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>BBVA Bancomer delivered the best return on equity (ROE) of the biggest nine Mexican banks to October, at 20%+ and “works” its healthy core capital ratio harder than their peers</li>
<li>The bank system trends remain healthy, with well controlled NPL ratios and healthy coverage; Banorte and BanBajio continue to screen better than peers on combined credit quality metrics to October</li>
<li>We remain cautious on Banorte, due largely to valuation and increasing competition; we like mid-cap bank BanBajio for its good value, and are positive on BBVA for its Mexican exposure</li>
</ul>


BBVA Bancomer delivered the best return on equity (ROE) of the biggest nine Mexican banks to October, at 20%+ and “works” its healthy core capital ratio harder than their peers
The bank system trends remain healthy, with well controlled NPL ratios and healthy coverage; Banorte and BanBajio continue to screen better than peers on combined credit quality metrics to October
We remain cautious on Banorte, due largely to valuation and increasing competition; we like mid-cap bank BanBajio for its good value, and are positive on BBVA for its Mexican exposure


Mexican Banks’ October Data Looks Benign on Credit Quality, Watch for Spread Erosion Going Forward

<ul>
<li>BBVA Bancomer delivered the best return on equity (ROE) of the biggest nine Mexican banks to September, at 20%, improving on a MoM basis due largely to a sub 40% efficiency ratio; in terms of ROE to core capital ratio, we identify that BBVA Bancomer and Banorte retain the best position, “working” their healthy levels of core capital harder than their peers</li>
<li>The bank system trends seem healthy, with well controlled NPL ratios and healthy coverage; one core risk to this rosy scenario is, in our view, worse than expected GDP growth leading to an up-tick in consumer delinquencies going forward, which would warrant an increase in cost of risk charges. Another factor that could upset returns is eroding credit margins due to rising funding costs</li>
<li>
<a href="https://www.smartkarma.com/entities/grupo-financiero-banorte-s-a-b-de-c-v" target="_blank" data-smartkarma-citation="entities:24780:1" rel="noopener">Grupo Financiero Banorte (GFNORTEO MF)</a>  and <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> continue to screen better than peers on credit quality metrics to August, with best-in-class combination of low NPL ratios and healthy coverage. Despite its good metrics, we recently turned negative on Banorte, due largely to valuation and increasing competition; we would highlight mid-cap bank BanBajio for its better relative value, and in the context of improving consumer credit quality</li>
</ul>


BBVA Bancomer delivered the best return on equity (ROE) of the biggest nine Mexican banks to September, at 20%, improving on a MoM basis due largely to a sub 40% efficiency ratio; in terms of ROE to core capital ratio, we identify that BBVA Bancomer and Banorte retain the best position, “working” their healthy levels of core capital harder than their peers
The bank system trends seem healthy, with well controlled NPL ratios and healthy coverage; one core risk to this rosy scenario is, in our view, worse than expected GDP growth leading to an up-tick in consumer delinquencies going forward, which would warrant an increase in cost of risk charges. Another factor that could upset returns is eroding credit margins due to rising funding costs

Grupo Financiero Banorte (GFNORTEO MF)  and Banco del Bajio SA (BBAJIOO MM) continue to screen better than peers on credit quality metrics to August, with best-in-class combination of low NPL ratios and healthy coverage. Despite its good metrics, we recently turned negative on Banorte, due largely to valuation and increasing competition; we would highlight mid-cap bank BanBajio for its better relative value, and in the context of improving consumer credit quality


