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 think of value based on traditional valuation metrics, such as PE multiples and PBV ratios, and supplement these by metrics like PE to growth ratios to identify the more attractive names amongst growth – including FinTech – stocks</li>
<li>In Brazil, we continue to like <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>  and we add <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> to the attractive value category</li>
<li>We turn cautious on Brazilian challenger <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>, based on valuation; it trades on a consensus 2022E PBV ratio of 17.8x and even compared to Nubank’s estimated valuation, and those of other digital banks, Inter seems expensive</li>
<li>In Mexico, <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 MF)</a> is much more of a positive consensus recommendation, yet we still believe that the stock has further to run</li>
<li>There is heightened political risk in Peru; <a href="https://www.smartkarma.com/entities/credicorp-ltd" target="_blank" data-smartkarma-citation="entities:25963:1" rel="noopener">Credicorp Ltd (BAP US)</a>  has de-rated and is a stock to watch</li>
<li>Among the LatAm payments companies, we are positive on <a href="https://www.smartkarma.com/entities/pagseguro-digital-ltd" target="_blank" data-smartkarma-citation="entities:27939:1" rel="noopener">Pagseguro Digital Ltd (PAGS US)</a> </li>
<li>Despite its premium growth in AUM, we are cautious on <a href="https://www.smartkarma.com/entities/xp-inc" target="_blank" data-smartkarma-citation="entities:28619:1" rel="noopener">XP Inc (XP US)</a>, due to eroding take rate and rising IFA costs</li>
<li>In exchanges, <a href="https://www.smartkarma.com/entities/b3-sa-brasil-bolsa-balcao" target="_blank" data-smartkarma-citation="entities:24580:1" rel="noopener">B3 Sa - Brasil Bolsa Balcao (B3SA3 BZ)</a>’s valuations have descended from the stratosphere but we believe that this stock could have further downside risk</li>
<li>Risks to our positive view on Banco do Brasil and Bradesco include higher than expected NPLs and lower than expected credit spreads, as well as soft fee growth; similar risks apply to Banorte, BanBajio and in the case of Credicorp we also add political risk; Banco Inter’s upside risks include better than expected opex control especially on new customer acquisition driving better than expected returns; XP upside risks include higher than expected take rate and lower than expected opex, and B3 could deliver stronger than expected revenue growth in FICC and derivatives especially</li>
</ul>


We think of value based on traditional valuation metrics, such as PE multiples and PBV ratios, and supplement these by metrics like PE to growth ratios to identify the more attractive names amongst growth – including FinTech – stocks
In Brazil, we continue to like Banco Do Brasil Sa (BBAS3 BZ)  and we add Banco Bradesco Sa (BBDC4 BZ) to the attractive value category
We turn cautious on Brazilian challenger Banco Inter SA (BIDI11 BZ), based on valuation; it trades on a consensus 2022E PBV ratio of 17.8x and even compared to Nubank’s estimated valuation, and those of other digital banks, Inter seems expensive
In Mexico, Grupo Financiero Banorte-O (GFNORTEO MF) is much more of a positive consensus recommendation, yet we still believe that the stock has further to run
There is heightened political risk in Peru; Credicorp Ltd (BAP US)  has de-rated and is a stock to watch
Among the LatAm payments companies, we are positive on Pagseguro Digital Ltd (PAGS US) 
Despite its premium growth in AUM, we are cautious on XP Inc (XP US), due to eroding take rate and rising IFA costs
In exchanges, B3 Sa - Brasil Bolsa Balcao (B3SA3 BZ)’s valuations have descended from the stratosphere but we believe that this stock could have further downside risk
Risks to our positive view on Banco do Brasil and Bradesco include higher than expected NPLs and lower than expected credit spreads, as well as soft fee growth; similar risks apply to Banorte, BanBajio and in the case of Credicorp we also add political risk; Banco Inter’s upside risks include better than expected opex control especially on new customer acquisition driving better than expected returns; XP upside risks include higher than expected take rate and lower than expected opex, and B3 could deliver stronger than expected revenue growth in FICC and derivatives especially


