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.

Equity Bottom-Up

Itau Unibanco Holding  / Equity Bottom-Up

<ul>
<li>The system ended the year with an NPL ratio of 2.1% and NPL coverage of 295%, in Brazilian GAAP terms, as shown in Figures 5 and 10 in this report</li>
<li>Although these headline NPL ratios and coverage for the bank sector at December 2020 look reassuring, they are, in our view, not the optimal metric for credit risk going forward</li>
<li>We note that early delinquency indicators, which often act as a leading indicator for headline NPLs, are starting to rise as the pandemic mandated grace period ends for the bulk of renegotiated loans, as seen in Figure 9</li>
<li>System data to December 2020 shows that household loan renegotiations have risen sharply, and in 4Q20 delinquencies on renegotiated loans have, as shown in Figure 8, started to rise</li>
<li>The Brazilian household debt service ratio is rising and the debt burden is at a 13 year high, as shown in Figures 13 and 14</li>
<li>The largest three private sector banks in Brazil have reported 4Q20 results, and we compare some credit quality metrics; in the cases of <a href="https://www.smartkarma.com/entities/itau-unibanco-holding-sa-9d47d196-e503-471b-a84e-ca4401033062" target="_blank" data-smartkarma-citation="entities:24550:1" rel="noopener">Itau Unibanco Holding Sa (ITUB4 BZ)</a>, <a href="https://www.smartkarma.com/entities/banco-santander-brasil-sa" target="_blank" data-smartkarma-citation="entities:27709:1" rel="noopener">Banco Santander Brasil SA (SANB11 BZ)</a> and <a href="https://www.smartkarma.com/entities/banco-bradesco-sa" target="_blank" data-smartkarma-citation="entities:24569:1" rel="noopener">Banco Bradesco Sa (BBDC4 BZ)</a>, we believe that the low domestic GAAP NPL ratios may not be an accurate reflection of the credit risk outlook, so we compare these with the central bank defined D-H poor credit quality “buckets” in Figure 2, and the D-H coverage ratio</li>
<li>We conclude that on D-H share of total loans and coverage, Itau Unibanco’s Brazilian operations screen best, despite having the highest Brazil GAAP NPL ratio in 4Q20; Bradesco has the highest D-H share of total loans, and the lowest D-H coverage along with Santander Brasil</li>
<li>Risks to our positive view on Itau Unibanco include a worse than expected outcome on Brazilian credit quality for Itau in Brazil and its non-Brazilian LatAm operations, thereby raising pressure on their cost of risk outlook</li>
</ul>


The system ended the year with an NPL ratio of 2.1% and NPL coverage of 295%, in Brazilian GAAP terms, as shown in Figures 5 and 10 in this report
Although these headline NPL ratios and coverage for the bank sector at December 2020 look reassuring, they are, in our view, not the optimal metric for credit risk going forward
We note that early delinquency indicators, which often act as a leading indicator for headline NPLs, are starting to rise as the pandemic mandated grace period ends for the bulk of renegotiated loans, as seen in Figure 9
System data to December 2020 shows that household loan renegotiations have risen sharply, and in 4Q20 delinquencies on renegotiated loans have, as shown in Figure 8, started to rise
The Brazilian household debt service ratio is rising and the debt burden is at a 13 year high, as shown in Figures 13 and 14
The largest three private sector banks in Brazil have reported 4Q20 results, and we compare some credit quality metrics; in the cases of Itau Unibanco Holding Sa (ITUB4 BZ), Banco Santander Brasil SA (SANB11 BZ) and Banco Bradesco Sa (BBDC4 BZ), we believe that the low domestic GAAP NPL ratios may not be an accurate reflection of the credit risk outlook, so we compare these with the central bank defined D-H poor credit quality “buckets” in Figure 2, and the D-H coverage ratio
We conclude that on D-H share of total loans and coverage, Itau Unibanco’s Brazilian operations screen best, despite having the highest Brazil GAAP NPL ratio in 4Q20; Bradesco has the highest D-H share of total loans, and the lowest D-H coverage along with Santander Brasil
Risks to our positive view on Itau Unibanco include a worse than expected outcome on Brazilian credit quality for Itau in Brazil and its non-Brazilian LatAm operations, thereby raising pressure on their cost of risk outlook


Brazil Banks YE 2020 Snapshot: Itau (ITUB4 BZ) Well Positioned to Confront Tougher Credit Quality

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Positive COVID vaccine news has since led to bullish inflections in a staggering number of countries, ACWI-US included. Our current outlook is bullish. Buy dips. In this report we outline key technical levels across markets and highlight actionable ideas within our Financials &amp; Energy Sectors.

Positive COVID vaccine news has since led to bullish inflections in a staggering number of countries, ACWI-US included. Our current outlook is bullish. Buy dips. In this report we outline key technical levels across markets and highlight actionable ideas within our Financials &amp; Energy Sectors.

