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

<ul>
<li>CASA’s enhanced offer for <a href="https://www.smartkarma.com/entities/credito-valtellinese-spa" target="_blank" data-smartkarma-citation="entities:21175:1" rel="noopener">Credito Valtellinese SpA (CVAL IM)</a> confirms the appetite for M&amp;A in Southern Europe, and Italy in particular</li>
<li>We expect Italian M&amp;A to be largely intra-country, as the key factors driving consolidation is the need for greater domestic scale given the lower for longer interest rates, especially in Europe, as well as the march of digital banking globally</li>
<li>After <a href="https://www.smartkarma.com/entities/intesa-sanpaolo-spa" target="_blank" data-smartkarma-citation="entities:21200:1" rel="noopener">Intesa Sanpaolo (ISP IM)</a>-UBI, and now potentially the conclusion of CASA Italia-CreVal, the focus is on the future of <a href="https://www.smartkarma.com/entities/banca-monte-dei-paschi-di-siena" target="_blank" data-smartkarma-citation="entities:21162:1" rel="noopener">Banca Monte dei Paschi di Siena (BMPS IM)</a> </li>
<li>A combination between <a href="https://www.smartkarma.com/entities/banco-bpm-spa" target="_blank" data-smartkarma-citation="entities:28121:1" rel="noopener">Banco BPM SpA (BAMI IM)</a> and <a href="https://www.smartkarma.com/entities/bper-banca-s-p-a" target="_blank" data-smartkarma-citation="entities:21165:1" rel="noopener">BPER Banca S.p.A (BPE IM)</a> now seems less likely; this implies that Banco BPM is a potential contender, once again, to combine with BMPS; the latter has largely de-risked its balance sheet, even if its core capital ratio is low</li>
<li>We would see a BPM-BMPS union as a major positive catalyst for a <a href="https://www.smartkarma.com/entities/unicredit-spa" target="_blank" data-smartkarma-citation="entities:21234:1" rel="noopener">UniCredit SpA (UCG IM)</a>  re-rating; even if Unicredit were to acquire BMPS, we believe that, at current valuations, a lot of the risks are discounted</li>
<li>Risks to our positive Unicredit view include Unicredit’s acquisition of BMPS on unfavourable terms, as well as worse than expected organic performance of revenue growth, given the challenging interest rate environment</li>
</ul>


CASA’s enhanced offer for Credito Valtellinese SpA (CVAL IM) confirms the appetite for M&amp;A in Southern Europe, and Italy in particular
We expect Italian M&amp;A to be largely intra-country, as the key factors driving consolidation is the need for greater domestic scale given the lower for longer interest rates, especially in Europe, as well as the march of digital banking globally
After Intesa Sanpaolo (ISP IM)-UBI, and now potentially the conclusion of CASA Italia-CreVal, the focus is on the future of Banca Monte dei Paschi di Siena (BMPS IM) 
A combination between Banco BPM SpA (BAMI IM) and BPER Banca S.p.A (BPE IM) now seems less likely; this implies that Banco BPM is a potential contender, once again, to combine with BMPS; the latter has largely de-risked its balance sheet, even if its core capital ratio is low
We would see a BPM-BMPS union as a major positive catalyst for a UniCredit SpA (UCG IM)  re-rating; even if Unicredit were to acquire BMPS, we believe that, at current valuations, a lot of the risks are discounted
Risks to our positive Unicredit view include Unicredit’s acquisition of BMPS on unfavourable terms, as well as worse than expected organic performance of revenue growth, given the challenging interest rate environment


Southern Europe Banks: Focus on Italian Banks M&A

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

<a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings' (HSBA LN)</a> newly issued Additional Tier 1 (AT1) bond is not worth chasing. HSBC remains adrift and a strategic reset in February could have an outsized impact on longer dated notes. We see better risk adjusted returns in lower duration securities of the issuer.HCBC’s 4.6% coupon 2030 first call AT1 bond priced in-line with similarly long-duration AT1 notes. The market’s preference for duration aided in generating attractive pricing for the issuer. Priced at 10-year Treasuries plus 365 basis points, we see little upside and plenty of market-driven downside at this level. Only <a href="https://www.smartkarma.com/entities/bnp-paribas" target="_blank" data-smartkarma-citation="entities:525:1" rel="noopener">BNP Paribas' (BNP FP)</a> 4.5% coupon 2030 first call AT1 priced at a tighter spread in 10-year AT1 paper this year and BNP’s market timing was perfect.This issuance also suggests to us a sooner than expected restart of stock buybacks. To limit capital leverage, HSBC Holding’s UK regulator generally does not allow banks to issue AT1 while the firm is buying stock in the open market. Stock buybacks can deplete capital buffers faster than regular dividends and, therefore, are not AT1 investor friendly.  Taken together, a flat yield curve combined with<ul><li><ul>
<li>overpriced risk relative to ratings,</li>
<li>spreads that are tight to similar maturity senior bonds</li>
<li>capital buffers that are in-line with peers but driven by high conversion trigger levels that are not priced-in, and</li>
<li>underpriced credit default risk at the long end</li>
</ul></li></ul>leads us to conclude that the newly issued AT1 note has limited upside relative to its shorter duration cohorts.Finally, investor preference for long-duration assets in the low yield environment appears to be having a large impact on valuations. Chasing spread at this point in the cycle can be dangerous. Given better risk / return opportunities on other parts of the credit continuum, we do not recommend chasing HSBC’s new AT1 bond.