LatAm Financials Review: Focus on the Value Opportunities

Equity Bottom-Up

Postal Savings Bank of China C / Equity Bottom-Up

<ul>
<li>We screen the 4Q20 results for credit quality and value of thirty five GEM banks</li>
<li>We add a new screen showing tangible book value per share growth from 2016 to 2020, and compare this to 2020 PTBV ratio</li>
<li>Specifically we identify six banks that screen well on these combined factors; <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 MF)</a>, <a href="https://www.smartkarma.com/entities/credicorp-ltd" target="_blank" data-smartkarma-citation="entities:25963:1" rel="noopener">Credicorp Ltd (BAP US)</a>, <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/hana-financial-group" target="_blank" data-smartkarma-citation="entities:12843:1" rel="noopener">Hana Financial (086790 KS)</a>, <a href="https://www.smartkarma.com/entities/postal-savings-bank-of-china" target="_blank" data-smartkarma-citation="entities:22848:1" rel="noopener">Postal Savings Bank of China (1658 HK)</a> and – in the higher risk category – <a href="https://www.smartkarma.com/entities/commercial-international-bank" target="_blank" data-smartkarma-citation="entities:27625:1" rel="noopener">Commercial International Bank (COMI EY)</a> of Egypt</li>
<li>A name to watch, albeit a higher risk GEM bank on attractive valuations, is <a href="https://www.smartkarma.com/entities/turkiye-garanti-bankasi-as" target="_blank" data-smartkarma-citation="entities:25026:1" rel="noopener">Turkiye Garanti Bankasi As (GARAN TI)</a> in Turkey; nevertheless, the unpredictable Erdogan factor still calls for near term caution</li>
<li>Private sector Indian banks trade on demanding valuations, in our view; public sector bank SBI is the deep value, but relatively high risk, name in India with its relatively low NPL coverage levels</li>
<li>Risks to our positive view on these six GEM banks generally include increased political and geo-political tensions, as well as a weaker than expected GDP growth recovery leading to worsen than expected credit quality  and weak loan growth</li>
</ul>


We screen the 4Q20 results for credit quality and value of thirty five GEM banks
We add a new screen showing tangible book value per share growth from 2016 to 2020, and compare this to 2020 PTBV ratio
Specifically we identify six banks that screen well on these combined factors; Grupo Financiero Banorte-O (GFNORTEO MF), Credicorp Ltd (BAP US), Banco Do Brasil Sa (BBAS3 BZ), Hana Financial (086790 KS), Postal Savings Bank of China (1658 HK) and – in the higher risk category – Commercial International Bank (COMI EY) of Egypt
A name to watch, albeit a higher risk GEM bank on attractive valuations, is Turkiye Garanti Bankasi As (GARAN TI) in Turkey; nevertheless, the unpredictable Erdogan factor still calls for near term caution
Private sector Indian banks trade on demanding valuations, in our view; public sector bank SBI is the deep value, but relatively high risk, name in India with its relatively low NPL coverage levels
Risks to our positive view on these six GEM banks generally include increased political and geo-political tensions, as well as a weaker than expected GDP growth recovery leading to worsen than expected credit quality  and weak loan growth


<ul>
<li>We screen the 4Q20 results for credit quality and value, of those GEM banks that have reported to date</li>
<li>Specifically we identify <a href="https://www.smartkarma.com/entities/credicorp-ltd" target="_blank" data-smartkarma-citation="entities:25963:1" rel="noopener">Credicorp Ltd (BAP US)</a> in Peru as a banking group well placed to benefit from recovery in 2021; its credit quality metrics are sound and high quality, and it is an attractive GARP choice</li>
<li>
<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 MF)</a> screens well, in our view, from both credit quality metrics and value parameters</li>
<li>Despite <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 healthy credit quality metrics, this is now overshadowed by corporate governance concerns for Brazil SOEs following the Petrobras CEO’s abrupt removal</li>
<li>Outside LatAm, select private sector Indian banks seem to screen well on credit quality, but valuations are demanding; public sector bank <a href="https://www.smartkarma.com/entities/state-bank-of-india" target="_blank" data-smartkarma-citation="entities:160:1" rel="noopener">State Bank Of India (SBIN IN)</a> is the deep value but relatively high risk name in India. An alternative higher risk GEM bank on attractive valuations is <a href="https://www.smartkarma.com/entities/turkiye-garanti-bankasi-as" target="_blank" data-smartkarma-citation="entities:25026:1" rel="noopener">Turkiye Garanti Bankasi As (GARAN TI)</a> in Turkey</li>
<li>Risks to our positive view on Credicorp include increased political uncertainty in Peru, as well as a weaker than expected recovery leading to worsen than expected credit quality  and weak loan growth</li>
</ul>


