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>Despite the compression in the Brazil digital banks’ multiples from the FinTech de-rating, big fundamental hurdles remain, especially for Nubank</li>
<li>Nubank is delivering on increased loan penetration and this should drive revenue growth; still, this also drives higher and front loaded provisioning charges along with capital absorption</li>
<li>Banco Inter is less challenged than Nubank on most metrics, and it is modestly profitable, but we believe it is too early to turn positive; we like Banco do Brasil</li>
</ul>


Despite the compression in the Brazil digital banks’ multiples from the FinTech de-rating, big fundamental hurdles remain, especially for Nubank
Nubank is delivering on increased loan penetration and this should drive revenue growth; still, this also drives higher and front loaded provisioning charges along with capital absorption
Banco Inter is less challenged than Nubank on most metrics, and it is modestly profitable, but we believe it is too early to turn positive; we like Banco do Brasil


Brazil Digital Banks – Nubank and Banco Inter Shares Have De-Rated, but Still Face Challenges

Event-Driven

<ul>
<li>Itausa is trading at a stated 24.4% discount to the HoldCo’s NAV, with the discount having widened sharply since last month; we turn positive on Itausa</li>
<li>We believe that the discount under-estimates the stated NAV; separate from Itausa’s stake in XP, Itaú Unibanco, in which Itausa holds a 37.2% stake, has a direct 11.36% XP stake</li>
<li>Adding its indirect XP stake share to Itausa’s NAV implies a discount of 26.1%; since December 2008, only on 11% of the month end datapoints has Itausa’s discount exceeded 25%</li>
</ul>


Itausa is trading at a stated 24.4% discount to the HoldCo’s NAV, with the discount having widened sharply since last month; we turn positive on Itausa
We believe that the discount under-estimates the stated NAV; separate from Itausa’s stake in XP, Itaú Unibanco, in which Itausa holds a 37.2% stake, has a direct 11.36% XP stake
Adding its indirect XP stake share to Itausa’s NAV implies a discount of 26.1%; since December 2008, only on 11% of the month end datapoints has Itausa’s discount exceeded 25%


Itausa (ITSA4 BZ) – Historically Wide, and Potentially Understated, NAV Discount

<ul>
<li>Itaú Unibanco’s acquisition of an 11.36% stake in XP in April is no strategic move; it is a contractual obligation that remained, after the regulator blocked Itaú’s acquisition plans</li>
<li>This adds to the existing overhang in XP shares, given that fellow XP shareholder Itausa deems its 11.5% XP stake to be non-strategic, having already made disposals through block trades</li>
<li>We remain cautious on XP shares based on the disposal overhang and competitive pressures in Brazilian wealth management undermining XP’s fundamentals; near term, Itausa warrants monitoring on its NAV discount</li>
</ul>


Itaú Unibanco’s acquisition of an 11.36% stake in XP in April is no strategic move; it is a contractual obligation that remained, after the regulator blocked Itaú’s acquisition plans
This adds to the existing overhang in XP shares, given that fellow XP shareholder Itausa deems its 11.5% XP stake to be non-strategic, having already made disposals through block trades
We remain cautious on XP shares based on the disposal overhang and competitive pressures in Brazilian wealth management undermining XP’s fundamentals; near term, Itausa warrants monitoring on its NAV discount


XP (XP US) – Less Demanding Valuations, but the Overhang Still Weighs

<ul>
<li>Itausa is trading at an 19.6% discount to the HoldCo’s NAV, with the discount narrowing sharply over the last two months</li>
<li>In addition, after a big increase in the dividend per share announced due to 2021 results, we believe that it is unlikely to see another big increase going forward</li>
<li>Banco Itaú Unibanco, Itausa’s largest investment, is positively geared to the hiking interest rate cycle by the Brazil central bank; we prefer direct exposure to the bank versus the holdco</li>
</ul>


Itausa is trading at an 19.6% discount to the HoldCo’s NAV, with the discount narrowing sharply over the last two months
In addition, after a big increase in the dividend per share announced due to 2021 results, we believe that it is unlikely to see another big increase going forward
Banco Itaú Unibanco, Itausa’s largest investment, is positively geared to the hiking interest rate cycle by the Brazil central bank; we prefer direct exposure to the bank versus the holdco


Itausa (ITSA4 BZ) – Too Narrow a NAV Discount, and the Dividend Yield Is No Longer Compelling

<ul>
<li>Banco do Brasil is the clear value pick among LatAm banks, with sound credit quality and capital metrics as well as positive asset sensitivity on a delayed basis</li>
<li>Itaú Unibanco is the most asset sensitive of the Brazilian banks, with its large consumer exposure, and it shows positive trends in terms of asset quality</li>
<li>Santander Brasil has greater credit quality headwinds than peers and is the least asset sensitive of the big four peers, with Bradesco’s positive asset sensitivity repricing more slowly</li>
</ul>


Banco do Brasil is the clear value pick among LatAm banks, with sound credit quality and capital metrics as well as positive asset sensitivity on a delayed basis
Itaú Unibanco is the most asset sensitive of the Brazilian banks, with its large consumer exposure, and it shows positive trends in terms of asset quality
Santander Brasil has greater credit quality headwinds than peers and is the least asset sensitive of the big four peers, with Bradesco’s positive asset sensitivity repricing more slowly


Brazil Banks: Our Picks on Asset Sensitivity and Credit Quality Are Itaú Unibanco & Banco Do Brasil

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)

Brazil Digital Banks – Nubank and Banco Inter Shares Have De-Rated, but Still Face Challenges

The Brazil digital banks' high loan penetration should drive revenue growth, but this also accelerates NPL formation, provisioning charges and...

Victor Galliano

Itausa (ITSA4 BZ) – Historically Wide, and Potentially Understated, NAV Discount

Itausa's NAV discount of c25% drives our positive view; with Itausa's indirect XP stake share, the discount reaches 26%; over 162 monthly...

Victor Galliano

XP (XP US) – Less Demanding Valuations, but the Overhang Still Weighs

XP's less demanding valuation is not enough, in our view, to offset the big share overhang, and competition in Brazil wealth management is...

Victor Galliano

Itausa (ITSA4 BZ) – Too Narrow a NAV Discount, and the Dividend Yield Is No Longer Compelling

Itausa's NAV discount has narrowed sharply, it has little scope of dividend growth, and is selling down its XP stake at a tricky moment; we prefer...

Victor Galliano

Brazil Banks: Our Picks on Asset Sensitivity and Credit Quality Are Itaú Unibanco & Banco Do Brasil

Itaú Unibanco, the most asset sensitive big-cap Brazil bank, benefits from the BCB's recent monetary tightening, with Banco do Brasil & its sound...

Victor Galliano

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