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.

Thematic (Sector/Industry)

<ul>
<li>The elephant in the Italian bank M&amp;A room is government controlled <a href="https://www.smartkarma.com/entities/banca-monte-dei-paschi-di-siena" target="_blank" data-smartkarma-citation="entities:21162:1" rel="noopener">Banca Monte dei Paschi di Siena (BMPS IM)</a>, which needs to find a merger partner in 2021; will that be <a href="https://www.smartkarma.com/entities/unicredit-spa" target="_blank" data-smartkarma-citation="entities:21234:1" rel="noopener">UniCredit SpA (UCG IM)</a>, post-Mustier, and who could be its new CEO?</li>
<li>We believe that, in the event of a Unicredit acquisition of BMPS, it would require meaningful “government sponsorship”; in effect, for BMPS, pre-deal, to dispose of the bulk of its NPLs – which is underway – and for a capital infusion that renders the deal to be capital neutral for Unicredit</li>
<li>The other big M&amp;A unknowns relate to the listed mid-cap banks especially <a href="https://www.smartkarma.com/entities/banco-bpm-spa" target="_blank" data-smartkarma-citation="entities:28121:1" rel="noopener">Banco BPM SpA (BAMI IM)</a> and <a href="https://www.smartkarma.com/entities/bper-banca-s-p-a" target="_blank" data-smartkarma-citation="entities:21165:1" rel="noopener">BPER Banca S.p.A (BPE IM)</a>; these banks need to cut costs and branch networks, which can be more readily incorporated into a merger restructuring plan</li>
<li>We believe that the risk of a BMPS acquisition is largely priced into Unicredit shares, and we expect its wide PBV discount to premium valued <a href="https://www.smartkarma.com/entities/intesa-sanpaolo-spa" target="_blank" data-smartkarma-citation="entities:21200:1" rel="noopener">Intesa Sanpaolo (ISP IM)</a> to narrow;  our recommendation is to go long Unicredit, short Intesa</li>
<li>We think <a href="https://www.smartkarma.com/entities/credit-agricole-sa" target="_blank" data-smartkarma-citation="entities:21373:1" rel="noopener">Credit Agricole Sa (ACA FP)</a> is unlikely to sweeten the <a href="https://www.smartkarma.com/entities/credito-valtellinese-spa" target="_blank" data-smartkarma-citation="entities:21175:1" rel="noopener">Credito Valtellinese Sc (CVAL IM)</a> cash offer of €10.50 per share, and with CreVal shares trading at a 7% offer premium, there could be downside risk</li>
<li>We remain negative on Banco BPM shares, as, in the wake of the CredAg offer for CreVal, we believe that BPM’s options are limited, and that it may be the potential “back-stop” merger candidate with BMPS, in the event of no deal with Unicredit; the alternative could be a BPM-BPER merger, and we turn constructive on BPER, after its protracted underperformance</li>
<li>Risks to our view include Unicredit acquiring BMPS on worse than expected terms, with Intesa on the other hand delivering better than expected synergies and savings from the UBI integration; other risks also include a bidder emerging for BPM, as well as no merger or bid for BPER</li>
</ul>


The elephant in the Italian bank M&amp;A room is government controlled Banca Monte dei Paschi di Siena (BMPS IM), which needs to find a merger partner in 2021; will that be UniCredit SpA (UCG IM), post-Mustier, and who could be its new CEO?
We believe that, in the event of a Unicredit acquisition of BMPS, it would require meaningful “government sponsorship”; in effect, for BMPS, pre-deal, to dispose of the bulk of its NPLs – which is underway – and for a capital infusion that renders the deal to be capital neutral for Unicredit
The other big M&amp;A unknowns relate to the listed mid-cap banks especially Banco BPM SpA (BAMI IM) and BPER Banca S.p.A (BPE IM); these banks need to cut costs and branch networks, which can be more readily incorporated into a merger restructuring plan
We believe that the risk of a BMPS acquisition is largely priced into Unicredit shares, and we expect its wide PBV discount to premium valued Intesa Sanpaolo (ISP IM) to narrow;  our recommendation is to go long Unicredit, short Intesa
We think Credit Agricole Sa (ACA FP) is unlikely to sweeten the Credito Valtellinese Sc (CVAL IM) cash offer of €10.50 per share, and with CreVal shares trading at a 7% offer premium, there could be downside risk
We remain negative on Banco BPM shares, as, in the wake of the CredAg offer for CreVal, we believe that BPM’s options are limited, and that it may be the potential “back-stop” merger candidate with BMPS, in the event of no deal with Unicredit; the alternative could be a BPM-BPER merger, and we turn constructive on BPER, after its protracted underperformance
Risks to our view include Unicredit acquiring BMPS on worse than expected terms, with Intesa on the other hand delivering better than expected synergies and savings from the UBI integration; other risks also include a bidder emerging for BPM, as well as no merger or bid for BPER


