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>BBVA Bancomer delivered the best return on equity (ROE) of the biggest nine Mexican banks to September, at 20%, improving on a MoM basis due largely to a sub 40% efficiency ratio; in terms of ROE to core capital ratio, we identify that BBVA Bancomer and Banorte retain the best position, “working” their healthy levels of core capital harder than their peers</li>
<li>The bank system trends seem healthy, with well controlled NPL ratios and healthy coverage; one core risk to this rosy scenario is, in our view, worse than expected GDP growth leading to an up-tick in consumer delinquencies going forward, which would warrant an increase in cost of risk charges. Another factor that could upset returns is eroding credit margins due to rising funding costs</li>
<li>
<a href="https://www.smartkarma.com/entities/grupo-financiero-banorte-s-a-b-de-c-v" target="_blank" data-smartkarma-citation="entities:24780:1" rel="noopener">Grupo Financiero Banorte (GFNORTEO MF)</a>  and <a href="https://www.smartkarma.com/entities/banco-del-bajio-sa" target="_blank" data-smartkarma-citation="entities:28382:1" rel="noopener">Banco del Bajio SA (BBAJIOO MM)</a> continue to screen better than peers on credit quality metrics to August, with best-in-class combination of low NPL ratios and healthy coverage. Despite its good metrics, we recently turned negative on Banorte, due largely to valuation and increasing competition; we would highlight mid-cap bank BanBajio for its better relative value, and in the context of improving consumer credit quality</li>
</ul>


BBVA Bancomer delivered the best return on equity (ROE) of the biggest nine Mexican banks to September, at 20%, improving on a MoM basis due largely to a sub 40% efficiency ratio; in terms of ROE to core capital ratio, we identify that BBVA Bancomer and Banorte retain the best position, “working” their healthy levels of core capital harder than their peers
The bank system trends seem healthy, with well controlled NPL ratios and healthy coverage; one core risk to this rosy scenario is, in our view, worse than expected GDP growth leading to an up-tick in consumer delinquencies going forward, which would warrant an increase in cost of risk charges. Another factor that could upset returns is eroding credit margins due to rising funding costs

Grupo Financiero Banorte (GFNORTEO MF)  and Banco del Bajio SA (BBAJIOO MM) continue to screen better than peers on credit quality metrics to August, with best-in-class combination of low NPL ratios and healthy coverage. Despite its good metrics, we recently turned negative on Banorte, due largely to valuation and increasing competition; we would highlight mid-cap bank BanBajio for its better relative value, and in the context of improving consumer credit quality


Mexican Banks’ September Data Looks Benign, but Not Without Potential Challenges

Research and consultancy, Tabbush Report

Daniel Tabbush

Research and consultancy

Tabbush Report

We provide research and consultancy on Asian banks. Our focus is on what we call “Asian bank research, without the noise.” We are interested in the most critical swing-factors for banks, the NPL and credit cycle, and where we believe there is a gap between perception and reality. We often focus on the less studied components of bank financial statements.  Our research is highly thematic, sometimes examining unlisted banks and companies as a window on mainstream banks. 

Being independent allows us to look at smaller banks, often overlooked by others. Analysis of BIS bank guidelines in the context of Asia, is also a focal point, while we also analyze global banks operating in the region. We use what we believe is the most comprehensive, reliable financials database, SNL Financial. S&P Capital IQ augments our database, with corporate data and CEIC, with economics. 

Asian bank research, without the noise.

We have seen with many European and US banks, a sharp reduction of credit costs during 2Q20 compared with 1Q20.  Even in Japan some banks have taken exceptionally high credit costs during the March quarter, suggesting there can be a major reduction during 1Q21 ending in June. There is an altogether different concern from some of Latin America’s largest banks. <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-santander-mexico-sa-in" target="_blank" data-smartkarma-citation="entities:27672:1" rel="noopener">Banco Santander Mexico-B (BSMXB MM)</a> are two that stand out, with incredibly low provision expenses during 1Q20 relative to FY19. This can mean a sharp rise during 2Q20. We have already seen this with some LatAm peers.

We have seen with many European and US banks, a sharp reduction of credit costs during 2Q20 compared with 1Q20.  Even in Japan some banks have taken exceptionally high credit costs during the March quarter, suggesting there can be a major reduction during 1Q21 ending in June. There is an altogether different concern from some of Latin America’s largest banks. Itau Unibanco Holding Sa (ITUB4 BZ) and Banco Santander Mexico-B (BSMXB MM) are two that stand out, with incredibly low provision expenses during 1Q20 relative to FY19. This can mean a sharp rise during 2Q20. We have already seen this with some LatAm peers. 

LatAm Banks – Late Bloomers On Credit Costs?

