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>BPCE, the co-operative banking group and majority shareholder of <a href="https://www.smartkarma.com/entities/natixis-sa" target="_blank" data-smartkarma-citation="entities:21493:1" rel="noopener">Natixis SA (KN FP)</a> , is offering €4 per share to 29.3% owned by Natixis minority shareholders</li>
<li>Since the replacement of Francois Riahi as CEO by Nicolas Namais last August, Natixis has been brought under closer control by BPCE</li>
<li>We believe that this move will tighten BPCE control and accelerate the restructuring in the asset management and investment banking arenas</li>
<li>Even though this deal is a specific case, in broader terms, it reflects there is appetite for banking deals at current valuations, and that European bank M&amp;A is largely focused on intra-country deals, as has recently been seen in Spain and Italy</li>
<li>A successful offer would result in Natixis being delisting and it implies a “take out” PBV ratio of 0.7x and PE multiple of 15.8x for 2021, based on consensus estimates, which should be appealing to minorities</li>
<li>Risks to our constructive views on European banks M&amp;A prospects include regulatory hurdles, at the national and supra-national levels, as well as capital constraints and credit quality challenges</li>
</ul>


BPCE, the co-operative banking group and majority shareholder of Natixis SA (KN FP) , is offering €4 per share to 29.3% owned by Natixis minority shareholders
Since the replacement of Francois Riahi as CEO by Nicolas Namais last August, Natixis has been brought under closer control by BPCE
We believe that this move will tighten BPCE control and accelerate the restructuring in the asset management and investment banking arenas
Even though this deal is a specific case, in broader terms, it reflects there is appetite for banking deals at current valuations, and that European bank M&amp;A is largely focused on intra-country deals, as has recently been seen in Spain and Italy
A successful offer would result in Natixis being delisting and it implies a “take out” PBV ratio of 0.7x and PE multiple of 15.8x for 2021, based on consensus estimates, which should be appealing to minorities
Risks to our constructive views on European banks M&amp;A prospects include regulatory hurdles, at the national and supra-national levels, as well as capital constraints and credit quality challenges


Natixis (KN FP) - BPCE: European Bank Consolidation Rolls On

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

Our bullish outlook continues to be supported by ongoing positive market dynamics and the absence of breakdowns for major indexes around the globe. The path of least resistance remains higher and we continue to believe a melt-up is likely in the weeks/months ahead. The global Technology, Discretionary, and Manufacturing Sectors remain leadership -- add exposure/remain overweight. The Financial Sector has been playing catch-up and continues to show signs of price and RS bottoms as expectations rise for a global recovery -- add exposure.

Our bullish outlook continues to be supported by ongoing positive market dynamics and the absence of breakdowns for major indexes around the globe. The path of least resistance remains higher and we continue to believe a melt-up is likely in the weeks/months ahead. The global Technology, Discretionary, and Manufacturing Sectors remain leadership -- add exposure/remain overweight. The Financial Sector has been playing catch-up and continues to show signs of price and RS bottoms as expectations rise for a global recovery -- add exposure.

Global Equity Strategy: Santa Claus Rally Underway

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.

<ul>
<li>The elephant in the Italian bank M&amp;A room is government controlled <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>, which needs to find a merger partner in 2021; will that be <a href="https://www.smartkarma.com/entities/unicredit-spa" target="_blank" data-smartkarma-citation="entities:21234:1" rel="noopener">UniCredit SpA (UCG IM)</a>, post-Mustier, and who could be its new CEO?</li>
<li>We believe that, in the event of a Unicredit acquisition of BMPS, it would require meaningful “government sponsorship”; in effect, for BMPS, pre-deal, to dispose of the bulk of its NPLs – which is underway – and for a capital infusion that renders the deal to be capital neutral for Unicredit</li>
<li>The other big M&amp;A unknowns relate to the listed mid-cap banks especially <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>; these banks need to cut costs and branch networks, which can be more readily incorporated into a merger restructuring plan</li>
<li>We believe that the risk of a BMPS acquisition is largely priced into Unicredit shares, and we expect its wide PBV discount to premium valued <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> to narrow;  our recommendation is to go long Unicredit, short Intesa</li>
<li>We think <a href="https://www.smartkarma.com/entities/credit-agricole-sa" target="_blank" data-smartkarma-citation="entities:21373:1" rel="noopener">Credit Agricole Sa (ACA FP)</a> is unlikely to sweeten the <a href="https://www.smartkarma.com/entities/credito-valtellinese-spa" target="_blank" data-smartkarma-citation="entities:21175:1" rel="noopener">Credito Valtellinese Sc (CVAL IM)</a> cash offer of €10.50 per share, and with CreVal shares trading at a 7% offer premium, there could be downside risk</li>
<li>We remain negative on Banco BPM shares, as, in the wake of the CredAg offer for CreVal, we believe that BPM’s options are limited, and that it may be the potential “back-stop” merger candidate with BMPS, in the event of no deal with Unicredit; the alternative could be a BPM-BPER merger, and we turn constructive on BPER, after its protracted underperformance</li>
<li>Risks to our view include Unicredit acquiring BMPS on worse than expected terms, with Intesa on the other hand delivering better than expected synergies and savings from the UBI integration; other risks also include a bidder emerging for BPM, as well as no merger or bid for BPER</li>
</ul>


