. While its P/E ratio of 24.2 (as of Q3 2025) suggests a higher valuation relative to earnings, the bank's asset quality raises concerns. Its nonperforming loan (NPL) ratio stands at 15.7%, starkly above the sector's 3.2% benchmark, according to MarketScreener. This discrepancy highlights the risks embedded in Pan's loan portfolio, which could be mitigated through BTG's stronger risk management frameworks. The merger's projected cost of over BRL 2.3 billion for a full acquisition, as reported by MarketScreener, reflects the premium BTG is willing to pay for operational integration and long-term efficiency gains.

Strategic Synergies and Sector Context

The merger's strategic rationale lies in BTG's ability to leverage its capital strength and technological infrastructure to improve Pan's asset quality. BTG's NPL ratio of 2.3% in Q3 2025, according to MarketScreener (BTG), and a capital adequacy ratio (CAR) of 16.2% position it as a stable counterbalance to Pan's weaker metrics. Analysts argue that the combined entity could reduce redundant costs by up to 15% and boost ROE through cross-selling opportunities and streamlined operations, as reported by Valor.

In a broader sector context, Brazilian banks face a delicate balancing act. While the industry's average CAR of ~15.8%, according to CEIC data, meets Basel requirements, rising NPLs-up from 2.9% to 3.2% in early 2025, as CEIC data shows-signal growing credit risk. BTG's proactive integration of Pan, however, offers a blueprint for navigating these challenges. By consolidating under a single entity, the merger could enhance the combined bank's ability to compete with larger rivals like Itaú Unibanco and Banco Bradesco, which dominate the sector's capital and market share.

Market Reactions and Undervaluation Thesis

Despite the merger's strategic merits, market reactions have been mixed. Pan's stock surged to R$9.53 in early October amid speculation of a public acquisition (OPA) but retreated to R$8.50 by late October as BTG denied immediate plans for a full buyout, according to MarketScreener. This volatility underscores the market's skepticism about Pan's standalone viability. Yet, BTG's share-swap structure-avoiding a costly OPA-suggests a focus on long-term value creation rather than short-term speculation.

The undervaluation argument hinges on BTG's forward P/E of 10.60, which implies a discount to its historical performance and sector peers. With the Brazilian banking sector grappling with regulatory pressures and economic uncertainty, BTG's disciplined approach to integration and risk management positions it to capitalize on mispriced assets like Pan. The merger's projected completion by year-end 2025, per Valor, adds urgency to this thesis, as investors await tangible cost synergies and improved asset quality.

Conclusion

BTG Pactual's merger with Banco Pan exemplifies the opportunities available to discerning investors in a volatile market. By acquiring a struggling but strategically aligned peer at a premium, BTG is betting on its ability to transform Pan's asset quality and unlock value through operational efficiencies. While risks such as integration challenges and rising NPLs persist, the combined entity's strong capital position and sector-leading ROE make a compelling case for undervaluation. As the Brazilian banking sector navigates a fragile macroeconomic environment, this merger could serve as a blueprint for consolidating market share and driving sustainable growth.