Italian Banks M&A Scenarios: The Italian Job in 2021

European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

Banca Monte dei Paschi di Siena / Event-Driven

Banca Monte dei Paschi di Siena (BMPS IM)

<ul>
<li>ISP launches an unsolicited offer for BMPS: 1.6 ISP shares plus €1 cash. Using 9 June closes, implied €10.03 vs €10.37 spot, leaving a −3.24% gross spread.</li>
<li>The bid looks pre-emptive versus Banco BPM’s “merger of equals” approach. BMPS’ Mediobanca stake and merger plan complicate the stack; the register is block-driven, so pricing is negotiable.</li>
<li>This is not carry: long BMPS/short 1.6×ISP pays for optionality on a sweetener, a competing outcome, or ISP share upside. Base-case EV is ~€10.41 per share (+0.39%).</li>
</ul>


ISP launches an unsolicited offer for BMPS: 1.6 ISP shares plus €1 cash. Using 9 June closes, implied €10.03 vs €10.37 spot, leaving a −3.24% gross spread.
The bid looks pre-emptive versus Banco BPM’s “merger of equals” approach. BMPS’ Mediobanca stake and merger plan complicate the stack; the register is block-driven, so pricing is negotiable.
This is not carry: long BMPS/short 1.6×ISP pays for optionality on a sweetener, a competing outcome, or ISP share upside. Base-case EV is ~€10.41 per share (+0.39%).


All Roads Lead to Siena: Intesa Moves on BMPS

<ul>
<li>The core investor concern on Eurozone banks has been on the dovish ECB policy and the restart of QE with its negative implications for bank credit margins, including the Italians</li>
<li>Italian banks are being proactive and successful in legacy de-risking through the disposal or recovery of NPLs, improving balance sheets and lowering their prospective cost of risk</li>
<li>In this report, we focus on the importance of the Italian NPL transactions market, and how the continuation of the government guarantee on securitizations (GACS) supports pricing of NPL disposals</li>
<li>The key concern for Italian banks’ NPL disposals is that low NPL provision coverage on disposals could result in losses and capital hits, but we estimate that disposals in 2017 and 2018 have had a limited adverse impact on core capital, with the help of recoveries</li>
<li>The challenge lies with the Unlikely to Pay (UTP) “bucket” of NPLs, with their lower coverage than the Bad Loans (BL) category; here we expect internal work-outs and restructurings to play a bigger role in unsecured UTPs portfolios, with disposals focused on secured UTPs</li>
<li>We highlight Unicredit, Banco BPM, and UBI as de-risking winners on attractive valuations; Intesa is impressive on de-risking but well discounted in its valuation, whilst we believe BMPS is an avoid</li>
<li>Core risks to our thesis are a worsening in the Italian political outlook, tougher rules on NPL coverage requirements and reduced appetite on the part of buyers for Italian NPL disposals</li>
</ul>


