Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

The downgrade of <a href="https://www.smartkarma.com/entities/state-bank-of-india" target="_blank" data-smartkarma-citation="entities:160:1" rel="noopener">State Bank Of India's (SBIIN)</a> US$-denominated Additional Tier 1 (AT1) bond by Moody’s Investors Service is almost certain. Nonetheless, this downgrade is already priced-in and yet it remains more expensive to own than higher rated securities. Given this dichotomy, we continue to see better value away from State Bank of India's US$-AT1 bond.

The downgrade of State Bank Of India's (SBIIN) US$-denominated Additional Tier 1 (AT1) bond by Moody’s Investors Service is almost certain. Nonetheless, this downgrade is already priced-in and yet it remains more expensive to own than higher rated securities. Given this dichotomy, we continue to see better value away from State Bank of India's US$-AT1 bond.

State Bank of India: Likely AT1 Downgrade Already Priced-In

Equity Analyst, LightStream Research

Oshadhi Kumarasiri

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Capital Markets

XP Inc is the largest digital brokerage in Brazil with about 1.5m retail clients and R$350bn in assets under custody. It is a technology driven company focusing on providing financial and brokerage services at low commission/fee rates.XP Inc filed for an IPO on NASDAQ and it is expected to start trading on 11th December 2019. The IPO price range is set at $22.00-25.00 and at the higher end of the IPO price range, XP Inc’s IPO could raise as much as $1.8bn.<table class="table table-striped"><tbody>
<tr>
<td style="width: 142.0pt;">XP Inc</td>
<td style="width: 48.0pt;"> </td>
<td style="width: 48.0pt;"> </td>
</tr>
<tr>
<td style="width: 142.0pt;">IPO Price Range</td>
<td style="width: 48.0pt;">$22.00</td>
<td style="width: 48.0pt;">$25.00</td>
</tr>
<tr>
<td style="width: 142.0pt;">New Shares</td>
<td colspan="2" style="width: 96.0pt;">42.55m</td>
</tr>
<tr>
<td style="width: 142.0pt;">Selling Shareholders</td>
<td colspan="2" style="width: 96.0pt;">29.96m</td>
</tr>
<tr>
<td style="width: 142.0pt;">IPO Size - $m</td>
<td style="width: 48.0pt;">1,595</td>
<td style="width: 48.0pt;">1,813</td>
</tr>
<tr>
<td style="width: 142.0pt;">Overallotment Option</td>
<td colspan="2" style="width: 96.0pt;">10.88m</td>
</tr>
<tr>
<td style="width: 142.0pt;">Shares Outstanding Post IPO</td>
<td colspan="2" style="width: 96.0pt;">551.80m</td>
</tr>
<tr>
<td style="width: 142.0pt;">Market Cap - $m</td>
<td style="width: 48.0pt;">12,140</td>
<td style="width: 48.0pt;">13,795</td>
</tr>
<tr>
<td style="width: 142.0pt;">EV</td>
<td style="width: 48.0pt;">11,542</td>
<td style="width: 48.0pt;">13,070</td>
</tr>
<tr>
<td style="width: 142.0pt;">EV/EBITDA - TTM</td>
<td style="width: 48.0pt;">40.3</td>
<td style="width: 48.0pt;">45.7</td>
</tr>
<tr>
<td style="width: 142.0pt;">PE - TTM</td>
<td style="width: 48.0pt;">65.1</td>
<td style="width: 48.0pt;">74.0</td>
</tr>
<tr>
<td style="width: 142.0pt;">P/B</td>
<td style="width: 48.0pt;">7.6</td>
<td style="width: 48.0pt;">8.0</td>
</tr>
<tr>
<td style="width: 142.0pt;"> </td>
<td style="width: 48.0pt;"> </td>
<td style="width: 48.0pt;"> </td>
</tr>
</tbody></table><div class="content-caption">Source: Company Disclosures</div>Use of Proceeds<ul>
<li>To meet increasing working capital requirements.</li>
<li>To accelerate customer acquisition through increased investments in marketing and advertising.</li>
<li>To invest in human resources.</li>
<li>To add new financial services verticals.</li>
<li>To fund potential future acquisitions.</li>
<li>To fund other general corporate purposes.</li>
</ul>

XP Inc is the largest digital brokerage in Brazil with about 1.5m retail clients and R$350bn in assets under custody. It is a technology driven company focusing on providing financial and brokerage services at low commission/fee rates.XP Inc filed for an IPO on NASDAQ and it is expected to start trading on 11th December 2019. The IPO price range is set at $22.00-25.00 and at the higher end of the IPO price range, XP Inc’s IPO could raise as much as $1.8bn.