Mexican Banks’ September Data Looks Benign, but Not Without Potential Challenges

Equity Bottom-Up

Grupo Financiero Banorte SAB d / Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/grupo-financiero-banorte-s-a-b-de-c-v" target="_blank" data-smartkarma-citation="entities:24780:1" rel="noopener">Grupo Financiero Banorte (GFNORTEO MF)</a>’s 3Q21 results reflect the strength of the banking operation, balance sheet and its superior credit quality</li>
<li>The disappointments come in the non-bank operations, specifically the weakness in insurance</li>
<li>Yet the banking operations still fall short of pre-pandemic ROE levels, despite the very low cost of risk charge</li>
<li>On valuation, Banorte now trades close to its high in terms of pre-pandemic PBV ratio and its PBV is higher than Brazilian banking bell-weather Itaú Unibanco for the first time in three years</li>
<li>Even though the positive investor momentum is likely to be with Mexican equities in the short term, we believe that Banorte may be challenged to further enhance bank returns, due to intensifying competition from fintechs in Mexico</li>
<li>Banorte’s dividend yield forecasts are amongst the best in the sector, which is a share price support; yet the prospective dividend pay-out ratio is high, and so limits the potential for further dividend growth, in our view</li>
<li>Banorte has been one of our core bull calls in LatAm financials, but we now take a contrarian bearish view on Banorte, as we believe that much of the good news is discounted by the share price and we expect banking returns to be impacted by growing competition from fintechs</li>
<li>Risks to our negative view on Banorte include a lower cost of funding, better than expected fee growth as well as a falling cost of risk going forward and a limited adverse impact from fintech challengers</li>
</ul>



Grupo Financiero Banorte (GFNORTEO MF)’s 3Q21 results reflect the strength of the banking operation, balance sheet and its superior credit quality
The disappointments come in the non-bank operations, specifically the weakness in insurance
Yet the banking operations still fall short of pre-pandemic ROE levels, despite the very low cost of risk charge
On valuation, Banorte now trades close to its high in terms of pre-pandemic PBV ratio and its PBV is higher than Brazilian banking bell-weather Itaú Unibanco for the first time in three years
Even though the positive investor momentum is likely to be with Mexican equities in the short term, we believe that Banorte may be challenged to further enhance bank returns, due to intensifying competition from fintechs in Mexico
Banorte’s dividend yield forecasts are amongst the best in the sector, which is a share price support; yet the prospective dividend pay-out ratio is high, and so limits the potential for further dividend growth, in our view
Banorte has been one of our core bull calls in LatAm financials, but we now take a contrarian bearish view on Banorte, as we believe that much of the good news is discounted by the share price and we expect banking returns to be impacted by growing competition from fintechs
Risks to our negative view on Banorte include a lower cost of funding, better than expected fee growth as well as a falling cost of risk going forward and a limited adverse impact from fintech challengers


Banorte (GFNORTEO MM): Contrarian Move to Underweight - Sound 3Q21 but Much Is Discounted

<ul>
<li>BBVA Bancomer continued to deliver the best return on equity (ROE) of the biggest nine Mexican banks, on a trailing twelve months basis to August; <a href="https://www.smartkarma.com/entities/grupo-financiero-banorte-s-a-b-de-c-v" target="_blank" data-smartkarma-citation="entities:24780:1" rel="noopener">Grupo Financiero Banorte (GFNORTEO MF)</a> retained its second place with upper-teens ROE</li>
<li>To August 2021, bank system ROE recovered further from historically low levels, despite cost of risk edging higher MoM</li>
<li>Top line returns were supported by limited erosion of credit spreads, and benchmark rates rose again in September, which should be spread supportive</li>
<li>Banorte and <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> continue to screen better than peers on credit quality metrics to August, with best-in-class combination of low NPL ratios and healthy coverage</li>
<li>In terms of ROE to core capital ratio, we identify that BBVA Bancomer and Banorte retain the best position, “working” their healthy levels of core capital harder than their peers</li>
<li>We remain positive on Banorte, but would also highlight mid-cap bank BanBajio for its better relative value in the context of improving consumer credit quality</li>
<li>Risks to our positive view on Banorte and BanBajio include higher than expected opex, greater than expected spread pressure from higher funding costs and a further worsening of credit quality resulting in higher credit charges</li>
</ul>


BBVA Bancomer continued to deliver the best return on equity (ROE) of the biggest nine Mexican banks, on a trailing twelve months basis to August; Grupo Financiero Banorte (GFNORTEO MF) retained its second place with upper-teens ROE
To August 2021, bank system ROE recovered further from historically low levels, despite cost of risk edging higher MoM
Top line returns were supported by limited erosion of credit spreads, and benchmark rates rose again in September, which should be spread supportive
Banorte and Banco del Bajio SA (BBAJIOO MM) continue to screen better than peers on credit quality metrics to August, with best-in-class combination of low NPL ratios and healthy coverage
In terms of ROE to core capital ratio, we identify that BBVA Bancomer and Banorte retain the best position, “working” their healthy levels of core capital harder than their peers
We remain positive on Banorte, but would also highlight mid-cap bank BanBajio for its better relative value in the context of improving consumer credit quality
Risks to our positive view on Banorte and BanBajio include higher than expected opex, greater than expected spread pressure from higher funding costs and a further worsening of credit quality resulting in higher credit charges


