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 Capital Markets

<ul>
<li>Nubank’s shares are above the issue price post-IPO, with investors buying into the digital banking opportunity in Brazil as well as Mexico and Colombia</li>
<li>The bulls argue that the growth potential is not yet reflected in valuations; it has very low costs, and its positive returns will follow from greater loan and product penetration</li>
<li>Nubanks’s valuation is very stretched; good customer penetration does not yet equal deep product penetration which drives revenue growth, and new markets – Mexico and Colombia – will pressure costs</li>
</ul>


Nubank’s shares are above the issue price post-IPO, with investors buying into the digital banking opportunity in Brazil as well as Mexico and Colombia
The bulls argue that the growth potential is not yet reflected in valuations; it has very low costs, and its positive returns will follow from greater loan and product penetration
Nubanks’s valuation is very stretched; good customer penetration does not yet equal deep product penetration which drives revenue growth, and new markets – Mexico and Colombia – will pressure costs


Nubank (NU US) – IPO Done, Now Comes the Hard Part

Equity Bottom-Up

<ul>
<li>Brazil’s credit quality trends to April seem positive, on balance</li>
<li>Compared to March, there appear to be less concerning consumer credit quality and arrears (15-90 days delay) data</li>
<li>Credit quality to corporates shows that  even though credit risks are rising, the rate of growth is “shallow” in both large corporates as well as micro-enterprises and SMEs</li>
<li>In essence, we believe that credit quality risks may be moderating going forward, especially in higher risk consumer and in micro-enterprise and SME categories</li>
<li>In addition, the bank system’s generally high provisioning levels relative to delinquency provides a healthy buffer, in our view</li>
<li>Credit spreads ticked lower in April, and are still well below their recent highs of early 2020</li>
<li>We continue to see value in the sector and find <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> 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> attractive</li>
<li>Risks to positive view on these big cap Brazil banks include worse than expected credit quality, weak opex control and erosion of credit spreads</li>
</ul>


Brazil’s credit quality trends to April seem positive, on balance
Compared to March, there appear to be less concerning consumer credit quality and arrears (15-90 days delay) data
Credit quality to corporates shows that  even though credit risks are rising, the rate of growth is “shallow” in both large corporates as well as micro-enterprises and SMEs
In essence, we believe that credit quality risks may be moderating going forward, especially in higher risk consumer and in micro-enterprise and SME categories
In addition, the bank system’s generally high provisioning levels relative to delinquency provides a healthy buffer, in our view
Credit spreads ticked lower in April, and are still well below their recent highs of early 2020
We continue to see value in the sector and find Banco Do Brasil Sa (BBAS3 BZ) and Banco Bradesco Sa (BBDC4 BZ) attractive
Risks to positive view on these big cap Brazil banks include worse than expected credit quality, weak opex control and erosion of credit spreads


Brazil Bank Sector Trends to April in Ten Charts

<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 a leading digital bank in Brazil, only second to Nubank in scale and scope, with over 10m clients at the end of March 2021</li>
<li>It is also seeing accelerating loan growth to 1Q21 and broadening its service base deriving fees from its services and shopping platform</li>
<li>Yet, even on comparable FinTech valuations, as well as on the PEG ratio metric, Banco Inter’s market value seems stretched</li>
<li>In addition, given the acceleration in loan growth and the resultant absorption in capital, we see a real risk of a further equity cash call in coming quarters</li>
<li>We explore three scenarios for Banco Inter in this report; in our view, none of these scenarios’ implied returns make Banco Inter stock compelling at current valuations</li>
<li>Banco Inter’s upside risks include better than expected opex control especially on new customer acquisition driving better than expected returns</li>
</ul>



Banco Inter SA (BIDI11 BZ) is a leading digital bank in Brazil, only second to Nubank in scale and scope, with over 10m clients at the end of March 2021
It is also seeing accelerating loan growth to 1Q21 and broadening its service base deriving fees from its services and shopping platform
Yet, even on comparable FinTech valuations, as well as on the PEG ratio metric, Banco Inter’s market value seems stretched
In addition, given the acceleration in loan growth and the resultant absorption in capital, we see a real risk of a further equity cash call in coming quarters
We explore three scenarios for Banco Inter in this report; in our view, none of these scenarios’ implied returns make Banco Inter stock compelling at current valuations
Banco Inter’s upside risks include better than expected opex control especially on new customer acquisition driving better than expected returns


