Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Accelerating Tomorrow’s Independent Research

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Cross Asset Strategy

<ul>
<li>Brazil's Ex-President Michel Temer has been arrested as part of the on-going CarWash (Lava Jato) criminal investigation, on bribery and corruption charges</li>
<li>We believe that this increases the near-term downside risk to the BOVESPA index and blue chips, including the large cap banks</li>
<li>This will also, we believe, heighten the negative "noise" around pension reform, potentially increasing the complexity of the reform process; even if this development alone should not serve to derail it, in our view</li>
<li>Large cap Brazilian banks' share prices have come under pressure recently, and we would expect the market correction to continue in the short term</li>
<li>Nonetheless, we still see potential for <a href="https://www.smartkarma.com/entities/24564" target="_blank" data-smartkarma-citation="entities:24564:1">Banco Do Brasil Sa (BBAS3 BZ)</a> to re-rate over the medium term, and narrow the PBV gap with its core peers, <a href="https://www.smartkarma.com/entities/24550" target="_blank" data-smartkarma-citation="entities:24550:1">Itau Unibanco Holding Sa (ITUB4 BZ)</a> and <a href="https://www.smartkarma.com/entities/24569" target="_blank" data-smartkarma-citation="entities:24569:1">Banco Bradesco Sa (BBDC4 BZ)</a>, as Banco do Brasil's own internal restructuring takes effect</li>
</ul>


Brazil's Ex-President Michel Temer has been arrested as part of the on-going CarWash (Lava Jato) criminal investigation, on bribery and corruption charges
We believe that this increases the near-term downside risk to the BOVESPA index and blue chips, including the large cap banks
This will also, we believe, heighten the negative "noise" around pension reform, potentially increasing the complexity of the reform process; even if this development alone should not serve to derail it, in our view
Large cap Brazilian banks' share prices have come under pressure recently, and we would expect the market correction to continue in the short term
Nonetheless, we still see potential for Banco Do Brasil Sa (BBAS3 BZ) to re-rate over the medium term, and narrow the PBV gap with its core peers, Itau Unibanco Holding Sa (ITUB4 BZ) and Banco Bradesco Sa (BBDC4 BZ), as Banco do Brasil's own internal restructuring takes effect


Brazilian Political Turmoil Adds to Market Volatility, and Concerns on Pension Reform

Thematic (Sector/Industry)

<ul class="">
<li>Despite its challenges, the pension reform outlook in Brazil remains constructive, in our view; successful pension reform would create solid foundations for GDP growth, lowering fiscal account and inflationary pressures and lead to sustainably lower benchmark rates</li>
<li>A no or very limited reform scenario would leave Brazil stuck in the GDP growth slow lane, which would imply a growing fiscal deficit and rising public sector debt burden, with a need for higher benchmark rates. We believe that meaningful pension reform will be approved in 2019; but the possibility of a heavily diluted version of reforms is still a potential risk</li>
<li>The BCB's January bank sector data indicates a solid start to 2019, especially in seasonally adjusted new loan grantings driven by corporates, and in better yoy comparisons in NPL ratio and NPL coverage</li>
<li>We believe that successful pension reform should be positive for the bank sector, driving loan growth potential, as well as structural improvement in credit quality and sustainable lower benchmark interest rates. In conjunction, we see these factors as supportive for bank sector returns, with, over the medium term, the negative effect of lower credit spreads more than offset by the positive, structurally lower cost of risk from lower NPL ratios</li>
<li>The successful pension reform scenario implies further bank stock re-ratings, driven by multiple expansion. Our top pick in large cap banks is <a href="https://www.smartkarma.com/entities/24564" target="_blank" data-smartkarma-citation="entities:24564:1">Banco Do Brasil Sa (BBAS3 BZ)</a>, where the PBV discount to the private sector remains excessive; versus <a href="https://www.smartkarma.com/entities/24550" target="_blank" data-smartkarma-citation="entities:24550:1">Itau Unibanco Holding Sa (ITUB4 BZ)</a>, the PBV discount is 42% and versus <a href="https://www.smartkarma.com/entities/24569" target="_blank" data-smartkarma-citation="entities:24569:1">Banco Bradesco Sa (BBDC4 BZ)</a> the PBV discount is 39%</li>
</ul>


Despite its challenges, the pension reform outlook in Brazil remains constructive, in our view; successful pension reform would create solid foundations for GDP growth, lowering fiscal account and inflationary pressures and lead to sustainably lower benchmark rates
A no or very limited reform scenario would leave Brazil stuck in the GDP growth slow lane, which would imply a growing fiscal deficit and rising public sector debt burden, with a need for higher benchmark rates. We believe that meaningful pension reform will be approved in 2019; but the possibility of a heavily diluted version of reforms is still a potential risk
The BCB's January bank sector data indicates a solid start to 2019, especially in seasonally adjusted new loan grantings driven by corporates, and in better yoy comparisons in NPL ratio and NPL coverage
We believe that successful pension reform should be positive for the bank sector, driving loan growth potential, as well as structural improvement in credit quality and sustainable lower benchmark interest rates. In conjunction, we see these factors as supportive for bank sector returns, with, over the medium term, the negative effect of lower credit spreads more than offset by the positive, structurally lower cost of risk from lower NPL ratios
The successful pension reform scenario implies further bank stock re-ratings, driven by multiple expansion. Our top pick in large cap banks is Banco Do Brasil Sa (BBAS3 BZ), where the PBV discount to the private sector remains excessive; versus Itau Unibanco Holding Sa (ITUB4 BZ), the PBV discount is 42% and versus Banco Bradesco Sa (BBDC4 BZ) the PBV discount is 39%


Brazil Banks Outlook; Pension Reform, the Big Recession Hangover Cure?