The elephant in the Italian bank M&amp;A room is government controlled Banca Monte dei Paschi di Siena (BMPS IM), which needs to find a merger partner in 2021; will that be UniCredit SpA (UCG IM), post-Mustier, and who could be its new CEO?
We believe that, in the event of a Unicredit acquisition of BMPS, it would require meaningful “government sponsorship”; in effect, for BMPS, pre-deal, to dispose of the bulk of its NPLs – which is underway – and for a capital infusion that renders the deal to be capital neutral for Unicredit
The other big M&amp;A unknowns relate to the listed mid-cap banks especially Banco BPM SpA (BAMI IM) and BPER Banca S.p.A (BPE IM); these banks need to cut costs and branch networks, which can be more readily incorporated into a merger restructuring plan
We believe that the risk of a BMPS acquisition is largely priced into Unicredit shares, and we expect its wide PBV discount to premium valued Intesa Sanpaolo (ISP IM) to narrow;  our recommendation is to go long Unicredit, short Intesa
We think Credit Agricole Sa (ACA FP) is unlikely to sweeten the Credito Valtellinese Sc (CVAL IM) cash offer of €10.50 per share, and with CreVal shares trading at a 7% offer premium, there could be downside risk
We remain negative on Banco BPM shares, as, in the wake of the CredAg offer for CreVal, we believe that BPM’s options are limited, and that it may be the potential “back-stop” merger candidate with BMPS, in the event of no deal with Unicredit; the alternative could be a BPM-BPER merger, and we turn constructive on BPER, after its protracted underperformance
Risks to our view include Unicredit acquiring BMPS on worse than expected terms, with Intesa on the other hand delivering better than expected synergies and savings from the UBI integration; other risks also include a bidder emerging for BPM, as well as no merger or bid for BPER


Italian Banks M&A Scenarios: The Italian Job in 2021

Silver Point

Thomas J. Monaco

Independent Insight Provider

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

* ECB Potentially Killing Dividends: The European Central Bank (ECB) is likely to make a final decision next week on whether to allow banks to pay dividends in 2020 from 2019 results. The ECB leaning towards not allowing banks to pay dividends;*Asia-Pacific Likely To Follow: The financial sectors of Japan, Australia, mainland China, and India had been experiencing feeling capital pressures prior to COVID-19, now the entire Asia-Pacific regions would appear to be in the same boat. As such, we look for the entire region to follow the ECB’s lead on dividends – possibly even some of the ECB’s more ridiculous capital forbearance moves; and    *Europeans Banks Not Likely At Risk: BNP Paribas (BNP.FP) and Intesa Sanpaolo (ISP.IM) likely have the best lobbying power to pay a dividend in the event that national regulators are given the discretion to allow dividends. On a regulatory capital basis, as noted in our “DNB ASA – Window to Be Constructive Is Now Open” report dated July 13, 2020, DNB ASA (DNB.NO) remains best positioned to resume dividend payment and share buybacks, as CET1 is already back in compliance with pre-COV-19 capital target excluding all regulatory forbearance.

* ECB Potentially Killing Dividends: The European Central Bank (ECB) is likely to make a final decision next week on whether to allow banks to pay dividends in 2020 from 2019 results. The ECB leaning towards not allowing banks to pay dividends;*Asia-Pacific Likely To Follow: The financial sectors of Japan, Australia, mainland China, and India had been experiencing feeling capital pressures prior to COVID-19, now the entire Asia-Pacific regions would appear to be in the same boat. As such, we look for the entire region to follow the ECB’s lead on dividends – possibly even some of the ECB’s more ridiculous capital forbearance moves; and    *Europeans Banks Not Likely At Risk: BNP Paribas (BNP.FP) and Intesa Sanpaolo (ISP.IM) likely have the best lobbying power to pay a dividend in the event that national regulators are given the discretion to allow dividends. On a regulatory capital basis, as noted in our “DNB ASA – Window to Be Constructive Is Now Open” report dated July 13, 2020, DNB ASA (DNB.NO) remains best positioned to resume dividend payment and share buybacks, as CET1 is already back in compliance with pre-COV-19 capital target excluding all regulatory forbearance.

ECB Dividend Action Likely Leads to Similar Moves In Asia

Italy

Intesa Sanpaolo attracts deposits and offers banking and financial services. The Bank offers consumer credit, asset management, Internet banking, merchant banking, securities brokerage, factoring, and lease financing services, and manages mutual funds.  Intesa Sanpaolo operates branches throughout Italy, and offices elsewhere in Europe, Asia, and the United States.

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Intesa Sanpaolo (ISP IM)

Natixis (KN FP) - BPCE: European Bank Consolidation Rolls On

Even if this case is specific , BPCE's offer for Natixis shows that European bank consolidation continues, mainly on an intra-national level; we...

Victor Galliano

Global Equity Strategy: Santa Claus Rally Underway

Our bullish outlook continues to be supported by ongoing positive market dynamics and the absence of breakdowns across indexes, and we continue to...

Vermilion Research

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 M&A Scenarios: The Italian Job in 2021

Italian banks M&A is gathering and we take a largely contrarian stance on stocks; pairs trade long Unicredit, short Intesa; positive on BPER,...

Victor Galliano

ECB Dividend Action Likely Leads to Similar Moves In Asia

* ECB Potentially Killing Dividends: The European Central Bank (ECB) is likely to make a final decision next week on whether to allow banks to pay...

Thomas J. Monaco

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