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

Event-Driven

<ul>
<li>
<a href="https://www.smartkarma.com/entities/yandex-nv-a" target="_blank" data-smartkarma-citation="entities:414:1" rel="noopener">Yandex (YNDX US)</a>  offer for <a href="https://www.smartkarma.com/entities/tcs-group-holding-plc" target="_blank" data-smartkarma-citation="entities:28148:1" rel="noopener">TCS Group Holding PLC (TCS LI),</a> Tinkoff, values the Russian digital bank at 2021E PBV ratio of 2.8x and 2021E PE ratio of 10x</li>
<li>We believe that the Yandex-Tinkoff deal reflects that TechFin M&amp;A activity is more geared towards the quest for expansion of scope than scale</li>
<li>We see other cases of this type of M&amp;A in other recent transactions, in Brazil; for example, there are the cases of StoneCo-Linx and Nubank-EasyInvest</li>
<li>Tinkoff is a comparable digital bank in Emerging Markets to Brazilian <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>; we estimate that – based on a per digital account valuation – the Yandex offer values Tinkoff at a 25% premium to Banco Inter</li>
<li>We believe that this deal’s “read-across” is constructive for other digital banks in the main and specifically for Banco Inter’s market valuation, especially after the recent correction in share prices</li>
<li>Risks to our positive view on Banco Inter include lower than expected growth in the digital account base due to increased competition, worse than expected credit quality due to the economic downturn forcing cost of risk higher as well as downward pressure on credit spreads and fees</li>
</ul>



Yandex (YNDX US)  offer for TCS Group Holding PLC (TCS LI), Tinkoff, values the Russian digital bank at 2021E PBV ratio of 2.8x and 2021E PE ratio of 10x
We believe that the Yandex-Tinkoff deal reflects that TechFin M&amp;A activity is more geared towards the quest for expansion of scope than scale
We see other cases of this type of M&amp;A in other recent transactions, in Brazil; for example, there are the cases of StoneCo-Linx and Nubank-EasyInvest
Tinkoff is a comparable digital bank in Emerging Markets to Brazilian Banco Inter SA (BIDI11 BZ); we estimate that – based on a per digital account valuation – the Yandex offer values Tinkoff at a 25% premium to Banco Inter
We believe that this deal’s “read-across” is constructive for other digital banks in the main and specifically for Banco Inter’s market valuation, especially after the recent correction in share prices
Risks to our positive view on Banco Inter include lower than expected growth in the digital account base due to increased competition, worse than expected credit quality due to the economic downturn forcing cost of risk higher as well as downward pressure on credit spreads and fees


Yandex Offer for Tinkoff – TechFin M&A Driven by Quest for Greater Scope, and Brazil “read-Across”

<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

<ul>
<li>General Atlantic and XP Controle Participacoes have announced that they will be selling down their stakes in a secondary offering, now that lock-up has expired</li>
<li>This amounts to a maximum offer of 22.46m shares, equivalent to 4.1% of total shares in issue, and potentially increasing free float from just under 15% to 19%</li>
<li>The offer also explains why XP “pre-announced” 2Q20 results ahead of the quarter closing, to highlight its continued premium growth in revenue and profitability to potential new investors</li>
<li>We recognise that XP management is executing well in its core business of digital investment asset and retail wealth management, and that it is also growing through targeted and focused acquisitions</li>
<li>Nonetheless, we believe that current valuations more than discount the positive prospects, and, although the shares have started to correct, we see the secondary offer announcement adding to the share price’s downside risk</li>
<li>In terms of fundamental valuation, XP trades at a significant premium to international brokers and investment platforms, as well as other Brazilian FinTechs, as we show in this report</li>
<li>Risks to our view include XP scarcity value among Brazil listed FinTechs and its long run growth potential continuing to support its premium valuation</li>
</ul>


General Atlantic and XP Controle Participacoes have announced that they will be selling down their stakes in a secondary offering, now that lock-up has expired
This amounts to a maximum offer of 22.46m shares, equivalent to 4.1% of total shares in issue, and potentially increasing free float from just under 15% to 19%
The offer also explains why XP “pre-announced” 2Q20 results ahead of the quarter closing, to highlight its continued premium growth in revenue and profitability to potential new investors
We recognise that XP management is executing well in its core business of digital investment asset and retail wealth management, and that it is also growing through targeted and focused acquisitions
Nonetheless, we believe that current valuations more than discount the positive prospects, and, although the shares have started to correct, we see the secondary offer announcement adding to the share price’s downside risk
In terms of fundamental valuation, XP trades at a significant premium to international brokers and investment platforms, as well as other Brazilian FinTechs, as we show in this report
Risks to our view include XP scarcity value among Brazil listed FinTechs and its long run growth potential continuing to support its premium valuation


