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>Bank system loan growth to June has slowed, with the biggest downturn in corporate and directed lending</li>
<li>Despite this, private sector banks continue to outpace public sector banks on loan growth, and private banks are gaining market share</li>
<li>Credit quality remains benign, and system NPL coverage is healthy</li>
<li>Spreads are holding up better than we had expected in lending to individuals in 1H19, but we expect spreads to erode over the medium term</li>
<li>2Q19 results for the big cap private sector banks were generally good, but we believe that spread erosion going forward, and increased competition from digital challengers, will limit further upside potential to ROEs</li>
<li>We believe the one exception to this view is public sector controlled <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> where we see less downside risk to margins and spreads and further potential for opex control to contribute to medium term ROE expansion</li>
</ul>


Bank system loan growth to June has slowed, with the biggest downturn in corporate and directed lending
Despite this, private sector banks continue to outpace public sector banks on loan growth, and private banks are gaining market share
Credit quality remains benign, and system NPL coverage is healthy
Spreads are holding up better than we had expected in lending to individuals in 1H19, but we expect spreads to erode over the medium term
2Q19 results for the big cap private sector banks were generally good, but we believe that spread erosion going forward, and increased competition from digital challengers, will limit further upside potential to ROEs
We believe the one exception to this view is public sector controlled Banco Do Brasil Sa (BBAS3 BZ) where we see less downside risk to margins and spreads and further potential for opex control to contribute to medium term ROE expansion


Brazilian Banks; June Central Bank Data Is a Mixed Bag

<ul>
<li>Brazil is progressing on its digital banking journey; it is ahead of most LatAm countries, bar Chile, but it lags other emerging markets like Singapore, China, Russia and Malaysia</li>
<li>The death of bricks-and-mortar Brazilian retail banking is far from imminent; nonetheless, the digital disrupters are pushing incumbents to up IT investment, as well as selectively lowering fees and interest rates charged; in the short run, this could erode returns due to the time lag in recouping cost savings</li>
<li>Although all big-cap banks are responding to the digital challenge, and they have the advantages of scale and credit assessment experience, we see credit cards, payroll, auto and mortgage credit as the product lines most exposed to digital disruption</li>
<li>We believe that <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> is the most exposed Brazilian big-cap in credit cards, with <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> and <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> more exposed on SME, payroll and mortgage; <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>’s portfolio seems more defensive but is still exposed as the biggest absolute player in payroll lending and SME for agribusiness</li>
<li>The main challengers in Brazil are private capital companies like Nubank, Neon, Banco Original, Agibank and Creditas, along with listed entities <a href="https://www.smartkarma.com/entities/banco-inter-sa" target="_blank" data-smartkarma-citation="entities:28162:1" rel="noopener">Banco Inter SA (BIDI4 BZ)</a>  and <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> </li>
<li>Of the challengers, we like <a href="https://www.smartkarma.com/entities/banco-inter-sa" target="_blank" data-smartkarma-citation="entities:28162:1" rel="noopener">Banco Inter SA (BIDI4 BZ)</a> , on a long-term view, given the progress on its digital roll-out and potential for further growth, and despite Inter’s premium valuation; we see <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> as a “show me” story on its digital execution</li>
</ul>


Brazil is progressing on its digital banking journey; it is ahead of most LatAm countries, bar Chile, but it lags other emerging markets like Singapore, China, Russia and Malaysia
The death of bricks-and-mortar Brazilian retail banking is far from imminent; nonetheless, the digital disrupters are pushing incumbents to up IT investment, as well as selectively lowering fees and interest rates charged; in the short run, this could erode returns due to the time lag in recouping cost savings
Although all big-cap banks are responding to the digital challenge, and they have the advantages of scale and credit assessment experience, we see credit cards, payroll, auto and mortgage credit as the product lines most exposed to digital disruption
We believe that Itau Unibanco Holding Sa (ITUB4 BZ) is the most exposed Brazilian big-cap in credit cards, with Banco Bradesco Sa (BBDC4 BZ) and Banco Santander Brasil SA (SANB11 BZ) more exposed on SME, payroll and mortgage; Banco Do Brasil Sa (BBAS3 BZ)’s portfolio seems more defensive but is still exposed as the biggest absolute player in payroll lending and SME for agribusiness
The main challengers in Brazil are private capital companies like Nubank, Neon, Banco Original, Agibank and Creditas, along with listed entities Banco Inter SA (BIDI4 BZ)  and Banco Pan SA (BPAN4 BZ) 
Of the challengers, we like Banco Inter SA (BIDI4 BZ) , on a long-term view, given the progress on its digital roll-out and potential for further growth, and despite Inter’s premium valuation; we see Banco Pan SA (BPAN4 BZ) as a “show me” story on its digital execution


Primer on Brazilian Digital Banking – Disrupters & Adapters

Cross Asset Strategy

<ul>
<li>Brazilian 1Q19 GDP growth was -0.2% qoq, +0.5% yoy, a negative surprise for the market</li>
<li>Pension reform, although slow, is progressing and both executive and legislature are more engaged</li>
<li>Brazil Bank sector trends to April-end show loan growth acceleration, controlled delinquency and steady lending spreads</li>
<li>We reiterate our positive view on <a href="https://www.smartkarma.com/entities/banco-do-brasil-sa" target="_blank" data-smartkarma-citation="entities:24564:1">Banco Do Brasil Sa (BBAS3 BZ)</a> , for its value attributes and potential to deliver better returns going forward, and potential disposals of non-core interests boosting capital</li>
</ul>


Brazilian 1Q19 GDP growth was -0.2% qoq, +0.5% yoy, a negative surprise for the market
Pension reform, although slow, is progressing and both executive and legislature are more engaged
Brazil Bank sector trends to April-end show loan growth acceleration, controlled delinquency and steady lending spreads
We reiterate our positive view on Banco Do Brasil Sa (BBAS3 BZ) , for its value attributes and potential to deliver better returns going forward, and potential disposals of non-core interests boosting capital