Cross Asset Strategy

<ul>
<li>Carlos Urzua, Mexico's finance minister, resigned yesterday citing many differences of opinion on public policy decisions and discrepancies in economic matters</li>
<li>President Andres Manuel Lopez Obrador (AMLO) stated that Urzua was not embracing the "transformation" by his administration</li>
<li>Urzua has been replaced by his deputy, the under-secretary of finance, Arturo Herrera who is seen as a technocratic (ex-World Bank), relatively safe pair of hands</li>
<li>The gorilla in the room remains Pemex, with its massive debt, and the possible construction of the "AMLO statement" refinery in Tabasco, which Urzua opposed</li>
<li>We fear that Herrera may be less able to re-direct AMLO away from his more populist policies, which points to the risk of an increasingly market-unfriendly Mexico going forward</li>
<li>At the start of the year, we thought that AMLO might be less bad than feared, and government bond prices suggested it was so; we now turn more cautious on Mexico</li>
<li>Although we retain our core positive recommendation in Mexican financials, <a href="https://www.smartkarma.com/entities/gentera-sab-de-cv" target="_blank" data-smartkarma-citation="entities:27889:1" rel="noopener">Gentera SAB De CV (GENTERA* MM EQUITY)</a> ,  we believe that <a href="https://www.smartkarma.com/entities/grupo-financiero-banorte-o" target="_blank" data-smartkarma-citation="entities:24780:1" rel="noopener">Grupo Financiero Banorte-O (GFNORTEO MM)</a> in particular is at risk of further de-rating due to its government lending business</li>
</ul>


Carlos Urzua, Mexico's finance minister, resigned yesterday citing many differences of opinion on public policy decisions and discrepancies in economic matters
President Andres Manuel Lopez Obrador (AMLO) stated that Urzua was not embracing the "transformation" by his administration
Urzua has been replaced by his deputy, the under-secretary of finance, Arturo Herrera who is seen as a technocratic (ex-World Bank), relatively safe pair of hands
The gorilla in the room remains Pemex, with its massive debt, and the possible construction of the "AMLO statement" refinery in Tabasco, which Urzua opposed
We fear that Herrera may be less able to re-direct AMLO away from his more populist policies, which points to the risk of an increasingly market-unfriendly Mexico going forward
At the start of the year, we thought that AMLO might be less bad than feared, and government bond prices suggested it was so; we now turn more cautious on Mexico
Although we retain our core positive recommendation in Mexican financials, Gentera SAB De CV (GENTERA* MM EQUITY) ,  we believe that Grupo Financiero Banorte-O (GFNORTEO MM) in particular is at risk of further de-rating due to its government lending business


Mexican Finance Minister Resigns - Policy Risks Rising?

Accelerating Tomorrow’s Independent Research

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<ul>
<li>The Mexican president Andres Manuel Lopez Obrador (AMLO) announced at the annual Mexican bank association (ABM) convention on the 22nd March that there would be no cap or regulatory-enforced reduction in Mexican banking fee and commission charges</li>
<li>AMLO stated that he expects fees to decline going forward, as a result of increased competition between banks; in the ABM convention, it was also announced that banks will charge zero commissions on the planned platform for digital payments</li>
<li>This seems a better outcome on fees than the market expected - at least in the near term, as fees are still on the political agenda - and there was greater emphasis at the convention on how to achieve increased financial inclusion, via digital banking initiatives</li>
<li>Yet we still believe that bank fees could be a bone of contention over the medium term, and we show the FY 2018 ratio of fees to revenues and to assets for eight banks, in the charts below</li>
<li>The January 2019 Mexican banks data implies slower system loan growth going forward, yet credit quality remains healthy and credit spreads are holding steady</li>
<li>Despite the volatile global markets, in the short term banks like <a href="https://www.smartkarma.com/entities/24780" target="_blank" data-smartkarma-citation="entities:24780:1">Grupo Financiero Banorte-O (GFNORTEO MM)</a> could benefit from the "fee relief"; longer term, we would highlight <a href="https://www.smartkarma.com/entities/27889" target="_blank" data-smartkarma-citation="entities:27889:1">Gentera SAB De CV (GENTERA* MM EQUITY)</a> as an attractive fundamental pick in Mexican banks</li>
</ul>


The Mexican president Andres Manuel Lopez Obrador (AMLO) announced at the annual Mexican bank association (ABM) convention on the 22nd March that there would be no cap or regulatory-enforced reduction in Mexican banking fee and commission charges
AMLO stated that he expects fees to decline going forward, as a result of increased competition between banks; in the ABM convention, it was also announced that banks will charge zero commissions on the planned platform for digital payments
This seems a better outcome on fees than the market expected - at least in the near term, as fees are still on the political agenda - and there was greater emphasis at the convention on how to achieve increased financial inclusion, via digital banking initiatives
Yet we still believe that bank fees could be a bone of contention over the medium term, and we show the FY 2018 ratio of fees to revenues and to assets for eight banks, in the charts below
The January 2019 Mexican banks data implies slower system loan growth going forward, yet credit quality remains healthy and credit spreads are holding steady
Despite the volatile global markets, in the short term banks like Grupo Financiero Banorte-O (GFNORTEO MM) could benefit from the "fee relief"; longer term, we would highlight Gentera SAB De CV (GENTERA* MM EQUITY) as an attractive fundamental pick in Mexican banks


