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-do-brasil-sa" target="_blank" data-smartkarma-citation="entities:24564:1" rel="noopener">Banco Do Brasil Sa (BBAS3 BZ)</a> concluded and priced its secondary share offering equivalent to 4.6% of total shares outstanding</li>
<li>We believe that the offering has weighed on the share price since its announcement in August</li>
<li>The last two quarters' results show that Banco do Brasil is improving its ROE and we expect it to also build core capital in H219</li>
<li>Its 49.99% affiliate, Banco Votorantim, is preparing for its IPO potentially in 2020, which would provide Banco do Brasil  with an exit, allowing it to free up capital and to further boost ROE</li>
<li>We expect Banco do Brasil to re-rate and its PBV ratio discount to narrow with those of its core peers, <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> and <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>
</li>
<li>We see potential for at least a 20% re-rating in Banco do Brasil shares on a six month view, based on a tighter PBV ratio discount</li>
<li>Risks to our thesis are Banco do Brasil's inability to raise ROE due to margin pressure, sticky costs and higher cost of risk, as well as headwinds in core capital build from faster than expected loan growth</li>
</ul>



Banco Do Brasil Sa (BBAS3 BZ) concluded and priced its secondary share offering equivalent to 4.6% of total shares outstanding
We believe that the offering has weighed on the share price since its announcement in August
The last two quarters' results show that Banco do Brasil is improving its ROE and we expect it to also build core capital in H219
Its 49.99% affiliate, Banco Votorantim, is preparing for its IPO potentially in 2020, which would provide Banco do Brasil  with an exit, allowing it to free up capital and to further boost ROE
We expect Banco do Brasil to re-rate and its PBV ratio discount to narrow with those of its core peers, Itau Unibanco Holding Sa (ITUB4 BZ) and Banco Bradesco Sa (BBDC4 BZ)

We see potential for at least a 20% re-rating in Banco do Brasil shares on a six month view, based on a tighter PBV ratio discount
Risks to our thesis are Banco do Brasil's inability to raise ROE due to margin pressure, sticky costs and higher cost of risk, as well as headwinds in core capital build from faster than expected loan growth


Banco Do Brasil (BBAS3 BZ): Secondary Share Issue Done, Value and Fundamentals to Drive Re-Rating

<ul>
<li>Brazil assets have not escaped the impact of the generally "risk-off" mode in markets; for the Brazil big-cap banks, including our top pick <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> this has been compounded by the planned debt restructuring of the Odebrecht conglomerate</li>
<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>  has also been hit by the Brazil government's plan to sell down its stake, as well as the increased political concerns in Argentina impacting the disposal plans for the bank's subsidiary <a href="https://www.smartkarma.com/entities/banco-patagonia-sa" target="_blank" data-smartkarma-citation="entities:24431:1" rel="noopener">Banco Patagonia Sa (BPAT AR)</a> </li>
<li>
<a href="https://www.smartkarma.com/entities/banco-do-brasil-sa" target="_blank" data-smartkarma-citation="entities:24564:1" rel="noopener"></a>Despite these headwinds, <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> delivered sound 2Q19 results, in both earnings and balance sheet terms, with only a one-time hit to the CET1 ratio due to actuarial adjustments impacting the capital build</li>
<li>In addition, 2H19 should be better for capital generation, as the bank's subsidiary BB Seguros sold its stake in <a href="https://www.smartkarma.com/entities/irb-brasil-resseguros-s-a" target="_blank" data-smartkarma-citation="entities:27599:1" rel="noopener">IRB Brasil Resseguros S/A (IRBR3 BZ)</a> in July, and we see a steady improvement in returns from its Brazil bank affiliate, Banco Votorantim</li>
<li>We believe that <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> shares are great value, versus its LatAm bank peers, and the bank has the potential to deliver higher returns and capital build over the medium term</li>
</ul>


Brazil assets have not escaped the impact of the generally "risk-off" mode in markets; for the Brazil big-cap banks, including our top pick Banco Do Brasil Sa (BBAS3 BZ),  this has been compounded by the planned debt restructuring of the Odebrecht conglomerate

Banco Do Brasil Sa (BBAS3 BZ)  has also been hit by the Brazil government's plan to sell down its stake, as well as the increased political concerns in Argentina impacting the disposal plans for the bank's subsidiary Banco Patagonia Sa (BPAT AR) 

Despite these headwinds, Banco Do Brasil Sa (BBAS3 BZ) delivered sound 2Q19 results, in both earnings and balance sheet terms, with only a one-time hit to the CET1 ratio due to actuarial adjustments impacting the capital build
In addition, 2H19 should be better for capital generation, as the bank's subsidiary BB Seguros sold its stake in IRB Brasil Resseguros S/A (IRBR3 BZ) in July, and we see a steady improvement in returns from its Brazil bank affiliate, Banco Votorantim
We believe that Banco Do Brasil Sa (BBAS3 BZ) shares are great value, versus its LatAm bank peers, and the bank has the potential to deliver higher returns and capital build over the medium term


