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 target="_blank">The presidential election in Peru, a very tight race between far-left teacher Pedro Castillo and tarnished career politician Keiko Fujimori, will be held on 6th June</a></li>
<li>The contest is considered too close to call by pollsters, and although Castillo appears to have a slim lead over Fujimori, this lead has narrowed recently to well within the margin of error</li>
<li>
<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 a weathervane of the small Peruvian equity market, and, in view of the election uncertainty, its share price volatility has increased over the last few months; in addition, this uncertainty has fuelled short interest in Credicorp</li>
<li>It is clear that the election outcome, from a market perspective, will be a binary one, with further downside risk in the event of a Castillo victory and a relief rally should more market-friendly Fujimori win</li>
<li>Despite Credicorp’s share rebound of 20% off its recent lows, we see Credicorp as a buy for the brave – especially in view of Castillo’s lead narrowing – and, in the event of a Fujimori win, there is the added potential of investors scrambling to cover short positions in Peruvian assets, including Credicorp</li>
<li>Risks to our positive view on Credicorp include a Castillo victory and his implementation of draconian left-wing policies that hurt growth prospects, and result in higher system NPLs and higher costs through wage increases</li>
</ul>


The presidential election in Peru, a very tight race between far-left teacher Pedro Castillo and tarnished career politician Keiko Fujimori, will be held on 6th June
The contest is considered too close to call by pollsters, and although Castillo appears to have a slim lead over Fujimori, this lead has narrowed recently to well within the margin of error

Credicorp Ltd (BAP US)  is a weathervane of the small Peruvian equity market, and, in view of the election uncertainty, its share price volatility has increased over the last few months; in addition, this uncertainty has fuelled short interest in Credicorp
It is clear that the election outcome, from a market perspective, will be a binary one, with further downside risk in the event of a Castillo victory and a relief rally should more market-friendly Fujimori win
Despite Credicorp’s share rebound of 20% off its recent lows, we see Credicorp as a buy for the brave – especially in view of Castillo’s lead narrowing – and, in the event of a Fujimori win, there is the added potential of investors scrambling to cover short positions in Peruvian assets, including Credicorp
Risks to our positive view on Credicorp include a Castillo victory and his implementation of draconian left-wing policies that hurt growth prospects, and result in higher system NPLs and higher costs through wage increases


Credicorp (BAP US); Hanging on a Binary Election Outcome

Postal Savings Bank of China / 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

Event-Driven

Banco Bilbao Vizcaya Argentari / Event-Driven

<ul>
<li>In our view, the PNC-BBVA USA Bancshares deal reflects the trend towards “in country” domestic bank consolidation in developed markets, given very low interest rates, the pressure on fees and the need to focus on opex reduction</li>
<li>The attractive price tag of USD11.6bn (€9.7bn) provides <a href="https://www.smartkarma.com/entities/banco-bilbao-vizcaya-argentari" target="_blank" data-smartkarma-citation="entities:21251:1" rel="noopener">Banco Bilbao Vizcaya Argentari (BBVA SM)</a> with a big capital uplift at a limited cost to earnings; it reflects a historic (2019A) PE multiple of 19.7x and PTBV ratio of 1.34x, equivalent to 45% of market cap on at the close of 13th November</li>
<li>The US commercial bank disposal also gives BBVA a 294bps boost to its core capital ratio, which stood at 11.52% at 3Q20 end, and post deal would result in CET1 ratio of c 14.5%</li>
<li>Even though BBVA’s disposal will be EPS dilutive post-deal, the cost of foregone earnings is relatively low, given the sale price; USA Bancshares accounted for less than 10% of groups earnings in 2019 and 13% of the group’s gross income in the first nine months of 2020</li>
<li>BBVA management intends to redeploy capital in its core markets, and also has the option to do a large share buy-back at current share prices, ECB permitting</li>
<li>The big question is how management will focus on excess capital redeployment through potential M&amp;A going forward, and will look to redress the earnings split between its core emerging (c 70%) and developed markets (c 30%), post this disposal; we put forward our views on M&amp;A options in this report</li>
<li>Risks to our positive view on BBVA include the ECB maintaining strict regulatory constraints on a share buyback; also that BBVA is selling its USA franchise at a relatively low point in the macro-economic cycle</li>
</ul>


In our view, the PNC-BBVA USA Bancshares deal reflects the trend towards “in country” domestic bank consolidation in developed markets, given very low interest rates, the pressure on fees and the need to focus on opex reduction
The attractive price tag of USD11.6bn (€9.7bn) provides Banco Bilbao Vizcaya Argentari (BBVA SM) with a big capital uplift at a limited cost to earnings; it reflects a historic (2019A) PE multiple of 19.7x and PTBV ratio of 1.34x, equivalent to 45% of market cap on at the close of 13th November
The US commercial bank disposal also gives BBVA a 294bps boost to its core capital ratio, which stood at 11.52% at 3Q20 end, and post deal would result in CET1 ratio of c 14.5%
Even though BBVA’s disposal will be EPS dilutive post-deal, the cost of foregone earnings is relatively low, given the sale price; USA Bancshares accounted for less than 10% of groups earnings in 2019 and 13% of the group’s gross income in the first nine months of 2020
BBVA management intends to redeploy capital in its core markets, and also has the option to do a large share buy-back at current share prices, ECB permitting
The big question is how management will focus on excess capital redeployment through potential M&amp;A going forward, and will look to redress the earnings split between its core emerging (c 70%) and developed markets (c 30%), post this disposal; we put forward our views on M&amp;A options in this report
Risks to our positive view on BBVA include the ECB maintaining strict regulatory constraints on a share buyback; also that BBVA is selling its USA franchise at a relatively low point in the macro-economic cycle


BBVA: So Long, Sun-Belt – What Next; Buybacks and Potentially M&A?

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)

Credicorp (BAP US); Hanging on a Binary Election Outcome

Peru's presidential election, set for 6th June, will provide a binary outcome with clear market implications. Far-left candidate Castillo's lead is...

Victor Galliano

GEM Bank Screens; 4Q20, The Final Cut

We pick 6 GEM banks - Banorte, Credicorp, Banco do Brasil, Hana Financial, Postal Savings Bank of China & Commercial International Bank of Egypt -...

Victor Galliano

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

Screening GEM banks for sound credit quality and capital metrics among those that have reported 4Q20; of the standouts, we highlight Credicorp for...

Victor Galliano

BAP: Subpar Fundamental Momentum at an Elevated Valuation

BAP is a popular EM stock. Unfortunately, the stock price is running ahead of eroding fundamental momentum and valuation.

Paul Hollingworth

BBVA: So Long, Sun-Belt – What Next; Buybacks and Potentially M&A?

BBVA's sale of its US bank will give it excess capital to redeploy, in both share buybacks and potentially M&A too; we explore some potential M&A...

Victor Galliano

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