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

Grupo Financiero Banorte SAB d / Equity Bottom-Up

Grupo Financiero Banorte SAB d (GFNORTEO MF)

<ul>
<li>We analyse key trends to October 2022 for Banorte and Banco del Bajio, two of the top three ROE generating banks in Mexico which also trade on premium PBV ratios</li>
<li>For both, the challenges are funding costs that rise faster than loan yields, crimping credit spreads, as well as the indications that cost of risk may have bottomed out</li>
<li>Although the operating expenses ratio is well controlled so far, it seems unlikely that it can improve much more; these data trends add weight to our cautious view on Banorte</li>
</ul>


We analyse key trends to October 2022 for Banorte and Banco del Bajio, two of the top three ROE generating banks in Mexico which also trade on premium PBV ratios
For both, the challenges are funding costs that rise faster than loan yields, crimping credit spreads, as well as the indications that cost of risk may have bottomed out
Although the operating expenses ratio is well controlled so far, it seems unlikely that it can improve much more; these data trends add weight to our cautious view on Banorte


Banorte and BanBajio - October Data Trends, a First Look at 4Q 2022; Returns Pressure Building?

<ul>
<li>Bank sector trends to October continue to be sound, but return headwinds are emerging; further tightening credit spreads and initial signs of worsening in consumer credit quality</li>
<li>To October, funding costs are rising faster than loan yields, crimping credit spreads, and the rising credit card cost of risk indicates a worsening outlook for consumer credit quality</li>
<li>BBVA Mexico generates consistent premium ROE of 25%+, investors can gain exposure through BBVA equity; we continue to be cautious on Banorte, and we recommend taking profits on BanBajio</li>
</ul>


Bank sector trends to October continue to be sound, but return headwinds are emerging; further tightening credit spreads and initial signs of worsening in consumer credit quality
To October, funding costs are rising faster than loan yields, crimping credit spreads, and the rising credit card cost of risk indicates a worsening outlook for consumer credit quality
BBVA Mexico generates consistent premium ROE of 25%+, investors can gain exposure through BBVA equity; we continue to be cautious on Banorte, and we recommend taking profits on BanBajio


Mexican Banks’ October Data and Trends – Credit Spread Erosion a Bigger Threat than Credit Quality?

<ul>
<li>Banorte pulls out of the Banamex bidding, leaving two Mexican groups as potential bidders; this now removes the risk of a capital raise for Banorte and a potential dividend cut</li>
<li>Banorte delivered a strong set of 3Q22 results, yet we believe that its returns could be close to peaking and that we expect a profitability downturn in 2023</li>
<li>The withdrawal from the Banamex bidding is shareholder positive, but we see that current valuations do not reflect 2023 risks, especially from higher cost of risk and squeezed credit spreads</li>
</ul>


Banorte pulls out of the Banamex bidding, leaving two Mexican groups as potential bidders; this now removes the risk of a capital raise for Banorte and a potential dividend cut
Banorte delivered a strong set of 3Q22 results, yet we believe that its returns could be close to peaking and that we expect a profitability downturn in 2023
The withdrawal from the Banamex bidding is shareholder positive, but we see that current valuations do not reflect 2023 risks, especially from higher cost of risk and squeezed credit spreads


Banorte (GFNORTEO MX) – No Longer Bidding for Banamex, but Tougher Fundamental Hurdles into 2023

<ul>
<li>BBVA Mexico expanded its premium return on equity of the big nine Mexican banks to 23% to December, and through opex control, it “works” its healthy core capital ratio hard</li>
<li>The bank system trends remain healthy, with additional improvements to NPL ratios and healthy coverage; Banorte and BanBajio screen better than peers on combined credit quality metrics to December</li>
<li>We believe that mid-cap bank BanBajio is good value, and are positive on BBVA for its Mexican exposure; on balance, we remain cautious on Banorte, due largely to valuation</li>
</ul>


BBVA Mexico expanded its premium return on equity of the big nine Mexican banks to 23% to December, and through opex control, it “works” its healthy core capital ratio hard
The bank system trends remain healthy, with additional improvements to NPL ratios and healthy coverage; Banorte and BanBajio screen better than peers on combined credit quality metrics to December
We believe that mid-cap bank BanBajio is good value, and are positive on BBVA for its Mexican exposure; on balance, we remain cautious on Banorte, due largely to valuation


Mexican Banks’ December Data Adds to Positive Trend on Credit Quality, but Lending Spread Eroding

Event-Driven

<ul>
<li>Citi is to sell its Mexican retail and SME banking operations, which we call new Banamex; it is an attractive banking franchise that needs investment and a focus on costs</li>
<li>Based on peer group valuations, and on new Banamex’s disclosed parameters, we estimate that the disposal entity’s valuation range could range from USD7bn to USD10bn, and we identify potential bidders</li>
<li>We believe that our new Banamex valuation range emphasizes BanBajio’s attractive valuations, we stick with our positive view on mid-cap BanBajio; we believe that Banorte is fully valued</li>
</ul>


Citi is to sell its Mexican retail and SME banking operations, which we call new Banamex; it is an attractive banking franchise that needs investment and a focus on costs
Based on peer group valuations, and on new Banamex’s disclosed parameters, we estimate that the disposal entity’s valuation range could range from USD7bn to USD10bn, and we identify potential bidders
We believe that our new Banamex valuation range emphasizes BanBajio’s attractive valuations, we stick with our positive view on mid-cap BanBajio; we believe that Banorte is fully valued


Citi’s Mexican Exit; Our Thoughts on “new Banamex”

Mexico

Banco del Bajio S.A. provides a full range of commercial banking services. The Bank offers mortgages loans, saving, investment option, pension advice, and electronic billing services. Banco del Bajio operates in Mexico.

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Banco del Bajio SA (BBAJIOO MM)

Banorte and BanBajio - October Data Trends, a First Look at 4Q 2022; Returns Pressure Building?

Especially for Banorte the hurdles are fast rising funding costs crimping credit spreads, and indications that cost of risk may have bottomed out;...

Victor Galliano

Mexican Banks’ October Data and Trends – Credit Spread Erosion a Bigger Threat than Credit Quality?

Mexican bank October data show more credit spread erosion and signs of poorer credit quality; we advise BanBajio holders to take profits, we stay...

Victor Galliano

Banorte (GFNORTEO MX) – No Longer Bidding for Banamex, but Tougher Fundamental Hurdles into 2023

Banorte's withdrawal from Banamex bidding is positive, but current valuations do not reflect 2023 risks, especially from higher cost of risk,...

Victor Galliano

Mexican Banks’ December Data Adds to Positive Trend on Credit Quality, but Lending Spread Eroding

Credit quality ends the year strong, with evidence of marginal spread erosion in December; we like mid-cap bank BanBajio and BBVA for BBVA Mexico;...

Victor Galliano

Citi’s Mexican Exit; Our Thoughts on “new Banamex”

Citi sale of its Mexican commercial bank, new Banamex, will need the acquirer to control opex; in this report we estimate the valuation range &...

Victor Galliano

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