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>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

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

We have been here before. As the Fed places achieving full employment above its goal of stable and low inflation, risks to financial stability should rise. Stability may be threatened by asset bubbles which are already likely to be forming in asset markets.At the same time, the fear of missing out (FOMO) is pushing investors to be invested while herd mentality provides job protection for asset managers that remain invested. The risk of an equity correction grows in the background. The issue is the lack of a catalyst for now. However, when it does arrive, the question is whether it is accompanied by a flight to quality in the bond market or if rising inflation expectations keep pushing market interest rates higher. Correlations may be reset in the latter outcome and some asset managers could implode in that scenario.We have been here before, as well. Counterparty failures and concerns regarding central clearing house stability may be the hot topics by the end of the year. As such, credit analysts should re-assess their exposures to the former, the prime brokers. Concurrently, now would be an opportune time to buy protection via credit indexes or credit default swaps. Most asset managers will not, as they are protected by the herd, but fortune favors the brave.In the near term, the market is gaining a newfound appreciation for the obscure mechanisms that influence short-term interest rates. We do our best to explain these tools inside and for more background on these pressures, please see our most recent <a href="https://www.smartkarma.com/insights/bank-macro-manifest-risk-rally-gathers-steam-as-bad-news-more-stimulus" target="_blank" data-smartkarma-citation="insights:47886" rel="noopener">Bank Macro Manifest: Risk Rally Gathers Steam as Bad News = More Stimulus</a>. More importantly, this concern is new and something new creates an opportunity. This is where the price of protection could be earned.Only the patina of time will tell if we are right in our correlation and counterparty concerns. But why risk it? Now is the time to think outside the box. Credit investors are not just playing for carry. Price appreciation may be gone, but credit investors need to play for highly efficient carry. Emerging Market and other High Yield assets will likely be impacted by the dislocation in short-term interest rates as investors bid-up higher yielding, short duration assets. A melt-up should occur before we get to the eventual meltdown. This is where to position.As such we identify our top 10 bank securities to position within to ride the melt-up. Downside risks are limited to potential opportunity costs from not investing further out the curve. However, we suspect that many investors are already full of long duration positions. The upside is that, if we are correct, these securities could also outperform in a meltdown. Therefore, our top melt-up picks may dovetail with attempts to reduce duration as the year proceeds.

We have been here before. As the Fed places achieving full employment above its goal of stable and low inflation, risks to financial stability should rise. Stability may be threatened by asset bubbles which are already likely to be forming in asset markets.At the same time, the fear of missing out (FOMO) is pushing investors to be invested while herd mentality provides job protection for asset managers that remain invested. The risk of an equity correction grows in the background. The issue is the lack of a catalyst for now. However, when it does arrive, the question is whether it is accompanied by a flight to quality in the bond market or if rising inflation expectations keep pushing market interest rates higher. Correlations may be reset in the latter outcome and some asset managers could implode in that scenario.We have been here before, as well. Counterparty failures and concerns regarding central clearing house stability may be the hot topics by the end of the year. As such, credit analysts should re-assess their exposures to the former, the prime brokers. Concurrently, now would be an opportune time to buy protection via credit indexes or credit default swaps. Most asset managers will not, as they are protected by the herd, but fortune favors the brave.In the near term, the market is gaining a newfound appreciation for the obscure mechanisms that influence short-term interest rates. We do our best to explain these tools inside and for more background on these pressures, please see our most recent Bank Macro Manifest: Risk Rally Gathers Steam as Bad News = More Stimulus. More importantly, this concern is new and something new creates an opportunity. This is where the price of protection could be earned.Only the patina of time will tell if we are right in our correlation and counterparty concerns. But why risk it? Now is the time to think outside the box. Credit investors are not just playing for carry. Price appreciation may be gone, but credit investors need to play for highly efficient carry. Emerging Market and other High Yield assets will likely be impacted by the dislocation in short-term interest rates as investors bid-up higher yielding, short duration assets. A melt-up should occur before we get to the eventual meltdown. This is where to position.As such we identify our top 10 bank securities to position within to ride the melt-up. Downside risks are limited to potential opportunity costs from not investing further out the curve. However, we suspect that many investors are already full of long duration positions. The upside is that, if we are correct, these securities could also outperform in a meltdown. Therefore, our top melt-up picks may dovetail with attempts to reduce duration as the year proceeds. 