<ul class="">
<li>The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit cards</li>
<li>De-regulation and new entrants have brought challenges for the incumbents, especially for the largest player <a href="https://www.smartkarma.com/entities/24750" target="_blank">Cielo SA (CIEL3 BZ)</a>, with the challengers taking market share, squeezing margins and promoting better service for SME merchants in particular</li>
<li>Competitive pressures continue in the Brazil payments market, reflected in the declining merchant discount rate (MDR), lower rental rates and sale prices for POS terminals, as well as pressure on the commissions for early payment of merchant receivables; the near-term prospects for Cielo remain challenging in our view</li>
<li>Due to the ongoing headwinds, we expect Cielo to show negative earnings growth to 2021; management has announced that Cielo will defend its market share against the challengers; we see further downside risk to consensus earnings and the real risk of a greater than consensus 2019 DPS cut</li>
<li>
<a href="https://www.smartkarma.com/entities/27564" target="_blank">StoneCo Ltd (STNE US)</a>and <a href="https://www.smartkarma.com/entities/27939" target="_blank">Pagseguro Digital Ltd (PAGS US)</a> are two of the payment challengers in this de-regulated market, growing faster than the Brazilian non-cash transactions market and taking incumbents' market share; we see StoneCo to be the preferred entity to PagSeguro, based on StoneCo’s higher revenue yielding SME segment of focus and on its more attractive PEG ratio valuation</li>
</ul>


The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit cards
De-regulation and new entrants have brought challenges for the incumbents, especially for the largest player Cielo SA (CIEL3 BZ), with the challengers taking market share, squeezing margins and promoting better service for SME merchants in particular
Competitive pressures continue in the Brazil payments market, reflected in the declining merchant discount rate (MDR), lower rental rates and sale prices for POS terminals, as well as pressure on the commissions for early payment of merchant receivables; the near-term prospects for Cielo remain challenging in our view
Due to the ongoing headwinds, we expect Cielo to show negative earnings growth to 2021; management has announced that Cielo will defend its market share against the challengers; we see further downside risk to consensus earnings and the real risk of a greater than consensus 2019 DPS cut

StoneCo Ltd (STNE US)and Pagseguro Digital Ltd (PAGS US) are two of the payment challengers in this de-regulated market, growing faster than the Brazilian non-cash transactions market and taking incumbents' market share; we see StoneCo to be the preferred entity to PagSeguro, based on StoneCo’s higher revenue yielding SME segment of focus and on its more attractive PEG ratio valuation


Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers

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 cautious outlook and expectation for continued downward consolidation for global equities remains intact. Broad global indexes (MSCI ACWI, ACWI ex-U.S., EAFE, and EM) are all trading within patterns of lower highs and lower lows, leading us to believe the most likely scenario is that this near-term bounce is likely nothing more than a countertrend rally before longer-term downtrends reassert themselves. The one bright spot is EM.  In this report we highlight a number of attractive set-ups within the Financial, Communication, Engineering &amp; Construction, and Transportation Sectors.

Our cautious outlook and expectation for continued downward consolidation for global equities remains intact. Broad global indexes (MSCI ACWI, ACWI ex-U.S., EAFE, and EM) are all trading within patterns of lower highs and lower lows, leading us to believe the most likely scenario is that this near-term bounce is likely nothing more than a countertrend rally before longer-term downtrends reassert themselves. The one bright spot is EM.  In this report we highlight a number of attractive set-ups within the Financial, Communication, Engineering &amp; Construction, and Transportation Sectors.

Global Equity Strategy: Bearish with the Exception of EM.

Today’s report is international in title, global in coverage. Inside, after reviewing trends in EM, Europe, and Japan--EM looks great, by the way, especially Brazil--we highlight each MSCI ACWI sector, highlighting weighting recommendations, internal themes, and stock ideas. Top-down or bottom-up, there’s actionable ideas here for everyone.

Today’s report is international in title, global in coverage. Inside, after reviewing trends in EM, Europe, and Japan--EM looks great, by the way, especially Brazil--we highlight each MSCI ACWI sector, highlighting weighting recommendations, internal themes, and stock ideas. Top-down or bottom-up, there’s actionable ideas here for everyone.

Global Equity Strategy: Sector by Sector Overview

Brazil

Itaú Unibanco Holding S.A. is a Brazilian multinational financial conglomerate and the largest bank in Latin America by market value. It offers a comprehensive suite of financial products and services, including retail and wholesale banking, investment banking, asset management, and insurance to individual and corporate clients. The company is headquartered in São Paulo, Brazil, and traces its origins to 1924, with the merger of Banco Itaú and Unibanco forming the current entity in 2008.

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Itau Unibanco (ITUB4 BR)

Brazilian Political Turmoil Adds to Market Volatility, and Concerns on Pension Reform

Brazil's Ex-President Michel Temer has been arrested as part of the on-going CarWash (Lava Jato) criminal investigation, on bribery and corruption...

Boost Research

Brazil Banks Outlook; Pension Reform, the Big Recession Hangover Cure?

Despite its challenges, the pension reform outlook in Brazil remains constructive, in our view; successful pension reform would create solid...

Boost Research

Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers

The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit...

Boost Research

Global Equity Strategy: Bearish with the Exception of EM.

Our cautious outlook and expectation for continued downward consolidation for global equities remains intact. Broad global indexes (MSCI ACWI, ACWI...

Vermilion Research

Global Equity Strategy: Sector by Sector Overview

Today’s report is international in title, global in coverage. Inside, after reviewing trends in EM, Europe, and Japan--EM looks great, by the way,...

Vermilion Research

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