Mexican Banks’ August Data; Another Solid Month

<ul>
<li>BBVA Bancomer continued to deliver the best return on equity (ROE) of the biggest nine Mexican banks, on a trailing twelve months basis to July; <a href="https://www.smartkarma.com/entities/grupo-financiero-banorte-s-a-b-de-c-v" target="_blank" data-smartkarma-citation="entities:24780:1" rel="noopener">Grupo Financiero Banorte (GFNORTEO MF)</a> retained its second place with upper-teens ROE</li>
<li>To July 2021, bank system ROE recovered further from historically low levels, supported by a contained cost of risk</li>
<li>Top line returns were supported by limited erosion of credit spreads, and benchmark rates rose further in July, which should be spread supportive</li>
<li>Banorte and <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> continue to screen better than peers on credit quality metrics to July, with best-in-class combination of low NPL ratios and healthy coverage</li>
<li>In terms of ROE to core capital ratio, we identify that BBVA Bancomer and Banorte retain the best position, “working” their core capital harder than their peers</li>
<li>We remain positive on Banorte, but would also highlight mid-cap bank BanBajio for its better relative value</li>
<li>Risks to our positive view on Banorte and BanBajio include higher than expected opex, greater than expected spread pressure from higher funding costs and a further worsening of credit quality resulting in higher credit charges</li>
</ul>


BBVA Bancomer continued to deliver the best return on equity (ROE) of the biggest nine Mexican banks, on a trailing twelve months basis to July; Grupo Financiero Banorte (GFNORTEO MF) retained its second place with upper-teens ROE
To July 2021, bank system ROE recovered further from historically low levels, supported by a contained cost of risk
Top line returns were supported by limited erosion of credit spreads, and benchmark rates rose further in July, which should be spread supportive
Banorte and Banco del Bajio SA (BBAJIOO MM) continue to screen better than peers on credit quality metrics to July, with best-in-class combination of low NPL ratios and healthy coverage
In terms of ROE to core capital ratio, we identify that BBVA Bancomer and Banorte retain the best position, “working” their core capital harder than their peers
We remain positive on Banorte, but would also highlight mid-cap bank BanBajio for its better relative value
Risks to our positive view on Banorte and BanBajio include higher than expected opex, greater than expected spread pressure from higher funding costs and a further worsening of credit quality resulting in higher credit charges


Mexican Banks’ July Data Show Strong Balance Sheets, and Continuing Improvements in Returns

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.

Grupo Financiero Banorte SAB d (GFNORTEO MF)

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Grupo Financiero Banorte SAB d (GFNORTEO MF)

Mexican Banks’ October Data Looks Benign on Credit Quality, Watch for Spread Erosion Going Forward

Bank system trends are healthy; we like mid-cap bank BanBajio for its good value, & are positive on BBVA for its Mexican exposure, yet we are...

Victor Galliano

Mexican Banks’ September Data Looks Benign, but Not Without Potential Challenges

Mexican banks data to September are healthy, but rising funding costs threaten credit spreads, and any potential GDP slowdown could worsen consumer...

Victor Galliano

Banorte (GFNORTEO MM): Contrarian Move to Underweight - Sound 3Q21 but Much Is Discounted

Contrarian move to Underweight on Banorte despite a sound 3Q21; much is discounted in valuations & intensifying competition from fintechs & digital...

Victor Galliano

Mexican Banks’ August Data; Another Solid Month

August Mexican banks' returns further recover with credit cost growth limited & opex growth contained; good credit quality & coverage trends imply...

Victor Galliano

Mexican Banks’ July Data Show Strong Balance Sheets, and Continuing Improvements in Returns

Mexican banks' returns continue recovering to July as credit costs recede & opex growth is contained; healthy credit quality & coverage trends...

Victor Galliano

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