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

<ul>
<li>
<a href="https://www.smartkarma.com/entities/xp-inc" target="_blank" data-smartkarma-citation="entities:28619:1" rel="noopener">XP Inc (XP US)</a>’s 1Q21 results were solid, with an improving take rate and good cost control especially relating to Independent Financial Advisors (IFAs) in the quarter</li>
<li>XP’s valuations are underpinned by its growth story, and the ability to take market share in Brazilian wealth management from the incumbents, these being the large established banks</li>
<li>The reality is that other disruptors in wealth management are competing aggressively for IFAs and new clients, namely <a href="https://www.smartkarma.com/entities/banco-btg-pactual-sa" target="_blank" data-smartkarma-citation="entities:28665:1" rel="noopener">Banco BTG Pactual SA (BPAC11 BZ)</a>, Modal and EasyInvest to name but a few</li>
<li>In particular, the IFA network “arms race” is intensifying, especially between the leaders XP and BTG Pactual; XP is allegedly taking legal action against an IFA group switching to BTG Pactual</li>
<li>This is negative for XP’s earnings and returns prospects, in our view, in terms of lost retail revenue and increased opex pressure, with XP, on its premium valuations, potentially harbouring more downside risk</li>
<li>Risks to our view include XP’s ability to better contain cost pressures as well as its ability to deliver revenue growth from institutional and issuer services segments</li>
</ul>



XP Inc (XP US)’s 1Q21 results were solid, with an improving take rate and good cost control especially relating to Independent Financial Advisors (IFAs) in the quarter
XP’s valuations are underpinned by its growth story, and the ability to take market share in Brazilian wealth management from the incumbents, these being the large established banks
The reality is that other disruptors in wealth management are competing aggressively for IFAs and new clients, namely Banco BTG Pactual SA (BPAC11 BZ), Modal and EasyInvest to name but a few
In particular, the IFA network “arms race” is intensifying, especially between the leaders XP and BTG Pactual; XP is allegedly taking legal action against an IFA group switching to BTG Pactual
This is negative for XP’s earnings and returns prospects, in our view, in terms of lost retail revenue and increased opex pressure, with XP, on its premium valuations, potentially harbouring more downside risk
Risks to our view include XP’s ability to better contain cost pressures as well as its ability to deliver revenue growth from institutional and issuer services segments


XP (XP US): The IFA “arms Race” Is Turning Nasty

Equity Capital Markets

<ul>
<li>In the follow-on issue, the primary portion announced by <a href="https://www.smartkarma.com/entities/xp-inc" target="_blank" data-smartkarma-citation="entities:28619:1" rel="noopener">XP Inc (XP US)</a>  is small relative to its current market value (c 1.5%), but coupled with the Itaú partial disposal of a maximum 4.3% stake in XP, it creates a clear share over-hang</li>
<li>In addition, <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>’s spin-off of its remaining stake in XP (c 41.2% post follow-on) into single-purpose company named NewCo was approved by its board on 26th November, and shares in the forthcoming NewCo are exempt from any lock-up agreement</li>
<li>HoldCo <a href="https://www.smartkarma.com/entities/itausa-investimentos-itau-pr" target="_blank" data-smartkarma-citation="entities:24513:1" rel="noopener">Itausa-Investimentos Itau-Pr (ITSA4 BZ)</a> will become a large shareholder in XP post Itaú Unibanco’s spin-off, and although it has stated that it does not intend to dispose of its stake in the short term, Itausa does not consider the XP stake as a long term, strategic holding</li>
<li>The spin-off, lack of lock-up for spun-off shares and Itausa’s non-strategic classification of its XP holding creates further medium term over-hang for XP shares, in our view, post the follow-on issue; add to this the challenging fundamental outlook (especially related to the IFA “arms race”) and XP’s demanding valuations, it all contributes to our caution on XP shares</li>
<li>We prefer indirect, and diluted, exposure through holdco Itausa, in which we estimate Itausa will have an 15.6% economic stake in XP post follow-on issue and NewCo formation</li>
<li>Risks to our view include better than expected fundamental performance by XP, and less than expected pressure on costs related to incentives for IFAs, which would continue to drive premium growth and justify the premium multiples, and smaller than expected secondary share offerings in XP over the medium term</li>
</ul>