We screen the 4Q20 results for credit quality and value, of those GEM banks that have reported to date
Specifically we identify Credicorp Ltd (BAP US) in Peru as a banking group well placed to benefit from recovery in 2021; its credit quality metrics are sound and high quality, and it is an attractive GARP choice

Grupo Financiero Banorte-O (GFNORTEO MF) screens well, in our view, from both credit quality metrics and value parameters
Despite Banco Do Brasil Sa (BBAS3 BZ)’s healthy credit quality metrics, this is now overshadowed by corporate governance concerns for Brazil SOEs following the Petrobras CEO’s abrupt removal
Outside LatAm, select private sector Indian banks seem to screen well on credit quality, but valuations are demanding; public sector bank State Bank Of India (SBIN IN) is the deep value but relatively high risk name in India. An alternative higher risk GEM bank on attractive valuations is Turkiye Garanti Bankasi As (GARAN TI) in Turkey
Risks to our positive view on Credicorp include increased political uncertainty in Peru, as well as a weaker than expected recovery leading to worsen than expected credit quality  and weak loan growth


GEM Bank Credit Quality and Value Screens; the 4Q20 Story so Far

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Peru is reeling from a torrid and tragic C19 crisis, exacerbated by political turmoil. Peru, often cited as one of the few positive narratives in LATAM in the last 30 years, is sadly down on its luck.The lack of financial inclusion/penetration and education are often cited rightly as a potential driver of growth. Two-thirds of the population in Peru are not clients at any bank. This is not the way things were supposed to have panned out a decade ago. However, if inclusion had been greater in Peru, there would have been less exposure to the virus due to the reduced use of cash. It is good to see that Yape, a BCP application that allows money to flow instantly and securely between mobile phones and Yape card are gaining traction. 80% of Yape Card users do not withdraw their cash but use it electronically: they are transitioning from a cash to a digital economy. BCP has also launched programmes such as "ABC" talks and “Mujeres Emprendedoras”.Microfinance is carried out by Mibanco and Encumbra, All these initiatives are welcome but are long overdue.<a href="https://www.smartkarma.com/entities/credicorp-ltd" target="_blank" data-smartkarma-citation="entities:25963:1" rel="noopener">Credicorp Ltd (BAP US)</a>  is one of a coterie of “must-have” banks in many EM portfolios such as popular Sberbank and OTP even. They all remain expensive and reveal subpar fundamental momentum as measured by our PH Score™. This is not a signal of stellar returns.Credicorp’s most recent results were subpar on a LTM basis though the third quarter was viewed by some experts as better than Q2. (The bank swung back to a profit of 104.6 million Peruvian soles at Q320 from a loss of 620.4 million soles in the linked quarter, but fell 90.4% from 1.09 billion soles in the year-ago quarter). Results though do not signify a turnaround in the bank’s fortunes. One could argue that sky-high LLRs will -in great part- be reversed but this may be premature in the short-term as vaccine logistics remain highly complex and a great deal of damage may be permanent. The bank has a significant loan portfolio to small and midsize enterprises, which has been one of the worst-affected segments of the economy. Amid economic fallout tied to the COVID-19 pandemic, more than 40% of loans in neighbouring Colombia received forbearance, a number that will not be so dissimilar in Peru. At BCP, refinanced loans and internal overdue loans &gt;90 days climbed by 31% and 17.5% q-o-q. Management claims to have front-ended the bulk of the blow caused by the coronavirus pandemic with more aggressive provisioning than any other major LATAM bank. This may have some merit. There will be LLR reversals here for sure but the glass may be more empty than full and BCP’s call for a “V”-shaped recovery based on tentative Q3 High Frequency data may be rather optimistic.Our PH Score™ shows that the bank reported a sharp decrease in Profitability -ROE, ROA, and NIM- (the latter related to the Reactiva Perú programme), while Efficiency, Capital Adequacy, and Asset Quality all showed erosion. Asset Quality is deteriorating fast in SME-Pyme, Microfinance, Consumer, and Credit Cards. On the other hand, there was a huge increase in aforementioned Provisioning and better Liquidity.<div class="content-highlight">A FV of 33%, a PBV of 1.92x, an Earnings Yield of 1.4%, are unappealing though the Dividend Yield is not unattractive. A PH Score™ of 3.4 is in the bottom quartile globally.</div>

