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>We screen 30 European banks for their core profitability and their credit quality and coverage post 2Q21 results</li>
<li>The aim is to identify banks that are good value and have potential to deliver sustainably higher dividends going forward</li>
<li>We use a number of metrics including pre-provision and post-provision profit, cost of risk and credit quality</li>
<li>We highlight <a href="https://www.smartkarma.com/entities/lloyds-banking-group-plc" target="_blank" data-smartkarma-citation="entities:21009:1" rel="noopener">Lloyds Banking (LLOY LN)</a> and <a href="https://www.smartkarma.com/entities/bankinter-sa" target="_blank" data-smartkarma-citation="entities:21253:1" rel="noopener">Bankinter SA (BKT SM)</a> and stick with <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> and <a href="https://www.smartkarma.com/entities/credit-suisse-group-ag-f4b24f0c-c294-40b3-b491-759f0cb277e9" target="_blank" data-smartkarma-citation="entities:27915:1" rel="noopener">Credit Suisse Group AG (CSGN SW)</a> from the 1Q21 review</li>
<li>We are cautious on <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> and <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered (STAN LN)</a> </li>
<li>Risks to our view include, for our bullish calls, worse than expected cost of risk, opex and fee generation; for our bear calls, better than expected revenue generation with opex control leading to higher dividend prospects</li>
</ul>


We screen 30 European banks for their core profitability and their credit quality and coverage post 2Q21 results
The aim is to identify banks that are good value and have potential to deliver sustainably higher dividends going forward
We use a number of metrics including pre-provision and post-provision profit, cost of risk and credit quality
We highlight Lloyds Banking (LLOY LN) and Bankinter SA (BKT SM) and stick with Credit Agricole Sa (ACA FP) and Credit Suisse Group AG (CSGN SW) from the 1Q21 review
We are cautious on Intesa Sanpaolo (ISP IM) and Standard Chartered (STAN LN) 
Risks to our view include, for our bullish calls, worse than expected cost of risk, opex and fee generation; for our bear calls, better than expected revenue generation with opex control leading to higher dividend prospects


European & UK Banks; Screening for Investment Opportunities

<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

<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

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 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.

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Intesa Sanpaolo (ISP IM)

European & UK Banks; Screening for Investment Opportunities

We screen banks’ core earnings & credit quality to identify banks that are good value & can deliver higher dividends - we like Lloyds, BankInter,...

Victor Galliano

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

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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