XP Inc (NasdaqGS:XP): Secondary Offer and Valuation Are Catalysts for Share Price Correction

<ul>
<li>We explore two core scenarios 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> the Brazilian digital bank we cover, to see potential outcomes for returns going forward</li>
<li>We believe that 2020 and potentially part of 2021 will be challenging for Brazilian banks, but Inter is extremely well capitalised versus the Brazilian sector, and has a lower cost base given its lack of physical branch network</li>
<li>The key challenges will be in negotiating any downturn in the credit cycle, especially in credit cards and its mortgage portfolio; yet in the case of the latter the loan to value ratio seems well controlled</li>
<li>Under our base case, which we believe is achievable even in this challenging time, we see improved returns and double-digit ROAE for 2021</li>
<li>The bad case is clearly more challenging, and reflects worse assumptions on margins, cost of risk and opex mainly that drive adverse returns outcomes; nonetheless, we expect Inter to remain profitable under the bad scenario</li>
<li>We estimate an ROAE range, in bad to base cases for 2021, of 4.5% to 11% respectively; consensus 2021 ROE is currently 13.7%</li>
<li>Inter's investment attraction lies in its earnings growth CAGR, especially under our base case scenario, which implies an attractive PEG</li>
<li>Risks to our constructive view on Banco Inter include slower than expected loan growth, low margins and fee growth as well as higher cost of risk </li>
</ul>


We explore two core scenarios for Banco Inter SA (BIDI11 BZ), the Brazilian digital bank we cover, to see potential outcomes for returns going forward
We believe that 2020 and potentially part of 2021 will be challenging for Brazilian banks, but Inter is extremely well capitalised versus the Brazilian sector, and has a lower cost base given its lack of physical branch network
The key challenges will be in negotiating any downturn in the credit cycle, especially in credit cards and its mortgage portfolio; yet in the case of the latter the loan to value ratio seems well controlled
Under our base case, which we believe is achievable even in this challenging time, we see improved returns and double-digit ROAE for 2021
The bad case is clearly more challenging, and reflects worse assumptions on margins, cost of risk and opex mainly that drive adverse returns outcomes; nonetheless, we expect Inter to remain profitable under the bad scenario
We estimate an ROAE range, in bad to base cases for 2021, of 4.5% to 11% respectively; consensus 2021 ROE is currently 13.7%
Inter's investment attraction lies in its earnings growth CAGR, especially under our base case scenario, which implies an attractive PEG
Risks to our constructive view on Banco Inter include slower than expected loan growth, low margins and fee growth as well as higher cost of risk 


Banco Inter (BIDI11 BZ): Exploring Base and Bad Case Scenarios

Brazil

Inter & Co is a Brazilian financial technology company that operates as a digital multi-service bank, offering a comprehensive range of banking, credit, investments, payments, and lifestyle solutions. The company provides services through a digital banking super app, which includes checking accounts, loans, insurance, and a marketplace. Founded in 1994, Inter & Co is headquartered in Belo Horizonte, Brazil.

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Inter & Co (INBR32 BR)

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

Yandex Offer for Tinkoff – TechFin M&A Driven by Quest for Greater Scope, and Brazil “read-Across”

$yandex offer for Tinkoff values the Russian digital bank at 2021E PBV ratio of 2.8x and 2021E PE ratio of 10x We believe that the Yandex-Tinkoff...

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

Banco Inter (BIDI11 BZ): Exploring Base and Bad Case Scenarios

We explore two core scenarios for Banco Inter SA (BIDI11 BZ), the Brazilian digital bank we cover, to see potential outcomes for returns going...

Victor Galliano

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

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

Yandex Offer for Tinkoff – TechFin M&A Driven by Quest for Greater Scope, and Brazil “read-Across”

$yandex offer for Tinkoff values the Russian digital bank at 2021E PBV ratio of 2.8x and 2021E PE ratio of 10x We believe that the Yandex-Tinkoff...

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

XP Inc (NasdaqGS:XP): Secondary Offer and Valuation Are Catalysts for Share Price Correction

General Atlantic and XP Controle Participacoes have announced that they will be selling down their stakes in a secondary offering, now that...

Victor Galliano

Banco Inter (BIDI11 BZ): Exploring Base and Bad Case Scenarios

We explore two core scenarios for Banco Inter SA (BIDI11 BZ), the Brazilian digital bank we cover, to see potential outcomes for returns going...

Victor Galliano