HSBC Holdings' (HSBA LN) newly issued Additional Tier 1 (AT1) bond is not worth chasing. HSBC remains adrift and a strategic reset in February could have an outsized impact on longer dated notes. We see better risk adjusted returns in lower duration securities of the issuer.HCBC’s 4.6% coupon 2030 first call AT1 bond priced in-line with similarly long-duration AT1 notes. The market’s preference for duration aided in generating attractive pricing for the issuer. Priced at 10-year Treasuries plus 365 basis points, we see little upside and plenty of market-driven downside at this level. Only BNP Paribas' (BNP FP) 4.5% coupon 2030 first call AT1 priced at a tighter spread in 10-year AT1 paper this year and BNP’s market timing was perfect.This issuance also suggests to us a sooner than expected restart of stock buybacks. To limit capital leverage, HSBC Holding’s UK regulator generally does not allow banks to issue AT1 while the firm is buying stock in the open market. Stock buybacks can deplete capital buffers faster than regular dividends and, therefore, are not AT1 investor friendly.  Taken together, a flat yield curve combined with
overpriced risk relative to ratings,
spreads that are tight to similar maturity senior bonds
capital buffers that are in-line with peers but driven by high conversion trigger levels that are not priced-in, and
underpriced credit default risk at the long end
leads us to conclude that the newly issued AT1 note has limited upside relative to its shorter duration cohorts.Finally, investor preference for long-duration assets in the low yield environment appears to be having a large impact on valuations. Chasing spread at this point in the cycle can be dangerous. Given better risk / return opportunities on other parts of the credit continuum, we do not recommend chasing HSBC’s new AT1 bond.

Equity Bottom-Up

<ul>
<li>Italian banks have big challenges, exacerbated by the covid-19 crisis</li>
<li>Now the European Commission is putting forward a recovery package, with Italy as one of the key beneficiaries, and with Italy also seeming to emerge from the worst of the crisis</li>
<li>This is by no means a panacea, but it is already leading to a tightening of BTP-Bund spreads</li>
<li>In addition, investors appear to be rotating into value and out of growth stocks, given the extreme valuation differentials between the two</li>
<li>In light of these factors, we highlight <a href="https://www.smartkarma.com/entities/unicredit-spa" target="_blank" data-smartkarma-citation="entities:21234:1" rel="noopener">UniCredit SpA (UCG IM)</a>  and <a href="https://www.smartkarma.com/entities/banco-bpm-spa" target="_blank" data-smartkarma-citation="entities:28121:1" rel="noopener">Banco BPM SpA (BAMI IM)</a> as our preferred deep value picks in Italian banks</li>
<li>Risks to our view include a worse-than-expected economic outlook with a long slow recovery, impacting NPLs adversely and the Italian banks’ ability to deliver positive returns</li>
</ul>


Italian banks have big challenges, exacerbated by the covid-19 crisis
Now the European Commission is putting forward a recovery package, with Italy as one of the key beneficiaries, and with Italy also seeming to emerge from the worst of the crisis
This is by no means a panacea, but it is already leading to a tightening of BTP-Bund spreads
In addition, investors appear to be rotating into value and out of growth stocks, given the extreme valuation differentials between the two
In light of these factors, we highlight UniCredit SpA (UCG IM)  and Banco BPM SpA (BAMI IM) as our preferred deep value picks in Italian banks
Risks to our view include a worse-than-expected economic outlook with a long slow recovery, impacting NPLs adversely and the Italian banks’ ability to deliver positive returns


Italian Banks: Value Picks in a Time of Crisis

Banco Bilbao Vizcaya Argentari / Equity Bottom-Up

<ul>
<li>European banks are at the deep value end of the equities spectrum, in the current investment climate</li>
<li>We are not, however, consigning the entire sector to the “basket case”, and we sift through the European banks universe looking for attractively valued banks with solid digital banking credentials</li>
<li>We focus on two banks that are well placed to strengthen their digital banking positions on the back of the acceleration in society’s digital shift, due to the Covid-19 pandemic</li>
<li>Aside from the challenger banks, <a href="https://www.smartkarma.com/entities/caixabank-sa" target="_blank" data-smartkarma-citation="entities:21255:1" rel="noopener">CaixaBank SA (CABK SM)</a> and <a href="https://www.smartkarma.com/entities/banco-bilbao-vizcaya-argentari" target="_blank" data-smartkarma-citation="entities:21251:1" rel="noopener">Banco Bilbao Vizcaya Argentari (BBVA SM)</a>  are both legacy banks that are leading the Spanish digital banking drive, with BBVA also a major player in Mexico, Turkey, USA and parts of South America</li>
<li>Our conclusion is that BBVA is our preferred pick, given its attractive valuations, and superior digital banking credentials across multiple geographies, and that is despite its relative weakness versus CaixaBank in capital adequacy and, to a lesser degree, in terms of credit quality</li>
<li>Risks to our view include increased competition in digital banking, as well as worse than expected credit losses in Spain, Mexico and Turkey and the latter two carry the risk of further MXN and TRY currency depreciation</li>
</ul>


