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.

Event-Driven

Grupo Financiero Banorte SAB d / Event-Driven

Grupo Financiero Banorte SAB d (GFNORTEO MF)

<ul>
<li>Banorte and Santander have both hired M&amp;A advisors for a potential Citibanamex bid, according to Reuters; Banco Azteca is not participating in the bidding, whilst Inbursa is potentially still interested</li>
<li>In the event of a bid, we do not expect Santander to be aggressive on price; Banorte could be more aggressive, which would increase its chances of a winning bid</li>
<li>Were Banorte to acquire Citibanamex, we continue to believe that its prospective dividend could be at risk; in essence, the risks of M&amp;A still outweigh the potential opportunities</li>
</ul>


Banorte and Santander have both hired M&amp;A advisors for a potential Citibanamex bid, according to Reuters; Banco Azteca is not participating in the bidding, whilst Inbursa is potentially still interested
In the event of a bid, we do not expect Santander to be aggressive on price; Banorte could be more aggressive, which would increase its chances of a winning bid
Were Banorte to acquire Citibanamex, we continue to believe that its prospective dividend could be at risk; in essence, the risks of M&amp;A still outweigh the potential opportunities


CitiBanamex – Potential Bidders Get Serious, We Stay Cautious on Banorte

<ul>
<li>Citibanamex legacy operations represent a series of challenges for the acquirer, which include its high cost base, bloated branch network and higher credit risk exposure to consumers and SMEs</li>
<li>The opportunity for an acquirer is access to a rich and stable deposit base with a relatively low loan-to-deposit ratio and Banamex’s fee generating AFORE pension administrator</li>
<li>Banamex is attracting much interest, which puts pressure on bidders to pay up, especially Banorte; we revisit our potential capital absorption calculations, but still see risk to Banorte’s dividend prospects</li>
</ul>


Citibanamex legacy operations represent a series of challenges for the acquirer, which include its high cost base, bloated branch network and higher credit risk exposure to consumers and SMEs
The opportunity for an acquirer is access to a rich and stable deposit base with a relatively low loan-to-deposit ratio and Banamex’s fee generating AFORE pension administrator
Banamex is attracting much interest, which puts pressure on bidders to pay up, especially Banorte; we revisit our potential capital absorption calculations, but still see risk to Banorte’s dividend prospects


CitiBanamex Legacy Operations – Revisiting Banorte’s Potential M&A Challenge and Opportunity

Equity Bottom-Up

<ul>
<li>BBVA Mexico expanded its premium return on equity of the big nine Mexican banks to 23% to December, and through opex control, it “works” its healthy core capital ratio hard</li>
<li>The bank system trends remain healthy, with additional improvements to NPL ratios and healthy coverage; Banorte and BanBajio screen better than peers on combined credit quality metrics to December</li>
<li>We believe that mid-cap bank BanBajio is good value, and are positive on BBVA for its Mexican exposure; on balance, we remain cautious on Banorte, due largely to valuation</li>
</ul>


BBVA Mexico expanded its premium return on equity of the big nine Mexican banks to 23% to December, and through opex control, it “works” its healthy core capital ratio hard
The bank system trends remain healthy, with additional improvements to NPL ratios and healthy coverage; Banorte and BanBajio screen better than peers on combined credit quality metrics to December
We believe that mid-cap bank BanBajio is good value, and are positive on BBVA for its Mexican exposure; on balance, we remain cautious on Banorte, due largely to valuation


Mexican Banks’ December Data Adds to Positive Trend on Credit Quality, but Lending Spread Eroding

<ul>
<li>Citi is to sell its Mexican retail and SME banking operations, which we call new Banamex; it is an attractive banking franchise that needs investment and a focus on costs</li>
<li>Based on peer group valuations, and on new Banamex’s disclosed parameters, we estimate that the disposal entity’s valuation range could range from USD7bn to USD10bn, and we identify potential bidders</li>
<li>We believe that our new Banamex valuation range emphasizes BanBajio’s attractive valuations, we stick with our positive view on mid-cap BanBajio; we believe that Banorte is fully valued</li>
</ul>


Citi is to sell its Mexican retail and SME banking operations, which we call new Banamex; it is an attractive banking franchise that needs investment and a focus on costs
Based on peer group valuations, and on new Banamex’s disclosed parameters, we estimate that the disposal entity’s valuation range could range from USD7bn to USD10bn, and we identify potential bidders
We believe that our new Banamex valuation range emphasizes BanBajio’s attractive valuations, we stick with our positive view on mid-cap BanBajio; we believe that Banorte is fully valued


Citi’s Mexican Exit; Our Thoughts on “new Banamex”

Grupo Financiero Banorte SAB d / Equity Bottom-Up

<ul>
<li>BBVA Bancomer continued to deliver the best returns of the biggest nine Mexican banks, on a trailing twelve months basis to May; <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> retained its second place with upper-teens ROE</li>
<li>To June 2021, bank system ROE recovered further from historically low levels, helped by low cost of risk</li>
<li>Top line returns were supported by limited erosion of credit spreads, and higher benchmark rates from June 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> screen better than peers on credit quality metrics to June, with best-in-class combination of low NPL ratios and to healthy coverage</li>
<li>In terms of ROE to core capital ratio, we identify that BBVA Bancomer and Banorte “work” their core capital harder than their peers</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 returns of the biggest nine Mexican banks, on a trailing twelve months basis to May; Grupo Financiero Banorte-O (GFNORTEO MF) retained its second place with upper-teens ROE
To June 2021, bank system ROE recovered further from historically low levels, helped by low cost of risk
Top line returns were supported by limited erosion of credit spreads, and higher benchmark rates from June should be spread supportive
Banorte and Banco del Bajio SA (BBAJIOO MM) screen better than peers on credit quality metrics to June, with best-in-class combination of low NPL ratios and to healthy coverage
In terms of ROE to core capital ratio, we identify that BBVA Bancomer and Banorte “work” their core capital harder than their peers
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 ROE Recovery Continues into June

Mexico

Grupo Financiero Inbursa, SAB de C.V. is a holding company.  The Company, through its subsidiaries, attracts deposits and offers retail and commercial banking services.  The Bank manages stock and fixed income funds, and offers fire, transportation, automobile, agriculture, liability, casualty, and health insurance.  Inbursa also offers automobile and equipment lease financing.

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Grupo Financiero Inbursa-O (GFINBURO MM)

CitiBanamex – Potential Bidders Get Serious, We Stay Cautious on Banorte

Banorte and Santander hire M&A advisors for their Banamex bids, Inbursa is a likely candidate; Banorte remains the favourite, we believe, and so we...

Victor Galliano

CitiBanamex Legacy Operations – Revisiting Banorte’s Potential M&A Challenge and Opportunity

Banorte to buy Banamex? We think it likely, and that competition is pushing up the price for a bank in need of opex cuts and better credit quality;...

Victor Galliano

Mexican Banks’ December Data Adds to Positive Trend on Credit Quality, but Lending Spread Eroding

Credit quality ends the year strong, with evidence of marginal spread erosion in December; we like mid-cap bank BanBajio and BBVA for BBVA Mexico;...

Victor Galliano

Citi’s Mexican Exit; Our Thoughts on “new Banamex”

Citi sale of its Mexican commercial bank, new Banamex, will need the acquirer to control opex; in this report we estimate the valuation range &...

Victor Galliano

Mexican Banks ROE Recovery Continues into June

June data shows Mexican banks' ROE is rising helped by falling cost of risk; capital is sound, NPLs are contained; BBVA Bancomer & Banorte employ...

Victor Galliano

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