Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Financials & FinTech, EM & Developed Markets

Galliano’s Financials Research

Galliano's Financials Research provides fundamental research in Emerging Markets financials, including FinTech, as well as financials in select Developed Markets.

The investment style applied is generally value oriented, although Growth At Reasonable Price (GARP) strategies can also be used where appropriate. 

Our investment research approach aim is often contrarian, looking to capitalise on overly sceptical or optimistic consensus views. In terms of valuation techniques, the focus is on PBV ratio to ROE, PE multiples and dividend yield, as well as the application of PEG ratios and, where appropriate, Sum of the Parts (SOTP) valuations.

Event-Driven

<ul>
<li>Itausa is trading at a HoldCo NAV discount in excess of 25%, which is historically rare; we reiterate our positive view on Itausa</li>
<li>We believe that the NAV is under-estimated; separate from Itausa’s stake in XP, Itaú Unibanco, which is Itausa’s core holding with a 37.2% stake, has a direct 9.96% XP stake</li>
<li>Adding its indirect XP stake share to Itausa’s NAV implies a discount of 27%; since December 2008, only on 11% of the month end datapoints has Itausa’s discount exceeded 25%</li>
</ul>


Itausa is trading at a HoldCo NAV discount in excess of 25%, which is historically rare; we reiterate our positive view on Itausa
We believe that the NAV is under-estimated; separate from Itausa’s stake in XP, Itaú Unibanco, which is Itausa’s core holding with a 37.2% stake, has a direct 9.96% XP stake
Adding its indirect XP stake share to Itausa’s NAV implies a discount of 27%; since December 2008, only on 11% of the month end datapoints has Itausa’s discount exceeded 25%


Itausa (ITSA4 BZ) – Historically Big NAV Discount Buying Opportunity

Equity Bottom-Up

<ul>
<li>Banco Central do Brasil has been raising benchmark interest rates aggressively since 1H2021 and we believe it is approaching the peak of its tightening cycle; this feeds into loan spreads</li>
<li>1Q22 Brazil bank results showed limited evidence of widening spreads, due to a time lag, but loan quality is worsening due to the hiking interest rates amid the soft economy</li>
<li>Disciplined loan origination should support bank returns, especially in the consumer and SME segments, containing credit cost charges growth as spreads expand; deep-value Banco do Brasil remains our top pick</li>
</ul>


Banco Central do Brasil has been raising benchmark interest rates aggressively since 1H2021 and we believe it is approaching the peak of its tightening cycle; this feeds into loan spreads
1Q22 Brazil bank results showed limited evidence of widening spreads, due to a time lag, but loan quality is worsening due to the hiking interest rates amid the soft economy
Disciplined loan origination should support bank returns, especially in the consumer and SME segments, containing credit cost charges growth as spreads expand; deep-value Banco do Brasil remains our top pick


Brazil Banks – Returns Tug of War Between Spreads and Credit Costs, Stick with Banco Do Brasil

<ul>
<li>Despite the compression in the Brazil digital banks’ multiples from the FinTech de-rating, big fundamental hurdles remain, especially for Nubank</li>
<li>Nubank is delivering on increased loan penetration and this should drive revenue growth; still, this also drives higher and front loaded provisioning charges along with capital absorption</li>
<li>Banco Inter is less challenged than Nubank on most metrics, and it is modestly profitable, but we believe it is too early to turn positive; we like Banco do Brasil</li>
</ul>


Despite the compression in the Brazil digital banks’ multiples from the FinTech de-rating, big fundamental hurdles remain, especially for Nubank
Nubank is delivering on increased loan penetration and this should drive revenue growth; still, this also drives higher and front loaded provisioning charges along with capital absorption
Banco Inter is less challenged than Nubank on most metrics, and it is modestly profitable, but we believe it is too early to turn positive; we like Banco do Brasil


Brazil Digital Banks – Nubank and Banco Inter Shares Have De-Rated, but Still Face Challenges