XP Inc
 
 


IPO Price Range
$22.00
$25.00


New Shares
42.55m


Selling Shareholders
29.96m


IPO Size - $m
1,595
1,813


Overallotment Option
10.88m


Shares Outstanding Post IPO
551.80m


Market Cap - $m
12,140
13,795


EV
11,542
13,070


EV/EBITDA - TTM
40.3
45.7


PE - TTM
65.1
74.0


P/B
7.6
8.0


 
 
 

Source: Company DisclosuresUse of Proceeds
To meet increasing working capital requirements.
To accelerate customer acquisition through increased investments in marketing and advertising.
To invest in human resources.
To add new financial services verticals.
To fund potential future acquisitions.
To fund other general corporate purposes.


XP Inc IPO: Strong Business but Overpriced

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>
<a href="https://www.smartkarma.com/entities/itau-unibanco-holding-sa-9d47d196-e503-471b-a84e-ca4401033062" target="_blank" data-smartkarma-citation="entities:24550:1" rel="noopener">Itau Unibanco Holding Sa (ITUB4 BZ)</a> shares have outperformed <a href="https://www.smartkarma.com/entities/banco-bradesco-sa" target="_blank" data-smartkarma-citation="entities:24569:1" rel="noopener">Banco Bradesco Sa (BBDC4 BZ)</a> shares over the last six months - partly due to solid 3Q19 figures from Itau with resilience in margins, and a gain from the forthcoming XP IPO - with a widening differential in PBV ratios</li>
<li>We believe that the PBV ratio gap differential has widened out too far, with Itau's PBV ratio close to its three year peak, and we expect Itau may have more fundamental challenges going forward than Bradesco</li>
<li>We think that Itau's cost of credit already bottomed out in 4Q18, and it is taking on more risk in growing its loan portfolio share to small and medium sized corporates and credit card lending,  whilst Bradesco is more focused on payroll lending and its cost of risk to 3Q19 continues to fall</li>
<li>Itau also has the challenge of extracting higher returns from its ex-Brazil LatAm operations in Chile, Colombia and Argentina, which fall well short of the Brazil operations, with <a href="https://www.smartkarma.com/entities/itau-corpbanca" target="_blank" data-smartkarma-citation="entities:27602:1" rel="noopener">Itau CorpBanca (ITAUCORP CI)</a> improving returns but only slowly</li>
<li>One important positive argument in favour of Bradesco is the prospect of sustainably low benchmark interest rates going forward in Brazil; Bradesco's insurance and pensions operations account for a meaningful share of group earnings (c30%), and the insurance arm's returns are inversely correlated to benchmark interest rates</li>
<li>We recommend investors to go long <a href="https://www.smartkarma.com/entities/banco-bradesco-sa" target="_blank" data-smartkarma-citation="entities:24569:1" rel="noopener">Banco Bradesco Sa (BBDC4 BZ)</a> and, in a pairs trade, we would also recommend selling or shorting <a href="https://www.smartkarma.com/entities/itau-unibanco-holding-sa-9d47d196-e503-471b-a84e-ca4401033062" target="_blank" data-smartkarma-citation="entities:24550:1" rel="noopener">Itau Unibanco Holding Sa (ITUB4 BZ)</a> </li>
<li>Risks to our thesis include better than expected credit quality at <a href="https://www.smartkarma.com/entities/itau-unibanco-holding-sa-9d47d196-e503-471b-a84e-ca4401033062" target="_blank" data-smartkarma-citation="entities:24550:1" rel="noopener">Itau Unibanco Holding Sa (ITUB4 BZ)</a> driving ROE higher, and a faster turnaround at Itau Corpbanca; also poorer than expected results from Bradesco's insurance arm and worse than expected credit quality at Bradesco, leading to a higher cost of risk</li>
</ul>



Itau Unibanco Holding Sa (ITUB4 BZ) shares have outperformed Banco Bradesco Sa (BBDC4 BZ) shares over the last six months - partly due to solid 3Q19 figures from Itau with resilience in margins, and a gain from the forthcoming XP IPO - with a widening differential in PBV ratios
We believe that the PBV ratio gap differential has widened out too far, with Itau's PBV ratio close to its three year peak, and we expect Itau may have more fundamental challenges going forward than Bradesco
We think that Itau's cost of credit already bottomed out in 4Q18, and it is taking on more risk in growing its loan portfolio share to small and medium sized corporates and credit card lending,  whilst Bradesco is more focused on payroll lending and its cost of risk to 3Q19 continues to fall
Itau also has the challenge of extracting higher returns from its ex-Brazil LatAm operations in Chile, Colombia and Argentina, which fall well short of the Brazil operations, with Itau CorpBanca (ITAUCORP CI) improving returns but only slowly
One important positive argument in favour of Bradesco is the prospect of sustainably low benchmark interest rates going forward in Brazil; Bradesco's insurance and pensions operations account for a meaningful share of group earnings (c30%), and the insurance arm's returns are inversely correlated to benchmark interest rates
We recommend investors to go long Banco Bradesco Sa (BBDC4 BZ) and, in a pairs trade, we would also recommend selling or shorting Itau Unibanco Holding Sa (ITUB4 BZ) 
Risks to our thesis include better than expected credit quality at Itau Unibanco Holding Sa (ITUB4 BZ) driving ROE higher, and a faster turnaround at Itau Corpbanca; also poorer than expected results from Bradesco's insurance arm and worse than expected credit quality at Bradesco, leading to a higher cost of risk