The core investor concern on Eurozone banks has been on the dovish ECB policy and the restart of QE with its negative implications for bank credit margins, including the Italians
Italian banks are being proactive and successful in legacy de-risking through the disposal or recovery of NPLs, improving balance sheets and lowering their prospective cost of risk
In this report, we focus on the importance of the Italian NPL transactions market, and how the continuation of the government guarantee on securitizations (GACS) supports pricing of NPL disposals
The key concern for Italian banks’ NPL disposals is that low NPL provision coverage on disposals could result in losses and capital hits, but we estimate that disposals in 2017 and 2018 have had a limited adverse impact on core capital, with the help of recoveries
The challenge lies with the Unlikely to Pay (UTP) “bucket” of NPLs, with their lower coverage than the Bad Loans (BL) category; here we expect internal work-outs and restructurings to play a bigger role in unsecured UTPs portfolios, with disposals focused on secured UTPs
We highlight Unicredit, Banco BPM, and UBI as de-risking winners on attractive valuations; Intesa is impressive on de-risking but well discounted in its valuation, whilst we believe BMPS is an avoid
Core risks to our thesis are a worsening in the Italian political outlook, tougher rules on NPL coverage requirements and reduced appetite on the part of buyers for Italian NPL disposals


Italian Banks: Legacy NPL Disposals Drive Returns Recovery

<ul>
<li>The Italian Prime Minister Giuseppe Conte resigned on Tuesday resulting in the collapse of the anti-establishment coalition, between the right-wing League and left-wing Five Star Movement</li>
<li>There are on-going discussions between the opposition centre-left Democratic Party (PD) and the Five Star Movement (M5S), historically political rivals, which could potentially form a government. The other main political outcomes could be a caretaker government to see through the budget, or an Italian snap general election which could favour the far-right League</li>
<li>Markets have reacted mildly positively to the resignation news, with sovereign bond yields trending lower, as investors are hopeful of a PD-M5S alliance</li>
<li>A potential headwind to Italian banks would be a failure to structure a left-wing alliance, opening the door for a general election, which could usher in the far-right League and drive up sovereign bond yields</li>
<li>Despite the political uncertainty, we see deep value in the Italian banks, with <a href="https://www.smartkarma.com/entities/unicredit-spa" target="_blank" data-smartkarma-citation="entities:21234:1" rel="noopener">UniCredit SpA (UCG IM)</a> as the most attractive Italian bank on its "self-help" credentials along with its defensive qualities in the case of an-election-with-League-victory scenario</li>
<li>In the case of a more benign PD-M5S alliance scenario, which could imply lesser political headwinds, we would opt for higher "octane" banks <a href="https://www.smartkarma.com/entities/banca-popolare-dell-emilia-rom" target="_blank" data-smartkarma-citation="entities:21165:1" rel="noopener">Banca Popolare Dell'Emilia Rom (BPE IM) </a>and <a href="https://www.smartkarma.com/entities/banco-bpm-spa" target="_blank" data-smartkarma-citation="entities:28121:1" rel="noopener">Banco BPM SpA (BAMI IM)</a>
</li>
</ul>


The Italian Prime Minister Giuseppe Conte resigned on Tuesday resulting in the collapse of the anti-establishment coalition, between the right-wing League and left-wing Five Star Movement
There are on-going discussions between the opposition centre-left Democratic Party (PD) and the Five Star Movement (M5S), historically political rivals, which could potentially form a government. The other main political outcomes could be a caretaker government to see through the budget, or an Italian snap general election which could favour the far-right League
Markets have reacted mildly positively to the resignation news, with sovereign bond yields trending lower, as investors are hopeful of a PD-M5S alliance
A potential headwind to Italian banks would be a failure to structure a left-wing alliance, opening the door for a general election, which could usher in the far-right League and drive up sovereign bond yields
Despite the political uncertainty, we see deep value in the Italian banks, with UniCredit SpA (UCG IM) as the most attractive Italian bank on its "self-help" credentials along with its defensive qualities in the case of an-election-with-League-victory scenario
In the case of a more benign PD-M5S alliance scenario, which could imply lesser political headwinds, we would opt for higher "octane" banks Banca Popolare Dell'Emilia Rom (BPE IM) and Banco BPM SpA (BAMI IM)