<ul>
<li>Itausa is trading at a stated 24.4% discount to the HoldCo’s NAV, with the discount having widened sharply since last month; we turn positive on Itausa</li>
<li>We believe that the discount under-estimates the stated NAV; separate from Itausa’s stake in XP, Itaú Unibanco, in which Itausa holds a 37.2% stake, has a direct 11.36% XP stake</li>
<li>Adding its indirect XP stake share to Itausa’s NAV implies a discount of 26.1%; since December 2008, only on 11% of the month end datapoints has Itausa’s discount exceeded 25%</li>
</ul>


Itausa is trading at a stated 24.4% discount to the HoldCo’s NAV, with the discount having widened sharply since last month; we turn positive on Itausa
We believe that the discount under-estimates the stated NAV; separate from Itausa’s stake in XP, Itaú Unibanco, in which Itausa holds a 37.2% stake, has a direct 11.36% XP stake
Adding its indirect XP stake share to Itausa’s NAV implies a discount of 26.1%; since December 2008, only on 11% of the month end datapoints has Itausa’s discount exceeded 25%


Itausa (ITSA4 BZ) – Historically Wide, and Potentially Understated, NAV Discount

<ul>
<li>Itaú Unibanco’s acquisition of an 11.36% stake in XP in April is no strategic move; it is a contractual obligation that remained, after the regulator blocked Itaú’s acquisition plans</li>
<li>This adds to the existing overhang in XP shares, given that fellow XP shareholder Itausa deems its 11.5% XP stake to be non-strategic, having already made disposals through block trades</li>
<li>We remain cautious on XP shares based on the disposal overhang and competitive pressures in Brazilian wealth management undermining XP’s fundamentals; near term, Itausa warrants monitoring on its NAV discount</li>
</ul>


Itaú Unibanco’s acquisition of an 11.36% stake in XP in April is no strategic move; it is a contractual obligation that remained, after the regulator blocked Itaú’s acquisition plans
This adds to the existing overhang in XP shares, given that fellow XP shareholder Itausa deems its 11.5% XP stake to be non-strategic, having already made disposals through block trades
We remain cautious on XP shares based on the disposal overhang and competitive pressures in Brazilian wealth management undermining XP’s fundamentals; near term, Itausa warrants monitoring on its NAV discount


XP (XP US) – Less Demanding Valuations, but the Overhang Still Weighs

Brazil

Itau Unibanco Holding S.A. attracts deposits and offer retail, commercial, corporate, and private banking services. The Bank offers consumer loans, financial management, insurance, pension plans, treasury services, mortgage loans, lease financing, securities brokerage, and foreign exchange services.

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Itau Unibanco Holding (ITUB4 BZ)

Itausa (ITSA4 BZ) – Historically Big NAV Discount Buying Opportunity

Itausa is trading at a HoldCo NAV discount of 25%+, which is rare; in addition, we estimate that Itausa's enhanced NAV discount is a historically...

Victor Galliano

Brazil Banks – Returns Tug of War Between Spreads and Credit Costs, Stick with Banco Do Brasil

Higher benchmark interest rates feed into wider spreads for Brazil banks, and in the returns tug of war between higher spreads and bigger credit...

Victor Galliano

Brazil Digital Banks – Nubank and Banco Inter Shares Have De-Rated, but Still Face Challenges

The Brazil digital banks' high loan penetration should drive revenue growth, but this also accelerates NPL formation, provisioning charges and...

Victor Galliano

Itausa (ITSA4 BZ) – Historically Wide, and Potentially Understated, NAV Discount

Itausa's NAV discount of c25% drives our positive view; with Itausa's indirect XP stake share, the discount reaches 26%; over 162 monthly...

Victor Galliano

XP (XP US) – Less Demanding Valuations, but the Overhang Still Weighs

XP's less demanding valuation is not enough, in our view, to offset the big share overhang, and competition in Brazil wealth management is...

Victor Galliano

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