Bradesco (BBDC4 BZ) PBV Discount to Itaú Unibanco (ITUB4 BZ) Set to Narrow

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<ul>
<li>A rising pro-market tide has lifted the big-cap banks, but now it is time to be more selective. We see further potential for stock re-rating among the Brazilian banks, as the new Bolosonaro administration executes its pro-market policies.</li>
<li>Our top pick is <a href="https://www.smartkarma.com/entities/24564" target="_blank">Banco Do Brasil Sa (BdoBAS3 BZ)</a> , with a target price of BRL57, which implies 19% re-rating potential. We believe that Banco do Brasil (BdoB) shareholders are set to benefit from less of a “social programme” agenda which in turn should help improve ROE going forward.</li>
<li>Yet the PBV discount between BdoB and its private sector peers - especially against Itaú Unibanco at 52% - has barely narrowed, and we believe that the discount has potential to narrow further as BdoB’s ROE expands and narrows the gap with its private sector peers.</li>
</ul>


A rising pro-market tide has lifted the big-cap banks, but now it is time to be more selective. We see further potential for stock re-rating among the Brazilian banks, as the new Bolosonaro administration executes its pro-market policies.
Our top pick is Banco Do Brasil Sa (BdoBAS3 BZ) , with a target price of BRL57, which implies 19% re-rating potential. We believe that Banco do Brasil (BdoB) shareholders are set to benefit from less of a “social programme” agenda which in turn should help improve ROE going forward.
Yet the PBV discount between BdoB and its private sector peers - especially against Itaú Unibanco at 52% - has barely narrowed, and we believe that the discount has potential to narrow further as BdoB’s ROE expands and narrows the gap with its private sector peers.


Brazil Banks: Banco Do Brasil Focus - Prospects for Improved Returns, Narrowing PBV Discount

Founder, Riedel Research

David Riedel

Founder

Independent equity research on GEM Markets

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Customized company reports and unlimited on-line access to the program's services.

Riedel provides research coverage of companies across the full range of market capitalization. Experienced research professionals in each market develop company reports and analysis as well as earnings models and projections. Ratings are Buy, Hold and Sell with a focus on compelling investment ideas - both long and short. Downloadable, dynamic earnings models are built to facilitate sensitivity analysis.

Please feel free to contact us for complimentary access to our written research.  We want to show you that our unique research flow can add value and help develop a long-term, high value-add relationship.

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RRG Actionable Ideas in Latin America - Finding the Balance in Volatile Markets<ul>
<li>Market uncertainty has led many clients to ask for long and short positions in various regions.</li>
<li>Starting with Latin America - Other regions to follow in the coming days.</li>
<li>In Brazil we are concerned about relative performance of one of the banks which seems to be slow to catch up to rapid digitization of banking.</li>
<li>For profit education is a good place to hid in the economic uncertainty in Brazil</li>
<li>In Mexico rising crime…</li>
</ul>

RRG Actionable Ideas in Latin America - Finding the Balance in Volatile Markets
Market uncertainty has led many clients to ask for long and short positions in various regions.
Starting with Latin America - Other regions to follow in the coming days.
In Brazil we are concerned about relative performance of one of the banks which seems to be slow to catch up to rapid digitization of banking.
For profit education is a good place to hid in the economic uncertainty in Brazil
In Mexico rising crime…


Opportunities in Brazil and Mexico - Company Specific Dynamics Drive Long/Short Recommendations

Brazil

Itau Unibanco Holding S.A. is a universal bank offering a wide range of financial services, including retail and wholesale banking, and market activities. The company provides personal loans, credit cards, mortgage loans, insurance, and asset management. Itau Unibanco is headquartered in São Paulo, Brazil, and was formed in 2008 through the merger of Banco Itaú and Unibanco.

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

Itau Unibanco (ITUB US)

State Bank of India: Likely AT1 Downgrade Already Priced-In

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XP Inc is the largest digital brokerage in Brazil with about 1.5m retail clients and R$350bn in assets under custody. It is a technology driven...

Oshadhi Kumarasiri

Bradesco (BBDC4 BZ) PBV Discount to Itaú Unibanco (ITUB4 BZ) Set to Narrow

Itau Unibanco Holding Sa (ITUB4 BZ) shares have outperformed Banco Bradesco Sa (BBDC4 BZ) shares over the last six months - partly due to solid...

Victor Galliano

Brazil Banks: Banco Do Brasil Focus - Prospects for Improved Returns, Narrowing PBV Discount

A rising pro-market tide has lifted the big-cap banks, but now it is time to be more selective. We see further potential for stock re-rating among...

Boost Research

Opportunities in Brazil and Mexico - Company Specific Dynamics Drive Long/Short Recommendations

RRG Actionable Ideas in Latin America - Finding the Balance in Volatile Markets Market uncertainty has led many clients to ask for long and short...

David Riedel

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)