Italian Banks: Value Opportunities, Despite Political Uncertainty

<ul>
<li>Italian, and other Southern Europe, sovereign bond spreads continue to narrow as the market expects further stimulus measures from the ECB to be announced on the 25<sup>th</sup> July</li>
<li>Italian banks have big exposures to domestic sovereign bonds, which should be supportive of capital ratios in the near term</li>
<li>We do not expect the rosy scenario on tightening sovereign bond spreads to continue over the medium term; we see a real risk of more political confrontations between Rome and Brussels and of increased conflict within the Italian coalition itself</li>
<li>Based on CET1 ratios, we see <a href="https://www.smartkarma.com/entities/unicredit-spa" target="_blank" data-smartkarma-citation="entities:21234:1" rel="noopener">UniCredit SpA (UCG IM)</a> and <a href="https://www.smartkarma.com/entities/intesa-sanpaolo-spa" target="_blank" data-smartkarma-citation="entities:21200:1" rel="noopener">Intesa Sanpaolo (ISP IM)</a> as best positioned to absorb a widening of sovereign spreads over the medium term</li>
<li>Italian banks are out-of-favour, deep value stocks, and we recognise that Eurozone banks generally are challenged by the negative interest rate climate</li>
<li>Still, we believe that <a href="https://www.smartkarma.com/entities/unicredit-spa" target="_blank" data-smartkarma-citation="entities:21234:1" rel="noopener">UniCredit SpA (UCG IM)</a> stands out among the Italian and European banks</li>
</ul>


Italian, and other Southern Europe, sovereign bond spreads continue to narrow as the market expects further stimulus measures from the ECB to be announced on the 25th July
Italian banks have big exposures to domestic sovereign bonds, which should be supportive of capital ratios in the near term
We do not expect the rosy scenario on tightening sovereign bond spreads to continue over the medium term; we see a real risk of more political confrontations between Rome and Brussels and of increased conflict within the Italian coalition itself
Based on CET1 ratios, we see UniCredit SpA (UCG IM) and Intesa Sanpaolo (ISP IM) as best positioned to absorb a widening of sovereign spreads over the medium term
Italian banks are out-of-favour, deep value stocks, and we recognise that Eurozone banks generally are challenged by the negative interest rate climate
Still, we believe that UniCredit SpA (UCG IM) stands out among the Italian and European banks


Italian Banks - Sovereign Bond Risks at Bay for Now, Reveal a Good Value Equity Opportunity

Italy

Banco BPM SpA is a leading Italian banking group, providing a wide range of financial products and services including retail banking, corporate banking, private banking, investment banking, asset management, and insurance. The bank caters to private customers, small businesses, and large corporations across Italy. It was formed on January 1, 2017, from the merger of Banco Popolare and Banca Popolare di Milano, and is headquartered in Milan, Italy.

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Banco BPM (BAMI IM)

Italian Banks M&A Scenarios: The Italian Job in 2021

Italian banks M&A is gathering and we take a largely contrarian stance on stocks; pairs trade long Unicredit, short Intesa; positive on BPER,...

Victor Galliano

All Roads Lead to Siena: Intesa Moves on BMPS

Intesa’s opening bid for BMPS reshuffles Italian bank consolidation. With BMPS holding Mediobanca and BPM in the wings, outcomes hinge on price,...

Jesus Rodriguez Aguilar

Italian Banks: Legacy NPL Disposals Drive Returns Recovery

The core investor concern on Eurozone banks has been on the dovish ECB policy and the restart of QE with its negative implications for bank credit...

Victor Galliano

Italian Banks: Value Opportunities, Despite Political Uncertainty

The Italian Prime Minister Giuseppe Conte resigned on Tuesday resulting in the collapse of the anti-establishment coalition, between the...

Victor Galliano

Italian Banks - Sovereign Bond Risks at Bay for Now, Reveal a Good Value Equity Opportunity

Italian, and other Southern Europe, sovereign bond spreads continue to narrow as the market expects further stimulus measures from the ECB to be...

Victor Galliano

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