Brazil GDP Contraction, Sluggish Progress on Pension Reform Overshadow Sound Bank Sector Trends

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<ul>
<li>Negative press "noise" on the pension reform process, with heightened friction between the Executive and the Legislature, has hit the currency and equity markets</li>
<li>This reflects the Bolsonaro administration's limited engagement with the Legislature so far on pension reform</li>
<li>Finance Minister Paulo Guedes is spearheading the effort on pension reform, and has the support of Rodrigo Maia, the leader of the Chamber of Deputies</li>
<li>The latest poll on pension reform voting intentions in the Chamber suggest it is heading in the right direction, but that the administration needs to accelerate support to get the legislation approved; we see 3Q19 more likely than 2Q19 for pension reform approval</li>
<li>We see the equity market and currency corrections as an opportunity, and we highlight our positive view on <a href="https://www.smartkarma.com/entities/24564" target="_blank" data-smartkarma-citation="entities:24564:1">Banco Do Brasil Sa (BBAS3 BZ)</a>
</li>
</ul>


Negative press "noise" on the pension reform process, with heightened friction between the Executive and the Legislature, has hit the currency and equity markets
This reflects the Bolsonaro administration's limited engagement with the Legislature so far on pension reform
Finance Minister Paulo Guedes is spearheading the effort on pension reform, and has the support of Rodrigo Maia, the leader of the Chamber of Deputies
The latest poll on pension reform voting intentions in the Chamber suggest it is heading in the right direction, but that the administration needs to accelerate support to get the legislation approved; we see 3Q19 more likely than 2Q19 for pension reform approval
We see the equity market and currency corrections as an opportunity, and we highlight our positive view on Banco Do Brasil Sa (BBAS3 BZ)



Brazil Politics; The "Noise" On Pension Reform Is an Investor Opportunity

<ul>
<li>Brazil's Ex-President Michel Temer has been arrested as part of the on-going CarWash (<em>Lava Jato</em>) criminal investigation, on bribery and corruption charges</li>
<li>We believe that this increases the near-term downside risk to the BOVESPA index and blue chips, including the large cap banks</li>
<li>This will also, we believe, heighten the negative "noise" around pension reform, potentially increasing the complexity of the reform process; even if this development alone should not serve to derail it, in our view</li>
<li>Large cap Brazilian banks' share prices have come under pressure recently, and we would expect the market correction to continue in the short term</li>
<li>Nonetheless, we still see potential for <a href="https://www.smartkarma.com/entities/24564" target="_blank" data-smartkarma-citation="entities:24564:1">Banco Do Brasil Sa (BBAS3 BZ)</a> to re-rate over the medium term, and narrow the PBV gap with its core peers, <a href="https://www.smartkarma.com/entities/24550" target="_blank" data-smartkarma-citation="entities:24550:1">Itau Unibanco Holding Sa (ITUB4 BZ)</a> and <a href="https://www.smartkarma.com/entities/24569" target="_blank" data-smartkarma-citation="entities:24569:1">Banco Bradesco Sa (BBDC4 BZ)</a>, as Banco do Brasil's own internal restructuring takes effect</li>
</ul>


Brazil's Ex-President Michel Temer has been arrested as part of the on-going CarWash (Lava Jato) criminal investigation, on bribery and corruption charges
We believe that this increases the near-term downside risk to the BOVESPA index and blue chips, including the large cap banks
This will also, we believe, heighten the negative "noise" around pension reform, potentially increasing the complexity of the reform process; even if this development alone should not serve to derail it, in our view
Large cap Brazilian banks' share prices have come under pressure recently, and we would expect the market correction to continue in the short term
Nonetheless, we still see potential for Banco Do Brasil Sa (BBAS3 BZ) to re-rate over the medium term, and narrow the PBV gap with its core peers, Itau Unibanco Holding Sa (ITUB4 BZ) and Banco Bradesco Sa (BBDC4 BZ), as Banco do Brasil's own internal restructuring takes effect


Brazilian Political Turmoil Adds to Market Volatility, and Concerns on Pension Reform

Brazil

Banco Bradesco S.A. is a Brazilian financial services company that provides a wide range of banking products and services, including retail banking, investment banking, asset management, and specialized financial services. It also offers various insurance products such as life, health, and non-life insurance, along with pension plans. The company was founded in 1943 and is headquartered in Osasco, Brazil.

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Banco Bradesco (BBDC4 BR)

Brazilian Banks; June Central Bank Data Is a Mixed Bag

Bank system loan growth to June has slowed, with the biggest downturn in corporate and directed lending Despite this, private sector banks...

Victor Galliano

Primer on Brazilian Digital Banking – Disrupters & Adapters

Brazil is progressing on its digital banking journey; it is ahead of most LatAm countries, bar Chile, but it lags other emerging markets like...

Victor Galliano

Brazil GDP Contraction, Sluggish Progress on Pension Reform Overshadow Sound Bank Sector Trends

Brazilian 1Q19 GDP growth was -0.2% qoq, +0.5% yoy, a negative surprise for the market Pension reform, although slow, is progressing and both...

Victor Galliano

Brazil Politics; The "Noise" On Pension Reform Is an Investor Opportunity

Negative press "noise" on the pension reform process, with heightened friction between the Executive and the Legislature, has hit the currency and...

Boost Research

Brazilian Political Turmoil Adds to Market Volatility, and Concerns on Pension Reform

Brazil's Ex-President Michel Temer has been arrested as part of the on-going CarWash (Lava Jato) criminal investigation, on bribery and corruption...

Boost Research

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