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>Brazil’s consumer credit quality trends to April deteriorated further, and within corporates, SME credit quality trends also worsened</li>
<li>System loan growth was +16.8% for the twelve months to April which slightly accelerated from the YoY rate for March (+16.5%), due largely to the strong consumer loan growth (+21.9%)</li>
<li>The BCB’s latest consensus estimates point to further benchmark rate rises this year of another 50bps to 13.75%; this impacts credit quality, yet Brazilian banks benefit from higher loan spreads</li>
</ul>


Brazil’s consumer credit quality trends to April deteriorated further, and within corporates, SME credit quality trends also worsened
System loan growth was +16.8% for the twelve months to April which slightly accelerated from the YoY rate for March (+16.5%), due largely to the strong consumer loan growth (+21.9%)
The BCB’s latest consensus estimates point to further benchmark rate rises this year of another 50bps to 13.75%; this impacts credit quality, yet Brazilian banks benefit from higher loan spreads


April Brazil Bank Data in Twelve Charts; Consumer and SME NPLs Worsened, Higher Credit Spreads

<ul>
<li>Banco Central do Brasil has been raising benchmark interest rates aggressively since 1H2021 and we believe it is approaching the peak of its tightening cycle; this feeds into loan spreads</li>
<li>1Q22 Brazil bank results showed limited evidence of widening spreads, due to a time lag, but loan quality is worsening due to the hiking interest rates amid the soft economy</li>
<li>Disciplined loan origination should support bank returns, especially in the consumer and SME segments, containing credit cost charges growth as spreads expand; deep-value Banco do Brasil remains our top pick</li>
</ul>


Banco Central do Brasil has been raising benchmark interest rates aggressively since 1H2021 and we believe it is approaching the peak of its tightening cycle; this feeds into loan spreads
1Q22 Brazil bank results showed limited evidence of widening spreads, due to a time lag, but loan quality is worsening due to the hiking interest rates amid the soft economy
Disciplined loan origination should support bank returns, especially in the consumer and SME segments, containing credit cost charges growth as spreads expand; deep-value Banco do Brasil remains our top pick


Brazil Banks – Returns Tug of War Between Spreads and Credit Costs, Stick with Banco Do Brasil

<ul>
<li>Despite the compression in the Brazil digital banks’ multiples from the FinTech de-rating, big fundamental hurdles remain, especially for Nubank</li>
<li>Nubank is delivering on increased loan penetration and this should drive revenue growth; still, this also drives higher and front loaded provisioning charges along with capital absorption</li>
<li>Banco Inter is less challenged than Nubank on most metrics, and it is modestly profitable, but we believe it is too early to turn positive; we like Banco do Brasil</li>
</ul>


Despite the compression in the Brazil digital banks’ multiples from the FinTech de-rating, big fundamental hurdles remain, especially for Nubank
Nubank is delivering on increased loan penetration and this should drive revenue growth; still, this also drives higher and front loaded provisioning charges along with capital absorption
Banco Inter is less challenged than Nubank on most metrics, and it is modestly profitable, but we believe it is too early to turn positive; we like Banco do Brasil


Brazil Digital Banks – Nubank and Banco Inter Shares Have De-Rated, but Still Face Challenges

<ul>
<li>Brazil’s consumer credit quality trends to February deteriorated further relative to the previous month, despite corporate credit quality improving marginally</li>
<li>System loan growth was 16.6% for the twelve months to February which was slightly faster than the YoY rate for January (16.4%), totally due to the stronger consumer loan growth</li>
<li>The BCB is in the latter stages of its benchmark rate hiking cycle, which impacts credit quality, especially in consumer categories; still, Brazilian banks should benefit from higher loan spreads</li>
</ul>


Brazil’s consumer credit quality trends to February deteriorated further relative to the previous month, despite corporate credit quality improving marginally
System loan growth was 16.6% for the twelve months to February which was slightly faster than the YoY rate for January (16.4%), totally due to the stronger consumer loan growth
The BCB is in the latter stages of its benchmark rate hiking cycle, which impacts credit quality, especially in consumer categories; still, Brazilian banks should benefit from higher loan spreads


Brazil Banking Data to February in 12 Charts – Consumer NPLs Worsened Further Pushed by Higher Rates

Itau Unibanco Holding  / Equity Bottom-Up

<ul>
<li>Banco do Brasil is the clear value pick among LatAm banks, with sound credit quality and capital metrics as well as positive asset sensitivity on a delayed basis</li>
<li>Itaú Unibanco is the most asset sensitive of the Brazilian banks, with its large consumer exposure, and it shows positive trends in terms of asset quality</li>
<li>Santander Brasil has greater credit quality headwinds than peers and is the least asset sensitive of the big four peers, with Bradesco’s positive asset sensitivity repricing more slowly</li>
</ul>


Banco do Brasil is the clear value pick among LatAm banks, with sound credit quality and capital metrics as well as positive asset sensitivity on a delayed basis
Itaú Unibanco is the most asset sensitive of the Brazilian banks, with its large consumer exposure, and it shows positive trends in terms of asset quality
Santander Brasil has greater credit quality headwinds than peers and is the least asset sensitive of the big four peers, with Bradesco’s positive asset sensitivity repricing more slowly


Brazil Banks: Our Picks on Asset Sensitivity and Credit Quality Are Itaú Unibanco & Banco Do Brasil

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.

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Banco do Brasil (BBAS3 BZ)

April Brazil Bank Data in Twelve Charts; Consumer and SME NPLs Worsened, Higher Credit Spreads

April Brazil banks data shows that consumer and SME credit quality trends worsened further, yet loan growth accelerated and credit spreads widened;...

Victor Galliano

Brazil Banks – Returns Tug of War Between Spreads and Credit Costs, Stick with Banco Do Brasil

Higher benchmark interest rates feed into wider spreads for Brazil banks, and in the returns tug of war between higher spreads and bigger credit...

Victor Galliano

Brazil Digital Banks – Nubank and Banco Inter Shares Have De-Rated, but Still Face Challenges

The Brazil digital banks' high loan penetration should drive revenue growth, but this also accelerates NPL formation, provisioning charges and...

Victor Galliano

Brazil Banking Data to February in 12 Charts – Consumer NPLs Worsened Further Pushed by Higher Rates

Consumer NPLs worsened again in February, whilst corporate NPLs were broadly flat; yet Brazil banks should benefit from the BCB's hiking cycle of...

Victor Galliano

Brazil Banks: Our Picks on Asset Sensitivity and Credit Quality Are Itaú Unibanco & Banco Do Brasil

Itaú Unibanco, the most asset sensitive big-cap Brazil bank, benefits from the BCB's recent monetary tightening, with Banco do Brasil & its sound...

Victor Galliano

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