Banco Do Brasil (BBAS3 BZ) - Sound Progress, and Great Value Versus Its LatAm Peers

<ul>
<li>Brazil's pension reform agenda moves closer to approval, with  its passage through the special commission of the lower house last week</li>
<li>We expect the Chamber of Deputies vote to be a positive one this week, as the voting intention indications seem to be constructive</li>
<li>The passage of pension reform is set to be followed with other economic reforms, such as tax code reform and an accelerated privatization program</li>
<li>Brazilian equities, especially blue chips, have re-rated and we think there is more to come, although in banks we would be selective</li>
<li>We believe that <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> stands out among the Brazilian big-cap banks, based on its attractive valuations, improving ROE and its potential to improve its CET1 ratio through non-core disposals</li>
</ul>


Brazil's pension reform agenda moves closer to approval, with  its passage through the special commission of the lower house last week
We expect the Chamber of Deputies vote to be a positive one this week, as the voting intention indications seem to be constructive
The passage of pension reform is set to be followed with other economic reforms, such as tax code reform and an accelerated privatization program
Brazilian equities, especially blue chips, have re-rated and we think there is more to come, although in banks we would be selective
We believe that Banco Do Brasil Sa (BBAS3 BZ) stands out among the Brazilian big-cap banks, based on its attractive valuations, improving ROE and its potential to improve its CET1 ratio through non-core disposals


Brazilian Pension Reform Moves Ahead; We Stick with Our Positive View on Banco Do Brasil

<ul>
<li>Neoenergia registered its IPO on June 6th; <a href="https://www.smartkarma.com/entities/banco-do-brasil-sa" target="_blank" data-smartkarma-citation="entities:24564:1">Banco Do Brasil Sa (BBAS3 BZ)</a> is expected to raise between BRL1.64bn and BRL1.92bn from its 9.35% stake</li>
<li>We estimate that the Banco do Brasil capital contribution from the Neoenergia stake disposal should be small, but it should serve to add to positive sentiment for non-core disposals</li>
<li>More importantly, its 49.9% stake in Banco Votorantim is also up for sale and its returns are improving; we estimate that BVoto's disposal would be the biggest capital relief contribution of its non-core sales </li>
<li>
<a href="https://www.smartkarma.com/entities/banco-patagonia-sa" target="_blank" data-smartkarma-citation="entities:24431:1">Banco Patagonia Sa (BPAT AR)</a>, in which Banco do Brasil has an 80.4% stake, is more of a challenge for disposal given the approaching Argentinian presidential election - and the uncertain outcome - in October 2019, but could be slated for sale in early 2020</li>
<li>Banco do Brasil management has added the 10.1% stake in reinsurance company <a href="https://www.smartkarma.com/entities/irb-brasil-resseguros-s-a" target="_blank" data-smartkarma-citation="entities:27599:1">IRB Brasil Resseguros S/A (IRBR3 BZ)</a> to its list of non-core disposals</li>
<li>Overall, we see that these key disposals in total, through capital gains and RWA reduction in the case of the banks, should bring between 93bps to 100bps of capital relief to Banco do Brasil's CET1 ratio; even if we exclude the BPAT disposal, we estimate capital build from the other disposals could reach 75bps of CET1</li>
</ul>


Neoenergia registered its IPO on June 6th; Banco Do Brasil Sa (BBAS3 BZ) is expected to raise between BRL1.64bn and BRL1.92bn from its 9.35% stake
We estimate that the Banco do Brasil capital contribution from the Neoenergia stake disposal should be small, but it should serve to add to positive sentiment for non-core disposals
More importantly, its 49.9% stake in Banco Votorantim is also up for sale and its returns are improving; we estimate that BVoto's disposal would be the biggest capital relief contribution of its non-core sales 

Banco Patagonia Sa (BPAT AR), in which Banco do Brasil has an 80.4% stake, is more of a challenge for disposal given the approaching Argentinian presidential election - and the uncertain outcome - in October 2019, but could be slated for sale in early 2020
Banco do Brasil management has added the 10.1% stake in reinsurance company IRB Brasil Resseguros S/A (IRBR3 BZ) to its list of non-core disposals
Overall, we see that these key disposals in total, through capital gains and RWA reduction in the case of the banks, should bring between 93bps to 100bps of capital relief to Banco do Brasil's CET1 ratio; even if we exclude the BPAT disposal, we estimate capital build from the other disposals could reach 75bps of CET1