<ul>
<li>2Q20 results for <a href="https://www.smartkarma.com/entities/banco-inter-sa" target="_blank" data-smartkarma-citation="entities:28162:1" rel="noopener">Banco Inter SA (BIDI11 BZ)</a> were underwhelming, coming in below consensus earnings estimates</li>
<li>Nonetheless, beyond the revenue and earnings metrics Banco Inter shows clear progress in growth in customer base, customer activity as well as lowering customer acquisition costs</li>
<li>In terms of balance sheet, Banco Inter has a solid capital base to continue credit growth, and we recognise some early indications of credit quality improvement</li>
<li>The recent share price correction reflects, in our view, its below par 2Q20 results, as well as bigger picture concerns about the government’s reform programme</li>
<li>We see Banco Inter as a leading digital bank disrupter in Brazil that continues to warrant a premium valuation, especially given its strong capital base and its 6m plus base of digital accounts which will show through in revenue and earnings growth over the mid-term</li>
<li>Risks include increased competition from the large incumbent Brazilian banks driving down lending spreads and increasing customer acquisition costs, as well as higher than expected credit costs</li>
</ul>


2Q20 results for Banco Inter SA (BIDI11 BZ) were underwhelming, coming in below consensus earnings estimates
Nonetheless, beyond the revenue and earnings metrics Banco Inter shows clear progress in growth in customer base, customer activity as well as lowering customer acquisition costs
In terms of balance sheet, Banco Inter has a solid capital base to continue credit growth, and we recognise some early indications of credit quality improvement
The recent share price correction reflects, in our view, its below par 2Q20 results, as well as bigger picture concerns about the government’s reform programme
We see Banco Inter as a leading digital bank disrupter in Brazil that continues to warrant a premium valuation, especially given its strong capital base and its 6m plus base of digital accounts which will show through in revenue and earnings growth over the mid-term
Risks include increased competition from the large incumbent Brazilian banks driving down lending spreads and increasing customer acquisition costs, as well as higher than expected credit costs


Banco Inter (BIDI4 BZ): Positive Direction of Travel, Despite Underwhelming 2Q20

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Our top five picks for Additional Tier 1 (AT1) price accretion comprise bonds issued by <a href="https://www.smartkarma.com/entities/tmb-bank-pcl" target="_blank" data-smartkarma-citation="entities:8090:1" rel="noopener">TMB Bank PCL (TMB TB)</a>, <a href="https://www.smartkarma.com/entities/banco-santander-brasil-sa" target="_blank" data-smartkarma-citation="entities:27709:1" rel="noopener">Banco Santander Brasil SA (SANB11 BZ)</a>, <a href="https://www.smartkarma.com/entities/citizens-financial-group" target="_blank" data-smartkarma-citation="entities:16004:1" rel="noopener">Citizens Financial (CFG US)</a>, <a href="https://www.smartkarma.com/entities/grupo-financiero-banorte-o" target="_blank" data-smartkarma-citation="entities:24780:1" rel="noopener">Grupo Financiero Banorte-O (GFNORTEO MF)</a> and <a href="https://www.smartkarma.com/entities/banco-do-brasil-sa" target="_blank" data-smartkarma-citation="entities:24564:1" rel="noopener">Banco Do Brasil Sa (BBAS3 BZ)</a>.  Three banks issued AT1 notes with coupons lower than yields on their respective shorter callable bonds over the last two weeks. The result was a jump in the price of the shorter callable bonds. Information price discovery drove this impact. For more on this, please see: <a href="https://www.smartkarma.com/insights/chong-hing-bank-at1-alchemy" target="_blank" data-smartkarma-citation="insights:41645" rel="noopener">Chong Hing Bank: AT1 Alchemy</a>. The alchemy behind these moves requires deconstructing bond spread components to separate the underlying credit risk of the firm from the non-call risk of the security. We then model the possible impact from issuing new AT1 bonds on the price of already outstanding securities.

Our top five picks for Additional Tier 1 (AT1) price accretion comprise bonds issued by TMB Bank PCL (TMB TB), Banco Santander Brasil SA (SANB11 BZ), Citizens Financial (CFG US), Grupo Financiero Banorte-O (GFNORTEO MF) and Banco Do Brasil Sa (BBAS3 BZ).  Three banks issued AT1 notes with coupons lower than yields on their respective shorter callable bonds over the last two weeks. The result was a jump in the price of the shorter callable bonds. Information price discovery drove this impact. For more on this, please see: Chong Hing Bank: AT1 Alchemy. The alchemy behind these moves requires deconstructing bond spread components to separate the underlying credit risk of the firm from the non-call risk of the security. We then model the possible impact from issuing new AT1 bonds on the price of already outstanding securities. 

