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.

Thematic (Sector/Industry)

<ul>
<li>We believe Banco Inter’s recent share price correction reflects the increasing competition in Brazil digital banking</li>
<li>The big major challenger is clearly Nubank, but smaller domestic players and payment FinTechs are also offering banking services</li>
<li>The domestic incumbents are fighting back, as in the case of Bradesco’s Next, but there is also increasing evidence of fee pressure - especially in credit cards and, to some degree, in asset management - on the incumbents’ business models</li>
<li>In this report, which follows on from our <a href="https://www.smartkarma.com/insights/primer-on-brazilian-digital-banking-disrupters-adapters" target="_blank" data-smartkarma-citation="insights:30983" rel="noopener">Primer on Brazilian Digital Banking – Disrupters &amp; Adapters</a> , we look at traditional valuations of the listed players, as well as applying a basic non-traditional valuation metric to listed and unlisted FinTechs</li>
<li>We recommend <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>  in digital banking, based on its attractive PEG ratio, and we also continue to see value in “legacy” bank <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>; <a href="https://www.smartkarma.com/entities/banco-pan-sa" target="_blank" data-smartkarma-citation="entities:28163:1" rel="noopener">Banco Pan SA (BPAN4 BZ)</a> is rightly focused on low income digital banking but its market value is optimistically - in our view - anticipating a 2020 “roll-out" without challenges</li>
<li>Risks for Banco Inter include a lower-than-expected digital client additions, and an increase in customer acquisition costs as well as a higher than expected delinquency ratio leading to an increased cost of risk; for Banco do Brasil, risks include slower-than-expected organic capital generation potentially due to deficit on pension liabilities</li>
</ul>


We believe Banco Inter’s recent share price correction reflects the increasing competition in Brazil digital banking
The big major challenger is clearly Nubank, but smaller domestic players and payment FinTechs are also offering banking services
The domestic incumbents are fighting back, as in the case of Bradesco’s Next, but there is also increasing evidence of fee pressure - especially in credit cards and, to some degree, in asset management - on the incumbents’ business models
In this report, which follows on from our Primer on Brazilian Digital Banking – Disrupters &amp; Adapters , we look at traditional valuations of the listed players, as well as applying a basic non-traditional valuation metric to listed and unlisted FinTechs
We recommend Banco Inter SA (BIDI11 BZ)  in digital banking, based on its attractive PEG ratio, and we also continue to see value in “legacy” bank Banco Do Brasil Sa (BBAS3 BZ); Banco Pan SA (BPAN4 BZ) is rightly focused on low income digital banking but its market value is optimistically - in our view - anticipating a 2020 “roll-out" without challenges
Risks for Banco Inter include a lower-than-expected digital client additions, and an increase in customer acquisition costs as well as a higher than expected delinquency ratio leading to an increased cost of risk; for Banco do Brasil, risks include slower-than-expected organic capital generation potentially due to deficit on pension liabilities


Brazil Digital Banking – A Highly Competitive Market, but One with Opportunities

<ul>
<li>Brazil is progressing on its digital banking journey; it is ahead of most LatAm countries, bar Chile, but it lags other emerging markets like Singapore, China, Russia and Malaysia</li>
<li>The death of bricks-and-mortar Brazilian retail banking is far from imminent; nonetheless, the digital disrupters are pushing incumbents to up IT investment, as well as selectively lowering fees and interest rates charged; in the short run, this could erode returns due to the time lag in recouping cost savings</li>
<li>Although all big-cap banks are responding to the digital challenge, and they have the advantages of scale and credit assessment experience, we see credit cards, payroll, auto and mortgage credit as the product lines most exposed to digital disruption</li>
<li>We believe that <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> is the most exposed Brazilian big-cap in credit cards, with <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> and <a href="https://www.smartkarma.com/entities/banco-santander-brasil-sa" target="_blank" data-smartkarma-citation="entities:27709:1" rel="noopener">Banco Santander Brasil SA (SANB11 BZ)</a> more exposed on SME, payroll and mortgage; <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 portfolio seems more defensive but is still exposed as the biggest absolute player in payroll lending and SME for agribusiness</li>
<li>The main challengers in Brazil are private capital companies like Nubank, Neon, Banco Original, Agibank and Creditas, along with listed entities <a href="https://www.smartkarma.com/entities/banco-inter-sa" target="_blank" data-smartkarma-citation="entities:28162:1" rel="noopener">Banco Inter SA (BIDI4 BZ)</a>  and <a href="https://www.smartkarma.com/entities/banco-pan-sa" target="_blank" data-smartkarma-citation="entities:28163:1" rel="noopener">Banco Pan SA (BPAN4 BZ)</a> </li>
<li>Of the challengers, we like <a href="https://www.smartkarma.com/entities/banco-inter-sa" target="_blank" data-smartkarma-citation="entities:28162:1" rel="noopener">Banco Inter SA (BIDI4 BZ)</a> , on a long-term view, given the progress on its digital roll-out and potential for further growth, and despite Inter’s premium valuation; we see <a href="https://www.smartkarma.com/entities/banco-pan-sa" target="_blank" data-smartkarma-citation="entities:28163:1" rel="noopener">Banco Pan SA (BPAN4 BZ)</a> as a “show me” story on its digital execution</li>
</ul>


Brazil is progressing on its digital banking journey; it is ahead of most LatAm countries, bar Chile, but it lags other emerging markets like Singapore, China, Russia and Malaysia
The death of bricks-and-mortar Brazilian retail banking is far from imminent; nonetheless, the digital disrupters are pushing incumbents to up IT investment, as well as selectively lowering fees and interest rates charged; in the short run, this could erode returns due to the time lag in recouping cost savings
Although all big-cap banks are responding to the digital challenge, and they have the advantages of scale and credit assessment experience, we see credit cards, payroll, auto and mortgage credit as the product lines most exposed to digital disruption
We believe that Itau Unibanco Holding Sa (ITUB4 BZ) is the most exposed Brazilian big-cap in credit cards, with Banco Bradesco Sa (BBDC4 BZ) and Banco Santander Brasil SA (SANB11 BZ) more exposed on SME, payroll and mortgage; Banco Do Brasil Sa (BBAS3 BZ)’s portfolio seems more defensive but is still exposed as the biggest absolute player in payroll lending and SME for agribusiness
The main challengers in Brazil are private capital companies like Nubank, Neon, Banco Original, Agibank and Creditas, along with listed entities Banco Inter SA (BIDI4 BZ)  and Banco Pan SA (BPAN4 BZ) 
Of the challengers, we like Banco Inter SA (BIDI4 BZ) , on a long-term view, given the progress on its digital roll-out and potential for further growth, and despite Inter’s premium valuation; we see Banco Pan SA (BPAN4 BZ) as a “show me” story on its digital execution


Primer on Brazilian Digital Banking – Disrupters & Adapters

Brazil

Banco Pan SA attracts deposits and offers commercial banking services. The Bank offers loans, personal credit, investments, credit cards, and lease financing. Banco Pan operates throughout Brazil.

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Banco Pan SA (BPAN4 BZ)

Brazil Digital Banking – A Highly Competitive Market, but One with Opportunities

We believe Banco Inter’s recent share price correction reflects the increasing competition in Brazil digital banking The big major challenger is...

Victor Galliano

Primer on Brazilian Digital Banking – Disrupters & Adapters

Brazil is progressing on its digital banking journey; it is ahead of most LatAm countries, bar Chile, but it lags other emerging markets like...

Victor Galliano

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)