Banco Do Brasil (BBAS3 BZ): Neoenergia IPO Kicks off Non-Core Disposals

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<ul class="">
<li>
<a href="https://www.smartkarma.com/entities/24564" target="_blank" data-smartkarma-citation="entities:24564:1">Banco Do Brasil Sa (BBAS3 BZ)</a> management is exploring non-core disposals, across its investment portfolio</li>
<li>Its stakes in Banco Votorantim, utility holding Neoenergia and its Argentinian subsidiary <a href="https://www.smartkarma.com/entities/24431" target="_blank" data-smartkarma-citation="entities:24431:1">Banco Patagonia Sa (BPAT AR)</a> have been most readily mentioned, and are the most likely candidates, in our view</li>
<li>The disposal timings, we expect, could be nearer term for domestic, Brazilian assets, with Banco Patagonia more likely to be a longer term project (2020?); still, we see such potential disposals as positive catalysts for Banco do Brasil shares</li>
<li>We estimate that the CET1 accretion from disposals could total 73-80bps, of which the net gain from these potential disposals could add between 10-17 bps , with the risk weighted asset (RWA) reduction expected to free up an additional 63bps of CET1</li>
</ul>



Banco Do Brasil Sa (BBAS3 BZ) management is exploring non-core disposals, across its investment portfolio
Its stakes in Banco Votorantim, utility holding Neoenergia and its Argentinian subsidiary Banco Patagonia Sa (BPAT AR) have been most readily mentioned, and are the most likely candidates, in our view
The disposal timings, we expect, could be nearer term for domestic, Brazilian assets, with Banco Patagonia more likely to be a longer term project (2020?); still, we see such potential disposals as positive catalysts for Banco do Brasil shares
We estimate that the CET1 accretion from disposals could total 73-80bps, of which the net gain from these potential disposals could add between 10-17 bps , with the risk weighted asset (RWA) reduction expected to free up an additional 63bps of CET1


Banco Do Brasil (BBAS3) - Capital Contributions from Potential Non-Core Disposals

Argentina

Banco Patagonia SA operates as a commercial bank. The Bank attracts deposits from the general public and uses those funds to originate a variety of loans.

Banco Patagonia Sa (BPAT AR)

Banco Do Brasil (BBAS3 BZ) - Sound Progress, and Great Value Versus Its LatAm Peers

Brazil assets have not escaped the impact of the generally "risk-off" mode in markets; for the Brazil big-cap banks, including our top pick Banco...

Victor Galliano

Brazilian Pension Reform Moves Ahead; We Stick with Our Positive View on Banco Do Brasil

Brazil's pension reform agenda moves closer to approval, with its passage through the special commission of the lower house last week We expect...

Victor Galliano

Banco Do Brasil (BBAS3 BZ): Neoenergia IPO Kicks off Non-Core Disposals

Neoenergia registered its IPO on June 6th; Banco Do Brasil Sa (BBAS3 BZ) is expected to raise between BRL1.64bn and BRL1.92bn from its 9.35%...

Victor Galliano

Banco Do Brasil (BBAS3) - Capital Contributions from Potential Non-Core Disposals

Banco Do Brasil Sa (BBAS3 BZ) management is exploring non-core disposals, across its investment portfolio Its stakes in Banco Votorantim, utility...

Boost Research

Banco Do Brasil (BBAS3 BZ): Secondary Share Issue Done, Value and Fundamentals to Drive Re-Rating

Banco Do Brasil Sa (BBAS3 BZ) concluded and priced its secondary share offering equivalent to 4.6% of total shares outstanding We believe that...

Victor Galliano

Banco Do Brasil (BBAS3 BZ) - Sound Progress, and Great Value Versus Its LatAm Peers

Brazil assets have not escaped the impact of the generally "risk-off" mode in markets; for the Brazil big-cap banks, including our top pick Banco...

Victor Galliano

Brazilian Pension Reform Moves Ahead; We Stick with Our Positive View on Banco Do Brasil

Brazil's pension reform agenda moves closer to approval, with its passage through the special commission of the lower house last week We expect...

Victor Galliano

Banco Do Brasil (BBAS3 BZ): Neoenergia IPO Kicks off Non-Core Disposals

Neoenergia registered its IPO on June 6th; Banco Do Brasil Sa (BBAS3 BZ) is expected to raise between BRL1.64bn and BRL1.92bn from its 9.35%...

Victor Galliano

Banco Do Brasil (BBAS3) - Capital Contributions from Potential Non-Core Disposals

Banco Do Brasil Sa (BBAS3 BZ) management is exploring non-core disposals, across its investment portfolio Its stakes in Banco Votorantim, utility...

Boost Research