In the follow-on issue, the primary portion announced by XP Inc (XP US)  is small relative to its current market value (c 1.5%), but coupled with the Itaú partial disposal of a maximum 4.3% stake in XP, it creates a clear share over-hang
In addition, Itau Unibanco Holding Sa (ITUB4 BZ)’s spin-off of its remaining stake in XP (c 41.2% post follow-on) into single-purpose company named NewCo was approved by its board on 26th November, and shares in the forthcoming NewCo are exempt from any lock-up agreement
HoldCo Itausa-Investimentos Itau-Pr (ITSA4 BZ) will become a large shareholder in XP post Itaú Unibanco’s spin-off, and although it has stated that it does not intend to dispose of its stake in the short term, Itausa does not consider the XP stake as a long term, strategic holding
The spin-off, lack of lock-up for spun-off shares and Itausa’s non-strategic classification of its XP holding creates further medium term over-hang for XP shares, in our view, post the follow-on issue; add to this the challenging fundamental outlook (especially related to the IFA “arms race”) and XP’s demanding valuations, it all contributes to our caution on XP shares
We prefer indirect, and diluted, exposure through holdco Itausa, in which we estimate Itausa will have an 15.6% economic stake in XP post follow-on issue and NewCo formation
Risks to our view include better than expected fundamental performance by XP, and less than expected pressure on costs related to incentives for IFAs, which would continue to drive premium growth and justify the premium multiples, and smaller than expected secondary share offerings in XP over the medium term


XP (XP US) Follow-On Issue Highlights Over-Hang, Potential for More Share Sales Post Itaú Spin-Off

<ul>
<li>We believe that 2021 and 2022 consensus EBITDA and net earnings estimates for <a href="https://www.smartkarma.com/entities/xp-inc" target="_blank" data-smartkarma-citation="entities:28619:1" rel="noopener">XP Inc (XP US)</a> are too aggressive</li>
<li>XP’s “investment” in the IFA network is set to continue into 2021, in our view, to counter growing competition, largely from BTG Pactual where an IFA “arms race” seems to be brewing</li>
<li>XP’s September announcement to eliminate trading fees at Rico and to sharply reduced them at XP direct, although barely expected to impact revenue, is a sign of greater competitive pressures, mainly from other digital players</li>
<li>There is a cost outlay to broaden out XP’s suite of financial products, like credit cards, that will add to opex in 2021</li>
<li>We still expect XP to deliver strong growth, but based on our CAGR for EBITDA and net earnings, the EVG of 1.16x and PEG ratio of 1.84x look stretched</li>
<li>In addition, there is the stock overhang from <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>’s planned disposal of a 5% stake in XP, as well as the potential rotation from tech to value that could pressure XP’s premium multiples</li>
<li>Risks to our bearish view on XP include stronger than expected asset inflows, successful opex control and a rebound in the take rate from retail operations</li>
</ul>


We believe that 2021 and 2022 consensus EBITDA and net earnings estimates for XP Inc (XP US) are too aggressive
XP’s “investment” in the IFA network is set to continue into 2021, in our view, to counter growing competition, largely from BTG Pactual where an IFA “arms race” seems to be brewing
XP’s September announcement to eliminate trading fees at Rico and to sharply reduced them at XP direct, although barely expected to impact revenue, is a sign of greater competitive pressures, mainly from other digital players
There is a cost outlay to broaden out XP’s suite of financial products, like credit cards, that will add to opex in 2021
We still expect XP to deliver strong growth, but based on our CAGR for EBITDA and net earnings, the EVG of 1.16x and PEG ratio of 1.84x look stretched
In addition, there is the stock overhang from Itau Unibanco Holding Sa (ITUB4 BZ)’s planned disposal of a 5% stake in XP, as well as the potential rotation from tech to value that could pressure XP’s premium multiples
Risks to our bearish view on XP include stronger than expected asset inflows, successful opex control and a rebound in the take rate from retail operations