Peru is reeling from a torrid and tragic C19 crisis, exacerbated by political turmoil. Peru, often cited as one of the few positive narratives in LATAM in the last 30 years, is sadly down on its luck.The lack of financial inclusion/penetration and education are often cited rightly as a potential driver of growth. Two-thirds of the population in Peru are not clients at any bank. This is not the way things were supposed to have panned out a decade ago. However, if inclusion had been greater in Peru, there would have been less exposure to the virus due to the reduced use of cash. It is good to see that Yape, a BCP application that allows money to flow instantly and securely between mobile phones and Yape card are gaining traction. 80% of Yape Card users do not withdraw their cash but use it electronically: they are transitioning from a cash to a digital economy. BCP has also launched programmes such as "ABC" talks and “Mujeres Emprendedoras”.Microfinance is carried out by Mibanco and Encumbra, All these initiatives are welcome but are long overdue.Credicorp Ltd (BAP US)  is one of a coterie of “must-have” banks in many EM portfolios such as popular Sberbank and OTP even. They all remain expensive and reveal subpar fundamental momentum as measured by our PH Score™. This is not a signal of stellar returns.Credicorp’s most recent results were subpar on a LTM basis though the third quarter was viewed by some experts as better than Q2. (The bank swung back to a profit of 104.6 million Peruvian soles at Q320 from a loss of 620.4 million soles in the linked quarter, but fell 90.4% from 1.09 billion soles in the year-ago quarter). Results though do not signify a turnaround in the bank’s fortunes. One could argue that sky-high LLRs will -in great part- be reversed but this may be premature in the short-term as vaccine logistics remain highly complex and a great deal of damage may be permanent. The bank has a significant loan portfolio to small and midsize enterprises, which has been one of the worst-affected segments of the economy. Amid economic fallout tied to the COVID-19 pandemic, more than 40% of loans in neighbouring Colombia received forbearance, a number that will not be so dissimilar in Peru. At BCP, refinanced loans and internal overdue loans &gt;90 days climbed by 31% and 17.5% q-o-q. Management claims to have front-ended the bulk of the blow caused by the coronavirus pandemic with more aggressive provisioning than any other major LATAM bank. This may have some merit. There will be LLR reversals here for sure but the glass may be more empty than full and BCP’s call for a “V”-shaped recovery based on tentative Q3 High Frequency data may be rather optimistic.Our PH Score™ shows that the bank reported a sharp decrease in Profitability -ROE, ROA, and NIM- (the latter related to the Reactiva Perú programme), while Efficiency, Capital Adequacy, and Asset Quality all showed erosion. Asset Quality is deteriorating fast in SME-Pyme, Microfinance, Consumer, and Credit Cards. On the other hand, there was a huge increase in aforementioned Provisioning and better Liquidity.A FV of 33%, a PBV of 1.92x, an Earnings Yield of 1.4%, are unappealing though the Dividend Yield is not unattractive. A PH Score™ of 3.4 is in the bottom quartile globally.