European banks are at the deep value end of the equities spectrum, in the current investment climate
We are not, however, consigning the entire sector to the “basket case”, and we sift through the European banks universe looking for attractively valued banks with solid digital banking credentials
We focus on two banks that are well placed to strengthen their digital banking positions on the back of the acceleration in society’s digital shift, due to the Covid-19 pandemic
Aside from the challenger banks, CaixaBank SA (CABK SM) and Banco Bilbao Vizcaya Argentari (BBVA SM)  are both legacy banks that are leading the Spanish digital banking drive, with BBVA also a major player in Mexico, Turkey, USA and parts of South America
Our conclusion is that BBVA is our preferred pick, given its attractive valuations, and superior digital banking credentials across multiple geographies, and that is despite its relative weakness versus CaixaBank in capital adequacy and, to a lesser degree, in terms of credit quality
Risks to our view include increased competition in digital banking, as well as worse than expected credit losses in Spain, Mexico and Turkey and the latter two carry the risk of further MXN and TRY currency depreciation


European Banks: Focus on Digital Banking Pioneers Trading at Attractive Valuations

<ul>
<li>The ECB has ordered banks to freeze dividends and share buybacks, in an effort to retain banks' capital and bolster the lending capital base</li>
<li>We looked into the risk to dividends in last week's piece, <a href="https://www.smartkarma.com/insights/european-banks-dividends-in-a-time-of-crisis" target="_blank" data-smartkarma-citation="insights:37845" rel="noopener">European Banks: Dividends in a Time of Crisis</a>, focusing on the risk to dividend cuts</li>
<li>Now, the dividend yield attraction will likely be absent for all 2020 and should only add to investors concerns regarding Eurozone banks, at least in the short term</li>
<li>Furthermore, such a move by the ECB could have the unintended consequence of potentially de-railing, or at least deferring, the <a href="https://www.smartkarma.com/entities/intesa-sanpaolo-spa" target="_blank" data-smartkarma-citation="entities:21200:1" rel="noopener">Intesa Sanpaolo (ISP IM)</a> offer for <a href="https://www.smartkarma.com/entities/unione-di-banche-italiane-spa" target="_blank" data-smartkarma-citation="entities:21233:1" rel="noopener">Unione Di Banche Italiane (UBI IM)</a> thereby creating further downside risk to these shares</li>
<li>Risks to our view include that the current low PBV valuations in the Eurozone bank sector already discount much of the adverse prospects for the sector</li>
</ul>


The ECB has ordered banks to freeze dividends and share buybacks, in an effort to retain banks' capital and bolster the lending capital base
We looked into the risk to dividends in last week's piece, European Banks: Dividends in a Time of Crisis, focusing on the risk to dividend cuts
Now, the dividend yield attraction will likely be absent for all 2020 and should only add to investors concerns regarding Eurozone banks, at least in the short term
Furthermore, such a move by the ECB could have the unintended consequence of potentially de-railing, or at least deferring, the Intesa Sanpaolo (ISP IM) offer for Unione Di Banche Italiane (UBI IM) thereby creating further downside risk to these shares
Risks to our view include that the current low PBV valuations in the Eurozone bank sector already discount much of the adverse prospects for the sector


ECB Ruling on Dividends: Weaker Eurozone Banks in the Spotlight

Italy

Intesa Sanpaolo is Italy's largest banking group and a leading universal bank in Europe. It offers a wide range of financial services, including retail and commercial banking, private banking, asset management, and insurance. The company was formed in 2007 through the merger of Banca Intesa and Sanpaolo IMI, with roots tracing back to 1563. It is headquartered in Turin, Italy, with major management and operating functions in Milan.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

Intesa Sanpaolo (ISP IM)

Southern Europe Banks: Focus on Italian Banks M&A

The prospect of Italian bank sector M&A in Italy is overly penalizing Unicredit shares for the risk of a BMPS deal. With the BPM-BPER union called...

Victor Galliano

HSBC’s New AT1: Not Worth Chasing

HSBC remains adrift and a strategic reset could have an outsized impact on longer dated notes. The newly issued AT1 is not worth chasing. We see...

Hank Calenti, CFA

Italian Banks: Value Picks in a Time of Crisis

Italian banks have big challenges, exacerbated by the covid-19 crisis Now the European Commission is putting forward a recovery package, with...

Victor Galliano

European Banks: Focus on Digital Banking Pioneers Trading at Attractive Valuations

European banks are at the deep value end of the equities spectrum, in the current investment climate We are not, however, consigning the entire...

Victor Galliano

ECB Ruling on Dividends: Weaker Eurozone Banks in the Spotlight

The ECB has ordered banks to freeze dividends and share buybacks, in an effort to retain banks' capital and bolster the lending capital base We...

Victor Galliano

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)