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

Grupo Financiero Banorte SAB d / Equity Bottom-Up

Grupo Financiero Banorte SAB d (GFNORTEO MF)

<ul>
<li>
<a href="https://www.smartkarma.com/entities/citigroup-inc" target="_blank" data-smartkarma-citation="entities:279:1" rel="noopener">Citigroup Inc (C US)</a>  1Q21 results shows that Citi’s LatAm business – with Mexico at its core – continues to be a drag on its earnings</li>
<li>The main headwind in Citibanamex’s core business of Mexican consumer banking, bar weak revenue trends, was the sharp rise in credit provisions and charge-offs which served to lower its delinquency ratio</li>
<li>Citibanamex’s earnings hit from credit charges is not an early warning for Banorte’s upcoming 1Q21 results; <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> management bit that bullet early, and took large provision expenses and charge-offs “kitchen sinking” its 2Q20 results</li>
<li>In addition, according to the latest CNBV data on the Mexican bank system to February 2021, Banorte’s consumer NPL ratio was far lower than that of Banamex, with Banorte’s overall NPL ratio being less than half of that of Citibanamex</li>
<li>Banorte reports 1Q21 results on 23<sup>rd</sup> April, and we do not expect a large credit provisioning hit to earnings, which should underpin its attractive valuations</li>
<li>Risks to our positive view on Banorte include softer than expected revenue growth, from fee and credit spread pressure and higher than expected opex as well as higher than expected credit charges</li>
</ul>



Citigroup Inc (C US)  1Q21 results shows that Citi’s LatAm business – with Mexico at its core – continues to be a drag on its earnings
The main headwind in Citibanamex’s core business of Mexican consumer banking, bar weak revenue trends, was the sharp rise in credit provisions and charge-offs which served to lower its delinquency ratio
Citibanamex’s earnings hit from credit charges is not an early warning for Banorte’s upcoming 1Q21 results; Grupo Financiero Banorte-O (GFNORTEO MF) management bit that bullet early, and took large provision expenses and charge-offs “kitchen sinking” its 2Q20 results
In addition, according to the latest CNBV data on the Mexican bank system to February 2021, Banorte’s consumer NPL ratio was far lower than that of Banamex, with Banorte’s overall NPL ratio being less than half of that of Citibanamex
Banorte reports 1Q21 results on 23rd April, and we do not expect a large credit provisioning hit to earnings, which should underpin its attractive valuations
Risks to our positive view on Banorte include softer than expected revenue growth, from fee and credit spread pressure and higher than expected opex as well as higher than expected credit charges


Citigroup 1Q21 Results – Mexican Consumer Banking’s Charge-Offs Are Not an Early Warning for Banorte

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>Mexican loan appetite was soft to February, as seen in the yoy decline in system loan balances</li>
<li>There was a further erosion of system credit spreads in February, which we see as the lagged impact of past benchmark rate cuts and a changing loan mix</li>
<li>Despite these headwinds, there are some encouraging signs, as seen in the improving trend in opex to assets ratio, and the slightly lower system cost of risk</li>
<li>In terms of balance sheets, NPL coverage ratios remain healthy, even with loan charge-offs increasing, and core capital ratios are reassuring</li>
<li>Based on our spider charts, <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> leads among the big five banks in terms of trailing twelve month returns and most other metrics; in the mid-caps, <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> looks solid in terms of credit quality, coverage and capital</li>
<li>Risks to our positive view on Banorte and BanBajio include a slower than expected recovery which hurts credit quality and therefore cost of risk as well as intense competition driving credit spreads lower</li>
</ul>


Mexican loan appetite was soft to February, as seen in the yoy decline in system loan balances
There was a further erosion of system credit spreads in February, which we see as the lagged impact of past benchmark rate cuts and a changing loan mix
Despite these headwinds, there are some encouraging signs, as seen in the improving trend in opex to assets ratio, and the slightly lower system cost of risk
In terms of balance sheets, NPL coverage ratios remain healthy, even with loan charge-offs increasing, and core capital ratios are reassuring
Based on our spider charts, Grupo Financiero Banorte-O (GFNORTEO MF) leads among the big five banks in terms of trailing twelve month returns and most other metrics; in the mid-caps, Banco del Bajio SA (BBAJIOO MM) looks solid in terms of credit quality, coverage and capital
Risks to our positive view on Banorte and BanBajio include a slower than expected recovery which hurts credit quality and therefore cost of risk as well as intense competition driving credit spreads lower


Mexican Banks February 2021 Data Chart Book: Potential Signs that the Worst Is Past