Bank Credit Strategy: Pre-Positioning for AT1 Price Accretion

Thematic (Sector/Industry)

<ul><li>The Covid-19 pandemic is driving customer to change behaviour, and is accelerating and deepening the shift to digital banking and financial services, which presents hurdles for incumbents and mainly opportunities for FinTechs</li></ul><ul><li>
<a href="https://www.smartkarma.com/entities/banco-inter-sa" target="_blank" data-smartkarma-citation="entities:28162:1" rel="noopener">Banco Inter SA (BIDI11 BZ)</a>  is our preferred name on growth potential, solidity of capital base and steady customer growth; it offers premium growth prospects and trades on an attractive PEG</li></ul><ul><li>In the Brazil digital banking space, the leader, Nubank, remains privately owned, and it does not yet appear to have IPO plans</li></ul><ul><li>
<a href="https://www.smartkarma.com/entities/banco-pan-sa" target="_blank" data-smartkarma-citation="entities:28163:1" rel="noopener">Banco Pan SA (BPAN4 BZ)</a> is one to watch in the low-income space; it is transitioning from a low-income focused traditional to digital bank</li></ul><ul><li>These digital banks, along with the central bank promoting regulatory change, are driving the big Brazil banks onto the defensive; they will need to address opex more immediately to limit the erosion of their revenues and ultimately returns</li></ul><ul><li>The incumbents’ drive to lower opex is challenged by the need to continue to invest in and spend on their digital transformation, as well as the need to accelerate IT spend to account for consumer habits becoming increasingly digital under Covid-19</li></ul><ul><li>Risks to our positive view on <a href="https://www.smartkarma.com/entities/banco-inter-sa" target="_blank" data-smartkarma-citation="entities:28162:1" rel="noopener">Banco Inter SA (BIDI11 BZ)</a> and digital bank opportunities include incumbent bank client inertia, high customer acquisition costs for digital banks and slow cross-sales growth as well as higher than expected cost of risk for digital banks</li></ul>

The Covid-19 pandemic is driving customer to change behaviour, and is accelerating and deepening the shift to digital banking and financial services, which presents hurdles for incumbents and mainly opportunities for FinTechs
Banco Inter SA (BIDI11 BZ)  is our preferred name on growth potential, solidity of capital base and steady customer growth; it offers premium growth prospects and trades on an attractive PEGIn the Brazil digital banking space, the leader, Nubank, remains privately owned, and it does not yet appear to have IPO plans
Banco Pan SA (BPAN4 BZ) is one to watch in the low-income space; it is transitioning from a low-income focused traditional to digital bankThese digital banks, along with the central bank promoting regulatory change, are driving the big Brazil banks onto the defensive; they will need to address opex more immediately to limit the erosion of their revenues and ultimately returnsThe incumbents’ drive to lower opex is challenged by the need to continue to invest in and spend on their digital transformation, as well as the need to accelerate IT spend to account for consumer habits becoming increasingly digital under Covid-19Risks to our positive view on Banco Inter SA (BIDI11 BZ) and digital bank opportunities include incumbent bank client inertia, high customer acquisition costs for digital banks and slow cross-sales growth as well as higher than expected cost of risk for digital banks

Brazil Digital Banking: Client Behaviour Changes Driving Growth, with Regulatory Catalysts

Brazil

Banco Santander (Brasil) S.A. attracts deposits and offers retail, commercial and private banking, and asset management services. The Bank offers consumer credit,mortgage loans, lease financing, mutual funds, insurance, commercial credit, investment banking services, and structured finance.

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Banco Santander Brasil (SANB11 BZ)

Brazil Banks YE 2020 Snapshot: Itau (ITUB4 BZ) Well Positioned to Confront Tougher Credit Quality

Investors should look beyond the headline NPL ratios and coverage for Brazilian banks; we conclude that on the D-H share of loans and coverage,...

Victor Galliano

Bullish Inflections Around The World

In this report we outline key technical levels across markets and highlight actionable ideas within our Financials & Energy Sectors.

Vermilion Research

Banco Inter (BIDI4 BZ): Positive Direction of Travel, Despite Underwhelming 2Q20

2Q20 results for Banco Inter SA (BIDI11 BZ) were underwhelming, coming in below consensus earnings estimates Nonetheless, beyond the revenue and...

Victor Galliano

Bank Credit Strategy: Pre-Positioning for AT1 Price Accretion

Our top five picks for Additional Tier 1 (AT1) price accretion comprise bonds issued by TMB Bank PCL (TMB TB), Banco Santander Brasil SA (SANB11...

Hank Calenti, CFA

Brazil Digital Banking: Client Behaviour Changes Driving Growth, with Regulatory Catalysts

The Covid-19 pandemic is driving customer to change behaviour, and is accelerating and deepening the shift to digital banking and financial...

Victor Galliano

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