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>Among the EM digital banks covered, we turn constructive on Inter, we remain cautious on Nubank and see Bank Jago as an over-valued growth play; we are neutral on Kakaobank</li>
<li>Client penetration is key, yet digital banks also need to achieve loan and other banking product penetration to drive revenue growth and ultimately better returns</li>
<li>We believe that neobanks’ key hurdles to enhanced profitability are “old school” banking metrics; delinquency and cost of risk charges, as well as high capital absorption from fast loan growth</li>
</ul>


Among the EM digital banks covered, we turn constructive on Inter, we remain cautious on Nubank and see Bank Jago as an over-valued growth play; we are neutral on Kakaobank
Client penetration is key, yet digital banks also need to achieve loan and other banking product penetration to drive revenue growth and ultimately better returns
We believe that neobanks’ key hurdles to enhanced profitability are “old school” banking metrics; delinquency and cost of risk charges, as well as high capital absorption from fast loan growth


EM Digital Banks Overview - Brazil, South Korea and Indonesia

<ul>
<li>Softbank Group’s fintech portfolio companies – and especially those in the largely Softbank-funded Vision Fund 2 - were a meaningful part of the group’s large loss in fiscal 1Q 2022</li>
<li>However, Klarna and eToro “down rounds” - concluded in early July - do not seem to have been incorporated into June-end losses; the Vision Funds are absorbing the LatAm Fund</li>
<li>Despite the public markets rebound, Softbank faces multiples challenges, and it is hard to find positives in the Alibaba derivatives contracts</li>
</ul>


Softbank Group’s fintech portfolio companies – and especially those in the largely Softbank-funded Vision Fund 2 - were a meaningful part of the group’s large loss in fiscal 1Q 2022
However, Klarna and eToro “down rounds” - concluded in early July - do not seem to have been incorporated into June-end losses; the Vision Funds are absorbing the LatAm Fund
Despite the public markets rebound, Softbank faces multiples challenges, and it is hard to find positives in the Alibaba derivatives contracts


Softbank Group (9984 JP) 1Q 22 Results – Focus on Fintech and LatAm Holdings

Thematic (Sector/Industry)

<ul>
<li>Softbank has invested USD7bn in tech throughout Latin America since 3Q 2019, with 40% dedicated to fintech; we focus in on the listed fintech holdings, specifically Nubank and Banco Inter</li>
<li>In the 2Q22 market sell-off, we estimate that Softbank is holding 55+% unrealized losses in Nubank, with a similar level of losses on its more recent Banco Inter investments</li>
<li>These two neobanks have good client penetration but face profitability challenges; as a key shareholder, Softbank could push for transformative Nu-Inter M&amp;A, otherwise Softbank could seek to exit these investments</li>
</ul>


Softbank has invested USD7bn in tech throughout Latin America since 3Q 2019, with 40% dedicated to fintech; we focus in on the listed fintech holdings, specifically Nubank and Banco Inter
In the 2Q22 market sell-off, we estimate that Softbank is holding 55+% unrealized losses in Nubank, with a similar level of losses on its more recent Banco Inter investments
These two neobanks have good client penetration but face profitability challenges; as a key shareholder, Softbank could push for transformative Nu-Inter M&amp;A, otherwise Softbank could seek to exit these investments


Softbank (9984 JP) In Latin America: Focus on Fintechs and the LatAm Neobanks

<ul>
<li>Despite the compression in the Brazil digital banks’ multiples from the FinTech de-rating, big fundamental hurdles remain, especially for Nubank</li>
<li>Nubank is delivering on increased loan penetration and this should drive revenue growth; still, this also drives higher and front loaded provisioning charges along with capital absorption</li>
<li>Banco Inter is less challenged than Nubank on most metrics, and it is modestly profitable, but we believe it is too early to turn positive; we like Banco do Brasil</li>
</ul>


Despite the compression in the Brazil digital banks’ multiples from the FinTech de-rating, big fundamental hurdles remain, especially for Nubank
Nubank is delivering on increased loan penetration and this should drive revenue growth; still, this also drives higher and front loaded provisioning charges along with capital absorption
Banco Inter is less challenged than Nubank on most metrics, and it is modestly profitable, but we believe it is too early to turn positive; we like Banco do Brasil


Brazil Digital Banks – Nubank and Banco Inter Shares Have De-Rated, but Still Face Challenges

<ul>
<li>Nubank remains challenged, in our view, based on rising customer acquisition costs (especially in its Mexican and Colombian expansions), high capital absorption and maturing consumer credit portfolios adding to delinquencies</li>
<li>Banco Inter has a better balanced portfolio than Nubank with its mortgage book, which should mean lower hurdles on delinquency and capital consumption, although customer acquisition costs remain clear headwinds</li>
<li>The two Brazilian digital banks’ premium valuations are hard to justify on growth potential; our research models’ base assumptions show that Nubank shares, in particular, trade on very rich valuations</li>
</ul>


Nubank remains challenged, in our view, based on rising customer acquisition costs (especially in its Mexican and Colombian expansions), high capital absorption and maturing consumer credit portfolios adding to delinquencies
Banco Inter has a better balanced portfolio than Nubank with its mortgage book, which should mean lower hurdles on delinquency and capital consumption, although customer acquisition costs remain clear headwinds
The two Brazilian digital banks’ premium valuations are hard to justify on growth potential; our research models’ base assumptions show that Nubank shares, in particular, trade on very rich valuations


A Tale of Two Brazil Digital Banks – Nubank Still Exposed to Challenges, Banco Inter Less So

Brazil

Inter & Co, Inc. operates as an investment holding company. The Company, through its subsidiaries, serves customers in Brazil.

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Inter & Co (INTR US)

EM Digital Banks Overview - Brazil, South Korea and Indonesia

We turn constructive on Inter with its best combination of trends on fintech and bank metrics; we remain cautious on Nubank and see Bank Jago as an...

Victor Galliano

Softbank Group (9984 JP) 1Q 22 Results – Focus on Fintech and LatAm Holdings

Fintechs & LatAm contributed to the group’s large loss in 1QFY22; yet Klarna & eToro “down rounds” done in July are unlikely to have been accounted...

Victor Galliano

Softbank (9984 JP) In Latin America: Focus on Fintechs and the LatAm Neobanks

LatAm equity investments have added to Softbank's total equity value and rose to a 5% share in March; we expect this to go sharply into reverse at...

Victor Galliano

Brazil Digital Banks – Nubank and Banco Inter Shares Have De-Rated, but Still Face Challenges

The Brazil digital banks' high loan penetration should drive revenue growth, but this also accelerates NPL formation, provisioning charges and...

Victor Galliano

A Tale of Two Brazil Digital Banks – Nubank Still Exposed to Challenges, Banco Inter Less So

Nubank is more challenged than Inter, due to rising customer acquisition costs as it expands geographically, high capital absorption & with...

Victor Galliano

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