XP (XP US): Competition Headwinds to Persist

<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

High yield Tier 2 bonds of Asia-headquartered banks trade at an attractive valuation relative to Tier 2 bonds of other Emerging Market banks. The Tier 2 bonds of <a href="https://www.smartkarma.com/entities/bangkok-bank-public-co-ltd" target="_blank" data-smartkarma-citation="entities:213:1" rel="noopener">Bangkok Bank (BBL TB)</a>, <a href="https://www.smartkarma.com/entities/china-citic-bank-corp-ltd-ea6c25fd-4b20-45cb-a4a6-df7a60136f03" target="_blank" data-smartkarma-citation="entities:653:1" rel="noopener">China CITIC Bank (998 HK)</a> and <a href="https://www.smartkarma.com/entities/kasikornbank-pcl" target="_blank" data-smartkarma-citation="entities:293:1" rel="noopener">Kasikornbank PCL (KBANK TB)</a> continue to offer a large spread pick-up on a relative value basis.At the same time, several Turkish bank Tier 2 bonds trade with little Option Adjusted Spread pick-up relative to their Senior Unsecured debt. Either these Tier 2 bonds are completely illiquid or considerable distress is priced into Turkish bank Senior Unsecured bonds. A combination of both may be likely. High yield Tier 2 bonds of Latin American banks offer value between Asian and Turkish bank bond levels.In this, the first of a series of notes on Tier 2 debt instruments, we undertake a relative value assessment of Asia-headquartered bank bonds as compared to higher yielding bonds in other Emerging Markets. Future reports will consider call risk and fundamental perspectives as we identify our top picks in pans in this segment of the bank credit continuum.

High yield Tier 2 bonds of Asia-headquartered banks trade at an attractive valuation relative to Tier 2 bonds of other Emerging Market banks. The Tier 2 bonds of Bangkok Bank (BBL TB), China CITIC Bank (998 HK) and Kasikornbank PCL (KBANK TB) continue to offer a large spread pick-up on a relative value basis.At the same time, several Turkish bank Tier 2 bonds trade with little Option Adjusted Spread pick-up relative to their Senior Unsecured debt. Either these Tier 2 bonds are completely illiquid or considerable distress is priced into Turkish bank Senior Unsecured bonds. A combination of both may be likely. High yield Tier 2 bonds of Latin American banks offer value between Asian and Turkish bank bond levels.In this, the first of a series of notes on Tier 2 debt instruments, we undertake a relative value assessment of Asia-headquartered bank bonds as compared to higher yielding bonds in other Emerging Markets. Future reports will consider call risk and fundamental perspectives as we identify our top picks in pans in this segment of the bank credit continuum.

Asian Bank HY Tier 2: Relative Value Vs Global Emerging Market Peers

Brazil

Banco BTG Pactual S/A. provides financial services. The Company offers asset and wealth management, investment banking, trading, corporate lending, sales, and other related solutions. Banco BTG Pactual serves customers in Brazil.

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Banco BTG Pactual (BPAC11 BZ)

XP (XP US): The IFA “arms Race” Is Turning Nasty

In Brazilian wealth management, the "arms race" for IFAs is intensifying, especially between XP & BTG Pactual; XP, with its premium valuation, is...

Victor Galliano

XP (XP US): Competition Headwinds to Persist

Brazil fintech XP is in an IFA "arms race" with brokerage competitors that threatens its premium EBITDA growth and its stretched multiples; also...

Victor Galliano

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

Asian Bank HY Tier 2: Relative Value Vs Global Emerging Market Peers

High yield Tier 2 bonds of Asia-headquartered banks trade at an attractive valuation relative to Tier 2 bonds of other Emerging Market banks. The...

Hank Calenti, CFA

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

XP (XP US): The IFA “arms Race” Is Turning Nasty

In Brazilian wealth management, the "arms race" for IFAs is intensifying, especially between XP & BTG Pactual; XP, with its premium valuation, is...

Victor Galliano

XP (XP US) Follow-On Issue Highlights Over-Hang, Potential for More Share Sales Post Itaú Spin-Off

Post XP's follow-on, we see the spin-off, lack of lock-up for spun-off shares and Itausa’s non-strategic view of its XP shares adding to risk of...

Victor Galliano

XP (XP US): Competition Headwinds to Persist

Brazil fintech XP is in an IFA "arms race" with brokerage competitors that threatens its premium EBITDA growth and its stretched multiples; also...

Victor Galliano

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

Asian Bank HY Tier 2: Relative Value Vs Global Emerging Market Peers

High yield Tier 2 bonds of Asia-headquartered banks trade at an attractive valuation relative to Tier 2 bonds of other Emerging Market banks. The...

Hank Calenti, CFA