Bank Credit Strategy: Melt-Up Before Meltdown, Where to Position

Grupo Financiero Banorte SAB d / Equity Bottom-Up

Grupo Financiero Banorte SAB d (GFNORTEO MF)

<ul>
<li>Payment holidays and deferrals on loans came to an end in 4Q20 in Mexico, and this is reflected in the credit quality metrics</li>
<li>Loan balances fell in the year, as shown in Figure 2</li>
<li>We are starting to see the impact of the end of pandemic programmes, such as loan payment holidays and deferrals, translating into higher delinquency</li>
<li>Consequently, the rising cost of risk impacted Mexican bank sector returns for the full year, as shown in Figure 4</li>
<li>Yet banks seem well provisioned with system NPL coverage at 160% at YE 2020, and Banorte’s at 228%</li>
<li>We reiterate our positive view on <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 believe that it is in a stronger position than BBVA Bancomer 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> in terms of restructurings and deferrals; <a href="https://www.smartkarma.com/entities/grupo-financiero-inbursa-o" target="_blank" data-smartkarma-citation="entities:24776:1" rel="noopener">Grupo Financiero Inbursa-O (GFINBURO MM)</a> also seems to screen well, in our view</li>
<li>Risks to our positive view on Banorte include much worse than expected delinquency, especially in the consumer and SME segments, as a result of the pandemic induced economic contraction driving worse than expected cost of risk</li>
</ul>


Payment holidays and deferrals on loans came to an end in 4Q20 in Mexico, and this is reflected in the credit quality metrics
Loan balances fell in the year, as shown in Figure 2
We are starting to see the impact of the end of pandemic programmes, such as loan payment holidays and deferrals, translating into higher delinquency
Consequently, the rising cost of risk impacted Mexican bank sector returns for the full year, as shown in Figure 4
Yet banks seem well provisioned with system NPL coverage at 160% at YE 2020, and Banorte’s at 228%
We reiterate our positive view on Grupo Financiero Banorte-O (GFNORTEO MF), and believe that it is in a stronger position than BBVA Bancomer and Banco Santander Mexico-B (BSMXB MM) in terms of restructurings and deferrals; Grupo Financiero Inbursa-O (GFINBURO MM) also seems to screen well, in our view
Risks to our positive view on Banorte include much worse than expected delinquency, especially in the consumer and SME segments, as a result of the pandemic induced economic contraction driving worse than expected cost of risk


Mexican Banks YE 2020 Credit Quality Data Points; Banorte Screens Better than Peers

<ul>
<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> management not only hiked credit charges in 4Q20 results, they also threw in personnel restructuring charges and advanced fee charges from 2021</li>
<li>In addition, loan margin pressure has been minimised due to the bank’s very low deposit costs and effective hedging</li>
<li>Banorte has a fortress balance sheet; compared to the big five Mexican banks it has the best core capital ratio, the lowest NPL ratio and amongst the highest NPL coverage ratios</li>
<li>As the problem loans from the relief programme roll into NPLs in 2021, we still expect the NPL ratio to remain below 2% and the NPL coverage to remain comfortably in excess of 100%</li>
<li>Operating expenses in 4Q20 were, at first sight, disappointing but these adjusting for the one-off restructuring charges, the opex to total assets are very comparable to previous quarters, and better than those of 4Q19</li>
<li>Management is optimistic about dividend resumption, with payout of 2019 and 2020 earnings expected to be c 50% which implies an accumulated potential dividend yield of in the range of 9-10% which we expect to be paid in 2021</li>
<li>Risks to our positive view on Banorte are greater than expected pressure on credit margins, worse than expected credit quality and a regulatory delay on dividend approval</li>
</ul>