Event-Driven

<ul>
<li>
<a href="https://www.smartkarma.com/entities/banco-santander-sa" target="_blank" data-smartkarma-citation="entities:21296:1" rel="noopener">Banco Santander Sa (SAN SM)</a>  is to offer MXN24 per share for the 8.3% of <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>  held by minorities</li>
<li>Based on consensus estimates, the offer values SanMex at USD7.5bn (€6.4bn) and on a 2021E PBV ratio of 1x and a 2021E PE multiple of 8.8x</li>
<li>Santander estimates an outlay of €550m for full take up of the offer, with a positive impact to Santander Group EPS of 0.8% in 2023</li>
<li>Santander originally made an all share offer for minorities in April 2019, of Santander parent for SanMex shares; nearly two years later it is offering to sweep up the remaining minorities at an estimated 37% discount to its 2019, admittedly all share, offer</li>
<li>The offer is at least all cash, but we see it as an opportunistic offer by the parent  - SanMex is cheap relative to its LatAm peers and sister banks - to “tidy up” the shareholder structure</li>
<li>All the same, we do not believe that minorities have much bargaining power to oppose this, and based on the closing price of the 26<sup>th</sup> March, there is still 5.6% upside potential to the cash offer price</li>
<li>Our preferred name in Mexico remains <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> </li>
<li>Risks to our positive view include that Santander group withdraws its offer for the minorities, or that it does not gain regulatory approval in Mexico</li>
</ul>



Banco Santander Sa (SAN SM)  is to offer MXN24 per share for the 8.3% of Banco Santander Mexico-B (BSMXB MM)  held by minorities
Based on consensus estimates, the offer values SanMex at USD7.5bn (€6.4bn) and on a 2021E PBV ratio of 1x and a 2021E PE multiple of 8.8x
Santander estimates an outlay of €550m for full take up of the offer, with a positive impact to Santander Group EPS of 0.8% in 2023
Santander originally made an all share offer for minorities in April 2019, of Santander parent for SanMex shares; nearly two years later it is offering to sweep up the remaining minorities at an estimated 37% discount to its 2019, admittedly all share, offer
The offer is at least all cash, but we see it as an opportunistic offer by the parent  - SanMex is cheap relative to its LatAm peers and sister banks - to “tidy up” the shareholder structure
All the same, we do not believe that minorities have much bargaining power to oppose this, and based on the closing price of the 26th March, there is still 5.6% upside potential to the cash offer price
Our preferred name in Mexico remains Grupo Financiero Banorte-O (GFNORTEO MF) 
Risks to our positive view include that Santander group withdraws its offer for the minorities, or that it does not gain regulatory approval in Mexico


Santander Mexico (BSMXB MM) – Opportunistic Cash Offer for Minorities

<ul>
<li>The Mexican banks’ outlook is more constructive; there is GDP growth recovery potential, even if the credit quality drag is likely to worsen in the near term</li>
<li>An early look at 1Q 2021 via the January data shows that loan growth trends are recovering from their lows</li>
<li>The NPL ratio continues to deteriorate, especially in the consumer category post expiry of relief programmes, and cost of risk remains high into January and could potentially go higher in the near term</li>
<li>Despite these challenges, we see that Mexican banks are well provisioned against higher NPLs and also well capitalised</li>
<li>Our core picks in Mexican banks are <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>, and in the mid-caps <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>; they stand out for their attractive value and better-than-peers credit quality metrics as well as solid capital adequacy ratios</li>
<li>Risks to our view include softer than expected loan growth recovery and worse than expected NPLs, combined with credit spread erosion</li>
</ul>


The Mexican banks’ outlook is more constructive; there is GDP growth recovery potential, even if the credit quality drag is likely to worsen in the near term
An early look at 1Q 2021 via the January data shows that loan growth trends are recovering from their lows
The NPL ratio continues to deteriorate, especially in the consumer category post expiry of relief programmes, and cost of risk remains high into January and could potentially go higher in the near term
Despite these challenges, we see that Mexican banks are well provisioned against higher NPLs and also well capitalised
Our core picks in Mexican banks are Grupo Financiero Banorte-O (GFNORTEO MF), and in the mid-caps Banco del Bajio SA (BBAJIOO MM); they stand out for their attractive value and better-than-peers credit quality metrics as well as solid capital adequacy ratios
Risks to our view include softer than expected loan growth recovery and worse than expected NPLs, combined with credit spread erosion


Mexican Banks; an Early Look at 2021 Data

Mexico

Grupo Financiero Banorte S.A.B. de C.V. is a financial institution in Mexico. The Company offers banking services, premium banking, wholesale banking, leasing and factoring, warehousing, insurance, pensions and retirement savings.

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Grupo Financiero Banorte SAB d (GFNORTEO MF)

Citigroup 1Q21 Results – Mexican Consumer Banking’s Charge-Offs Are Not an Early Warning for Banorte

Another weak quarter from Citi's Mexican entity is not, we believe, an amber light for Banorte's upcoming 1Q21 results; Banorte pre-empted with...

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

Mexican Banks February 2021 Data Chart Book: Potential Signs that the Worst Is Past

Latest Mexican bank data shows negative loan growth and credit spread erosion, but also good opex control and potentially signs of cost of risk...

Victor Galliano

Santander Mexico (BSMXB MM) – Opportunistic Cash Offer for Minorities

Opportunistic offer by Santander for the SanMex minorities, at a c37% discount to the April 2019 all share offer. Activist rejection of offer is...

Victor Galliano

Mexican Banks; an Early Look at 2021 Data

Mexican banks' January 2021 data implies loan growth recovery, but also higher risk costs; yet Banorte and BanBajio stand out positively on...

Victor Galliano

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