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/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

Thematic (Sector/Industry)

<ul>
<li>We think of value based on traditional valuation metrics, such as PE multiples and PBV ratios, and supplement these by metrics like PE to growth ratios to identify the more attractive names amongst growth – including FinTech – stocks</li>
<li>In Brazil, we continue to like <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 we 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 attractive value category</li>
<li>We turn cautious on Brazilian challenger <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>, based on valuation; it trades on a consensus 2022E PBV ratio of 17.8x and even compared to Nubank’s estimated valuation, and those of other digital banks, Inter seems expensive</li>
<li>In Mexico, <a href="https://www.smartkarma.com/entities/grupo-financiero-banorte-o" target="_blank" data-smartkarma-citation="entities:24780:1" rel="noopener">Grupo Financiero Banorte-O (GFNORTEO MF)</a> is much more of a positive consensus recommendation, yet we still believe that the stock has further to run</li>
<li>There is heightened political risk in Peru; <a href="https://www.smartkarma.com/entities/credicorp-ltd" target="_blank" data-smartkarma-citation="entities:25963:1" rel="noopener">Credicorp Ltd (BAP US)</a>  has de-rated and is a stock to watch</li>
<li>Among the LatAm payments companies, we are positive on <a href="https://www.smartkarma.com/entities/pagseguro-digital-ltd" target="_blank" data-smartkarma-citation="entities:27939:1" rel="noopener">Pagseguro Digital Ltd (PAGS US)</a> </li>
<li>Despite its premium growth in AUM, we are cautious on <a href="https://www.smartkarma.com/entities/xp-inc" target="_blank" data-smartkarma-citation="entities:28619:1" rel="noopener">XP Inc (XP US)</a>, due to eroding take rate and rising IFA costs</li>
<li>In exchanges, <a href="https://www.smartkarma.com/entities/b3-sa-brasil-bolsa-balcao" target="_blank" data-smartkarma-citation="entities:24580:1" rel="noopener">B3 Sa - Brasil Bolsa Balcao (B3SA3 BZ)</a>’s valuations have descended from the stratosphere but we believe that this stock could have further downside risk</li>
<li>Risks to our positive view on Banco do Brasil and Bradesco include higher than expected NPLs and lower than expected credit spreads, as well as soft fee growth; similar risks apply to Banorte, BanBajio and in the case of Credicorp we also add political risk; Banco Inter’s upside risks include better than expected opex control especially on new customer acquisition driving better than expected returns; XP upside risks include higher than expected take rate and lower than expected opex, and B3 could deliver stronger than expected revenue growth in FICC and derivatives especially</li>
</ul>


We think of value based on traditional valuation metrics, such as PE multiples and PBV ratios, and supplement these by metrics like PE to growth ratios to identify the more attractive names amongst growth – including FinTech – stocks
In Brazil, we continue to like Banco Do Brasil Sa (BBAS3 BZ)  and we add Banco Bradesco Sa (BBDC4 BZ) to the attractive value category
We turn cautious on Brazilian challenger Banco Inter SA (BIDI11 BZ), based on valuation; it trades on a consensus 2022E PBV ratio of 17.8x and even compared to Nubank’s estimated valuation, and those of other digital banks, Inter seems expensive
In Mexico, Grupo Financiero Banorte-O (GFNORTEO MF) is much more of a positive consensus recommendation, yet we still believe that the stock has further to run
There is heightened political risk in Peru; Credicorp Ltd (BAP US)  has de-rated and is a stock to watch
Among the LatAm payments companies, we are positive on Pagseguro Digital Ltd (PAGS US) 
Despite its premium growth in AUM, we are cautious on XP Inc (XP US), due to eroding take rate and rising IFA costs
In exchanges, B3 Sa - Brasil Bolsa Balcao (B3SA3 BZ)’s valuations have descended from the stratosphere but we believe that this stock could have further downside risk
Risks to our positive view on Banco do Brasil and Bradesco include higher than expected NPLs and lower than expected credit spreads, as well as soft fee growth; similar risks apply to Banorte, BanBajio and in the case of Credicorp we also add political risk; Banco Inter’s upside risks include better than expected opex control especially on new customer acquisition driving better than expected returns; XP upside risks include higher than expected take rate and lower than expected opex, and B3 could deliver stronger than expected revenue growth in FICC and derivatives especially


LatAm Financials Review: Focus on the Value Opportunities

Smartkarma Research Team, Smartkarma

Smartkarma Research

Smartkarma Research Team

Smartkarma

Smartkarma unites the fragmented investment industry, connecting institutional investors, independent research providers, and corporates within a single network.

Research Reinvented

<p>For our next Webinar, we are excited to welcome Insight Provider <a href="https://www.smartkarma.com/profiles/victor-galliano" target="_blank" data-smartkarma-citation="accounts:3251" rel="noopener">Victor Galliano</a>, who will share his insight into opportunities in Lat-Am financials.</p><h3>The webinar will be hosted on Wednesday, 5 May 2021, 17:00 SGT/HKT.</h3><div class="content-highlight"><h2><a href="https://share.hsforms.com/1H9pFZOB-RF2J00kbvMmxcw2c5gj?zoom_webinar_id=83773021447" target="_blank" rel="noopener">Register for the Webinar here</a></h2></div><p>Victor Galliano is an experienced equity banks analyst, having covered Latin America banks and non-bank financials for over 12 years, as well as more recently covering Italian banks and Fintech. He has worked in sell-side equity research for 30 years in a career spanning Barclays, HSBC, BBVA LatInvest, Barings, and NatWest.</p>

For our next Webinar, we are excited to welcome Insight Provider Victor Galliano, who will share his insight into opportunities in Lat-Am financials.The webinar will be hosted on Wednesday, 5 May 2021, 17:00 SGT/HKT.Register for the Webinar hereVictor Galliano is an experienced equity banks analyst, having covered Latin America banks and non-bank financials for over 12 years, as well as more recently covering Italian banks and Fintech. He has worked in sell-side equity research for 30 years in a career spanning Barclays, HSBC, BBVA LatInvest, Barings, and NatWest.

Smartkarma Webinar | Latin America Financials: Focusing on Value Opportunities

<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 do Brasil S.A. attracts deposits and offers retail and commercial banking services.  The Bank offers consumer, commercial, and agribusiness loans, asset management, foreign exchange, private pension, insurance, lease financing, credit cards, and Internet banking services.

Price Gauge
52-week Range	0.00 - 0.00
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Dividend (Yield)	0.00

Banco do Brasil (BBAS3 BZ)

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