BAP: Subpar Fundamental Momentum at an Elevated Valuation

<ul>
<li>The investor rotation into value focusing in on EM and DM banks; our key picks are <a href="https://www.smartkarma.com/entities/credicorp-ltd" target="_blank" data-smartkarma-citation="entities:25963:1" rel="noopener">Credicorp Ltd (BAP US)</a>, <a href="https://www.smartkarma.com/entities/turkiye-garanti-bankasi-as" target="_blank" data-smartkarma-citation="entities:25026:1" rel="noopener">Turkiye Garanti Bankasi As (GARAN TI)</a>, <a href="https://www.smartkarma.com/entities/commercial-international-bank" target="_blank" data-smartkarma-citation="entities:27625:1" rel="noopener">Commercial International Bank (COMI EY)</a> in EM banks, and <a href="https://www.smartkarma.com/entities/unicredit-spa" target="_blank" data-smartkarma-citation="entities:21234:1" rel="noopener">UniCredit SpA (UCG IM)</a>, <a href="https://www.smartkarma.com/entities/caixabank-sa" target="_blank" data-smartkarma-citation="entities:21255:1" rel="noopener">CaixaBank SA (CABK SM)</a>, and <a href="https://www.smartkarma.com/entities/bper-banca-s-p-a" target="_blank" data-smartkarma-citation="entities:21165:1" rel="noopener">BPER Banca S.p.A (BPE IM)</a> in Southern Europe banks</li>
<li>Exchanges and Big Data, the convergence; <a href="https://www.smartkarma.com/entities/intercontinental-exchange-inc" target="_blank" data-smartkarma-citation="entities:10221:1" rel="noopener">Intercontinental Exchange (ICE US)</a> is strong on recurring revenues, and both ICE and <a href="https://www.smartkarma.com/entities/s-p-global-inc" target="_blank" data-smartkarma-citation="entities:9735:1" rel="noopener">S&amp;P Global Inc. (SPGI US)</a> should deliver shareholder value creation from transformative M&amp;A</li>
<li>Potential for premium growth and returns in digital payments; we like <a href="https://www.smartkarma.com/entities/nexi-spa" target="_blank" data-smartkarma-citation="entities:28921:1" rel="noopener">Nexi SpA (NEXI IM)</a>, where we see clear benefits from its M&amp;A, and we see <a href="https://www.smartkarma.com/entities/paypal-holdings-inc" target="_blank" data-smartkarma-citation="entities:4747:1" rel="noopener">Paypal Holdings (PYPL US)</a> as a core holding</li>
<li>Digital wealth managers focus on the mass affluent; <a href="https://www.smartkarma.com/entities/finecobank-banca-fineco-spa" target="_blank" data-smartkarma-citation="entities:21188:1" rel="noopener">Finecobank Banca Fineco (FBK IM)</a> stands out in Europe, <a href="https://www.smartkarma.com/entities/xp-inc" target="_blank" data-smartkarma-citation="entities:28619:1" rel="noopener">XP Inc (XP US)</a> is the leader in Brazil but looks over-valued and exposed to increased competition, in our view</li>
<li>Risks to our positive views on our themes includes slower than expected growth in digital payments, transactions and increased regulation on big data; a slower than expected global GDP recovery also could adversely impact bank fundamentals</li>
</ul>


The investor rotation into value focusing in on EM and DM banks; our key picks are Credicorp Ltd (BAP US), Turkiye Garanti Bankasi As (GARAN TI), Commercial International Bank (COMI EY) in EM banks, and UniCredit SpA (UCG IM), CaixaBank SA (CABK SM), and BPER Banca S.p.A (BPE IM) in Southern Europe banks
Exchanges and Big Data, the convergence; Intercontinental Exchange (ICE US) is strong on recurring revenues, and both ICE and S&amp;P Global Inc. (SPGI US) should deliver shareholder value creation from transformative M&amp;A
Potential for premium growth and returns in digital payments; we like Nexi SpA (NEXI IM), where we see clear benefits from its M&amp;A, and we see Paypal Holdings (PYPL US) as a core holding
Digital wealth managers focus on the mass affluent; Finecobank Banca Fineco (FBK IM) stands out in Europe, XP Inc (XP US) is the leader in Brazil but looks over-valued and exposed to increased competition, in our view
Risks to our positive views on our themes includes slower than expected growth in digital payments, transactions and increased regulation on big data; a slower than expected global GDP recovery also could adversely impact bank fundamentals


FinTech & Financial Investment Themes 2021

Bermuda

Credicorp Ltd. provides a full range of financial services including commercial banking, corporate finance, brokerage services, asset management, trust and insurance. The Company, through its subsidiaries, operates in Peru.

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Credicorp Ltd (BAP US)

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FinTech & Financial Investment Themes 2021

Our key 2021 investment themes and ideas in EM and S Europe banks, exchanges and data providers, digital payments companies and digital wealth...

Victor Galliano

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