Grupo Financiero Banorte-O (GFNORTEO MF) management not only hiked credit charges in 4Q20 results, they also threw in personnel restructuring charges and advanced fee charges from 2021
In addition, loan margin pressure has been minimised due to the bank’s very low deposit costs and effective hedging
Banorte has a fortress balance sheet; compared to the big five Mexican banks it has the best core capital ratio, the lowest NPL ratio and amongst the highest NPL coverage ratios
As the problem loans from the relief programme roll into NPLs in 2021, we still expect the NPL ratio to remain below 2% and the NPL coverage to remain comfortably in excess of 100%
Operating expenses in 4Q20 were, at first sight, disappointing but these adjusting for the one-off restructuring charges, the opex to total assets are very comparable to previous quarters, and better than those of 4Q19
Management is optimistic about dividend resumption, with payout of 2019 and 2020 earnings expected to be c 50% which implies an accumulated potential dividend yield of in the range of 9-10% which we expect to be paid in 2021
Risks to our positive view on Banorte are greater than expected pressure on credit margins, worse than expected credit quality and a regulatory delay on dividend approval


Banorte(GFNORTEO MM): Triple Hit in 4Q20 Lays the Foundation for Healthy Dividend Resumption in 2021

<ul>
<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> announced that it is to boost loan loss provisions by MXN2bn in 4Q20 reflecting the heightened pandemic credit risks</li>
<li>We see this as a “kitchen sinking” of 2020 earnings via cost of risk charges, but this creates a base for earnings recovery into 2021 and 2022</li>
<li>The Mexican banks’ November data underscores the need for bolstering provisions among the big banks; BBVA Bancomer, <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>, HSBC Mexico and CitiBanamex could all take a similar path to Banorte</li>
<li>We reiterate our positive view on Banorte, which screens well versus other EM banks on valuation and compares favourably in terms of credit quality and capital adequacy to its key Mexican peers</li>
<li>Risks to our positive Banorte view include worse than expected credit quality going forward, leading to higher credit charges, as well as soft loan growth and credit spread erosion</li>
</ul>



Grupo Financiero Banorte-O (GFNORTEO MF) announced that it is to boost loan loss provisions by MXN2bn in 4Q20 reflecting the heightened pandemic credit risks
We see this as a “kitchen sinking” of 2020 earnings via cost of risk charges, but this creates a base for earnings recovery into 2021 and 2022
The Mexican banks’ November data underscores the need for bolstering provisions among the big banks; BBVA Bancomer, Banco Santander Mexico-B (BSMXB MM), HSBC Mexico and CitiBanamex could all take a similar path to Banorte
We reiterate our positive view on Banorte, which screens well versus other EM banks on valuation and compares favourably in terms of credit quality and capital adequacy to its key Mexican peers
Risks to our positive Banorte view include worse than expected credit quality going forward, leading to higher credit charges, as well as soft loan growth and credit spread erosion


Banorte (GFNORTEO MF) To Boost Provisions; November Banks Data in Charts Reflects System’s Strength

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)

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

Bank Credit Strategy: Melt-Up Before Meltdown, Where to Position

We could see a melt-up in asset prices from short-term interest rate pressures before the eventual meltdown. We explain the melt-up potential and...

Hank Calenti, CFA

Mexican Banks YE 2020 Credit Quality Data Points; Banorte Screens Better than Peers

Mexican banks' YE 2020 credit data points to the coming wave of worsening credit quality; Banorte is best positioned among its peers to confront...

Victor Galliano

Banorte(GFNORTEO MM): Triple Hit in 4Q20 Lays the Foundation for Healthy Dividend Resumption in 2021

Banorte's 4Q20 triple "kitchen sinking" is the base for cementing its fortress balance sheet, for a recovery in earnings in 2021 and for a generous...

Victor Galliano

Banorte (GFNORTEO MF) To Boost Provisions; November Banks Data in Charts Reflects System’s Strength

Banorte will top up credit charges in 4Q20, boosting NPL coverage; for 2021 and 2022 we see lesser earnings risk for attractively valued Banorte,...

Victor Galliano

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