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>We analyse key trends to October 2022 for Banorte and Banco del Bajio, two of the top three ROE generating banks in Mexico which also trade on premium PBV ratios</li>
<li>For both, the challenges are funding costs that rise faster than loan yields, crimping credit spreads, as well as the indications that cost of risk may have bottomed out</li>
<li>Although the operating expenses ratio is well controlled so far, it seems unlikely that it can improve much more; these data trends add weight to our cautious view on Banorte</li>
</ul>


We analyse key trends to October 2022 for Banorte and Banco del Bajio, two of the top three ROE generating banks in Mexico which also trade on premium PBV ratios
For both, the challenges are funding costs that rise faster than loan yields, crimping credit spreads, as well as the indications that cost of risk may have bottomed out
Although the operating expenses ratio is well controlled so far, it seems unlikely that it can improve much more; these data trends add weight to our cautious view on Banorte


Banorte and BanBajio - October Data Trends, a First Look at 4Q 2022; Returns Pressure Building?

<ul>
<li>The ousting of Peruvian President Pedro Castillo follows his failed attempt to dissolve Congress; Vice-President Dina Boularte was sworn in yesterday as the new first female Peruvian President</li>
<li>Political instability is not uncommon in Peru, but an end to Castillo’s chaotic, market-unfriendly administration with its high turnover in ministerial posts should improve investor sentiment and encourage increased FDI</li>
<li>When we screen Peruvian bell-weather Credicorp against its LatAm peers, we conclude that, although it is not deep value, it is attractive versus its own history and selected peers</li>
</ul>


The ousting of Peruvian President Pedro Castillo follows his failed attempt to dissolve Congress; Vice-President Dina Boularte was sworn in yesterday as the new first female Peruvian President
Political instability is not uncommon in Peru, but an end to Castillo’s chaotic, market-unfriendly administration with its high turnover in ministerial posts should improve investor sentiment and encourage increased FDI
When we screen Peruvian bell-weather Credicorp against its LatAm peers, we conclude that, although it is not deep value, it is attractive versus its own history and selected peers


Credicorp (BAP US); Opportunity to Come from the Peruvian Political Crisis

<ul>
<li>Bank sector trends to October continue to be sound, but return headwinds are emerging; further tightening credit spreads and initial signs of worsening in consumer credit quality</li>
<li>To October, funding costs are rising faster than loan yields, crimping credit spreads, and the rising credit card cost of risk indicates a worsening outlook for consumer credit quality</li>
<li>BBVA Mexico generates consistent premium ROE of 25%+, investors can gain exposure through BBVA equity; we continue to be cautious on Banorte, and we recommend taking profits on BanBajio</li>
</ul>


Bank sector trends to October continue to be sound, but return headwinds are emerging; further tightening credit spreads and initial signs of worsening in consumer credit quality
To October, funding costs are rising faster than loan yields, crimping credit spreads, and the rising credit card cost of risk indicates a worsening outlook for consumer credit quality
BBVA Mexico generates consistent premium ROE of 25%+, investors can gain exposure through BBVA equity; we continue to be cautious on Banorte, and we recommend taking profits on BanBajio


Mexican Banks’ October Data and Trends – Credit Spread Erosion a Bigger Threat than Credit Quality?

<ul>
<li>Banorte pulls out of the Banamex bidding, leaving two Mexican groups as potential bidders; this now removes the risk of a capital raise for Banorte and a potential dividend cut</li>
<li>Banorte delivered a strong set of 3Q22 results, yet we believe that its returns could be close to peaking and that we expect a profitability downturn in 2023</li>
<li>The withdrawal from the Banamex bidding is shareholder positive, but we see that current valuations do not reflect 2023 risks, especially from higher cost of risk and squeezed credit spreads</li>
</ul>


Banorte pulls out of the Banamex bidding, leaving two Mexican groups as potential bidders; this now removes the risk of a capital raise for Banorte and a potential dividend cut
Banorte delivered a strong set of 3Q22 results, yet we believe that its returns could be close to peaking and that we expect a profitability downturn in 2023
The withdrawal from the Banamex bidding is shareholder positive, but we see that current valuations do not reflect 2023 risks, especially from higher cost of risk and squeezed credit spreads


Banorte (GFNORTEO MX) – No Longer Bidding for Banamex, but Tougher Fundamental Hurdles into 2023

Event-Driven

Grupo Financiero Banorte SAB d / Event-Driven

<ul>
<li>Santander’s USD6bn offer for Banamex was rejected by Citi as too low, according to press reports; the estimated valuation range for Banamex is now from USD7bn to USD8bn</li>
<li>This leaves Inbursa, the Mifel-Grupo Mexico consortium and Banorte as contenders, with Banorte still a leading contender</li>
<li>We continue to be cautious on Banorte, as its potential M&amp;A success would mean big challenges in terms of capital requirements, along with portfolio de-risking and unpopular cost-cutting</li>
</ul>


Santander’s USD6bn offer for Banamex was rejected by Citi as too low, according to press reports; the estimated valuation range for Banamex is now from USD7bn to USD8bn
This leaves Inbursa, the Mifel-Grupo Mexico consortium and Banorte as contenders, with Banorte still a leading contender
We continue to be cautious on Banorte, as its potential M&amp;A success would mean big challenges in terms of capital requirements, along with portfolio de-risking and unpopular cost-cutting


Banamex – Now There Are Three Potential Bidders, Still Including Banorte

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)

Banorte and BanBajio - October Data Trends, a First Look at 4Q 2022; Returns Pressure Building?

Especially for Banorte the hurdles are fast rising funding costs crimping credit spreads, and indications that cost of risk may have bottomed out;...

Victor Galliano

Credicorp (BAP US); Opportunity to Come from the Peruvian Political Crisis

The end of Castillo’s chaotic, market-unfriendly government should lead to improving investor sentiment; Peruvian blue-chip Credicorp is...

Victor Galliano

Mexican Banks’ October Data and Trends – Credit Spread Erosion a Bigger Threat than Credit Quality?

Mexican bank October data show more credit spread erosion and signs of poorer credit quality; we advise BanBajio holders to take profits, we stay...

Victor Galliano

Banorte (GFNORTEO MX) – No Longer Bidding for Banamex, but Tougher Fundamental Hurdles into 2023

Banorte's withdrawal from Banamex bidding is positive, but current valuations do not reflect 2023 risks, especially from higher cost of risk,...

Victor Galliano

Banamex – Now There Are Three Potential Bidders, Still Including Banorte

Banorte is expected to bid for Banamex and the risks are skewed against its shareholders; Banorte could need to raise capital and could find it...

Victor Galliano

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