Banco Inter (BIDI11 BZ): Too Much Optimism Built into Valuations

<ul>
<li>
<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 1Q21 results reflect its sound credit quality and coverage, as well as its healthy capital adequacy</li>
<li>Banco do Brasil’s NPL ratio is the best of the big four Brazil banks, and it also registers the lowest ratio of renegotiated loans to total loans</li>
<li>Its core capital adequacy is also the best of the big four at 1Q21, and this is despite a mark to market hit in the quarter</li>
<li>The new CEO Is committed to reduce the cost base, and enhance returns; administrative expenses declined QoQ and YoY</li>
<li>We believe that these 1Q21 results reinforce our positive view on Banco do Brasil shares and their potential to narrow the PBV ratio discount</li>
<li>Risks to our view include heightened corporate governance risks, as well as worsening credit quality in the forbearance portfolio</li>
</ul>



Banco Do Brasil Sa (BBAS3 BZ)’s 1Q21 results reflect its sound credit quality and coverage, as well as its healthy capital adequacy
Banco do Brasil’s NPL ratio is the best of the big four Brazil banks, and it also registers the lowest ratio of renegotiated loans to total loans
Its core capital adequacy is also the best of the big four at 1Q21, and this is despite a mark to market hit in the quarter
The new CEO Is committed to reduce the cost base, and enhance returns; administrative expenses declined QoQ and YoY
We believe that these 1Q21 results reinforce our positive view on Banco do Brasil shares and their potential to narrow the PBV ratio discount
Risks to our view include heightened corporate governance risks, as well as worsening credit quality in the forbearance portfolio


Banco Do Brasil (BBAS3 BZ): Solid 1Q21, with the Prospect of Improving Returns

<ul>
<li>Brazil’s credit quality, at first sight, seems well controlled based on headline data to March</li>
<li>The picture is more nuanced based on the household and consumer credit quality and leading indicator arrears (15-90 days delay) data</li>
<li>Credit quality to corporates shows that the trends are diverging between exposure to large corporates (benign) versus micro-enterprises and SMEs (worsening)</li>
<li>In short, we expect credit quality to deteriorate going forward, especially in higher risk consumer and in micro-enterprise and SME credit categories</li>
<li>Despite the potentially worsening credit quality, the bank system is generally well prepared with high provisioning levels relative to delinquency</li>
<li>Credit spreads ticked up in March, but are still well below their recent highs of early 2020</li>
<li>Nonetheless, we see value in the sector and find <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> attractive, and we also add <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> to the attractively valued list</li>
<li>Risks to positive view on these big cap Brazil banks include worse than expected credit quality, weak opex control and erosion of credit spreads</li>
</ul>


Brazil’s credit quality, at first sight, seems well controlled based on headline data to March
The picture is more nuanced based on the household and consumer credit quality and leading indicator arrears (15-90 days delay) data
Credit quality to corporates shows that the trends are diverging between exposure to large corporates (benign) versus micro-enterprises and SMEs (worsening)
In short, we expect credit quality to deteriorate going forward, especially in higher risk consumer and in micro-enterprise and SME credit categories
Despite the potentially worsening credit quality, the bank system is generally well prepared with high provisioning levels relative to delinquency
Credit spreads ticked up in March, but are still well below their recent highs of early 2020
Nonetheless, we see value in the sector and find Banco Do Brasil Sa (BBAS3 BZ) attractive, and we also add Banco Bradesco Sa (BBDC4 BZ) to the attractively valued list
Risks to positive view on these big cap Brazil banks include worse than expected credit quality, weak opex control and erosion of credit spreads


Brazil Bank Sector Trends to March in Ten Charts

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)

Nubank (NU US) – IPO Done, Now Comes the Hard Part

More than other digital banks, Nubank suffers from a disconnect between size of customer base & loan & deposit balances; also, we estimate that...

Victor Galliano

Brazil Bank Sector Trends to April in Ten Charts

April credit quality data is better than March, the bank system has good NPL coverage & the debt servicing burden is declining with falling lending...

Victor Galliano

Banco Inter (BIDI11 BZ): Too Much Optimism Built into Valuations

Banco Inter, as a leading Brazilian digital challenger bank, is growing fast. Yet our 3 scenarios show that premium growth does not mean premium...

Victor Galliano

Banco Do Brasil (BBAS3 BZ): Solid 1Q21, with the Prospect of Improving Returns

Post 1Q21 result, we believe that Banco do Brasil's PBV ratio discount (c60%) should narrow, supported by its healthy credit quality and capital...

Victor Galliano

Brazil Bank Sector Trends to March in Ten Charts

Brazil bank sector NPLs to March are worse than they appear at first look, NPL pressures are building in consumer & SME credit; yet banks are well...

Victor Galliano

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