Mexican Banks - Near Term Relief on Fees from the ABM Convention; Thoughts on January's Bank Data

<ul class="">
<li>We take a contrarian bullish view on microfinance bank <a href="https://www.smartkarma.com/entities/27889" target="_blank" data-smartkarma-citation="entities:27889:1">Gentera SAB De CV (GENTERA* MM EQUITY)</a> , despite the AMLO headwinds, and a cautious stance on <a href="https://www.smartkarma.com/entities/24780" target="_blank" data-smartkarma-citation="entities:24780:1">Grupo Financiero Banorte-O (GFNORTEO MM)</a>
</li>
<li>AMLO push to increase financial inclusion in Mexico, focused on the low income and rural population, may add to bank sector costs at the margin without materially impacting revenues</li>
<li>Early fears of increased intervention in the bank sector – such as capping fees and commissions – appear to have abated. Interest-free loans for micro-entrepreneurs have hit sentiment on microfinance and consumer finance stocks, especially <a href="https://www.smartkarma.com/entities/27889" target="_blank" data-smartkarma-citation="entities:27889:1">Gentera SAB De CV (GENTERA* MM EQUITY)</a>; we believe, on a medium-term view, these concerns may be overdone</li>
<li>We would be cautious on the Mexican big cap banks, and especially <a href="https://www.smartkarma.com/entities/24780" target="_blank" data-smartkarma-citation="entities:24780:1">Grupo Financiero Banorte-O (GFNORTEO MM)</a> ; we see downside risk to consensus estimates from overly-positive GFI acquisition synergies, and potential pressure on local government loan rates over the medium term</li>
<li>We are neutral on <a href="https://www.smartkarma.com/entities/24776" target="_blank" data-smartkarma-citation="entities:24776:1">Grupo Financiero Inbursa-O (GFINBURO MM)</a>  and <a href="https://www.smartkarma.com/entities/27672" target="_blank" data-smartkarma-citation="entities:27672:1">Banco Santander Mexico-B (BSMXB MM)</a> , we like BBVA Bancomer long-dated unsecured bonds as an alternative to Mexican bank equity exposure</li>
</ul>


We take a contrarian bullish view on microfinance bank Gentera SAB De CV (GENTERA* MM EQUITY) , despite the AMLO headwinds, and a cautious stance on Grupo Financiero Banorte-O (GFNORTEO MM)

AMLO push to increase financial inclusion in Mexico, focused on the low income and rural population, may add to bank sector costs at the margin without materially impacting revenues
Early fears of increased intervention in the bank sector – such as capping fees and commissions – appear to have abated. Interest-free loans for micro-entrepreneurs have hit sentiment on microfinance and consumer finance stocks, especially Gentera SAB De CV (GENTERA* MM EQUITY); we believe, on a medium-term view, these concerns may be overdone
We would be cautious on the Mexican big cap banks, and especially Grupo Financiero Banorte-O (GFNORTEO MM) ; we see downside risk to consensus estimates from overly-positive GFI acquisition synergies, and potential pressure on local government loan rates over the medium term
We are neutral on Grupo Financiero Inbursa-O (GFINBURO MM)  and Banco Santander Mexico-B (BSMXB MM) , we like BBVA Bancomer long-dated unsecured bonds as an alternative to Mexican bank equity exposure


Mexican Banks AMLO Effect; Less Bad than Feared?

Mexico

Banco Santander Mexico, S.A., Institucion de Banca Multiple, Grupo Financiero Santander Mexico provides commercial banking services. The Bank offers personal and corporate loans, saving accounts, deposits, credit cards, mutual funds, lease financing, investment facilities, and business consulting services. Banco Santander Mexico serves its customers in Mexico.

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Banco Santander Mexico-B (BSMXB MM)

Mexican Banks’ September Data Looks Benign, but Not Without Potential Challenges

Mexican banks data to September are healthy, but rising funding costs threaten credit spreads, and any potential GDP slowdown could worsen consumer...

Victor Galliano

LatAm Banks – Late Bloomers On Credit Costs?

We have seen with many European and US banks, a sharp reduction of credit costs during 2Q20 compared with 1Q20. Even in Japan some banks have...

Daniel Tabbush

Mexican Finance Minister Resigns - Policy Risks Rising?

Carlos Urzua, Mexico's finance minister, resigned yesterday citing many differences of opinion on public policy decisions and discrepancies in...

Victor Galliano

Mexican Banks - Near Term Relief on Fees from the ABM Convention; Thoughts on January's Bank Data

The Mexican president Andres Manuel Lopez Obrador (AMLO) announced at the annual Mexican bank association (ABM) convention on the 22nd March that...

Boost Research

Mexican Banks AMLO Effect; Less Bad than Feared?

We take a contrarian bullish view on microfinance bank Gentera SAB De CV (GENTERA* MM EQUITY) , despite the AMLO headwinds, and a cautious stance...

Boost Research

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