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

Banco Santander Brasil  / Equity Bottom-Up

<ul>
<li>In November most consumer NPL ratio categories, except credit cards, worsened with corporate delinquencies, especially in micro and SME, also deteriorating; the system NPL ratio is approaching its pre-pandemic high</li>
<li>System loan growth continues to decelerate; +14.7% for the twelve months to November is a further reduction from the October rate (+15.7%), due to slower corporate and consumer loan growth</li>
<li>New system credit spreads rose further MoM, and we expect average loan spreads to remain elevated into 2023; we favour Banco do Brasil, and are cautious on Santander Brasil</li>
</ul>


In November most consumer NPL ratio categories, except credit cards, worsened with corporate delinquencies, especially in micro and SME, also deteriorating; the system NPL ratio is approaching its pre-pandemic high
System loan growth continues to decelerate; +14.7% for the twelve months to November is a further reduction from the October rate (+15.7%), due to slower corporate and consumer loan growth
New system credit spreads rose further MoM, and we expect average loan spreads to remain elevated into 2023; we favour Banco do Brasil, and are cautious on Santander Brasil


November Brazil Bank Data in Charts – Household and Corporate NPL Metrics Broadly Worsening

<ul>
<li>Since our March-end report, our shorts – especially Kakao Pay – worked better than our longs, given the continuing turbulent conditions; Santander’s offer for Getnet minorities signals a specific opportunity</li>
<li>We still favour Mastercard in the megacaps, and we stick with PagSeguro and Nexi despite both having disappointed; Cielo has been a strong performer, but we would not chase it</li>
<li>Among our shorts, we remain negative on DLocal, given its very demanding valuations, and we still see Kakao Pay to be fundamentally over-valued; we reintroduce Paytm to the shorts list</li>
</ul>


Since our March-end report, our shorts – especially Kakao Pay – worked better than our longs, given the continuing turbulent conditions; Santander’s offer for Getnet minorities signals a specific opportunity
We still favour Mastercard in the megacaps, and we stick with PagSeguro and Nexi despite both having disappointed; Cielo has been a strong performer, but we would not chase it
Among our shorts, we remain negative on DLocal, given its very demanding valuations, and we still see Kakao Pay to be fundamentally over-valued; we reintroduce Paytm to the shorts list


Payment Companies Screens – More Constructive Market Signals or a Bear Market Rally?

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

Equity Capital Markets

<ul>
<li>Nubank’s shares are above the issue price post-IPO, with investors buying into the digital banking opportunity in Brazil as well as Mexico and Colombia</li>
<li>The bulls argue that the growth potential is not yet reflected in valuations; it has very low costs, and its positive returns will follow from greater loan and product penetration</li>
<li>Nubanks’s valuation is very stretched; good customer penetration does not yet equal deep product penetration which drives revenue growth, and new markets – Mexico and Colombia – will pressure costs</li>
</ul>


Nubank’s shares are above the issue price post-IPO, with investors buying into the digital banking opportunity in Brazil as well as Mexico and Colombia
The bulls argue that the growth potential is not yet reflected in valuations; it has very low costs, and its positive returns will follow from greater loan and product penetration
Nubanks’s valuation is very stretched; good customer penetration does not yet equal deep product penetration which drives revenue growth, and new markets – Mexico and Colombia – will pressure costs


Nubank (NU US) – IPO Done, Now Comes the Hard Part

<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

Brazil

Banco Santander (Brasil) S.A. attracts deposits and offers retail, commercial and private banking, and asset management services. The Bank offers consumer credit,mortgage loans, lease financing, mutual funds, insurance, commercial credit, investment banking services, and structured finance.

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Banco Santander Brasil (SANB11 BZ)

November Brazil Bank Data in Charts – Household and Corporate NPL Metrics Broadly Worsening

To November, consumer & corporate NPL ratios worsened, with the system NPL ratio near its pre-Covid high; we expect spreads to stay high, we favour...

Victor Galliano

Payment Companies Screens – More Constructive Market Signals or a Bear Market Rally?

In payments, we stick with our longs on Mastercard for its quality, PagSeguro and Nexi for value; we reintroduce Paytm to the shorts, adding it to...

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

Nubank (NU US) – IPO Done, Now Comes the Hard Part

More than other digital banks, Nubank suffers from a disconnect between size of customer base & loan & deposit balances; also, we estimate that...

Victor Galliano

Banco Do Brasil (BBAS3 BZ): Solid 1Q21, with the Prospect of Improving Returns

Post 1Q21 result, we believe that Banco do Brasil's PBV ratio discount (c60%) should narrow, supported by its healthy credit quality and capital...

Victor Galliano

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