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>We screen the 4Q20 results for credit quality and value, of those GEM banks that have reported to date</li>
<li>Specifically we identify <a href="https://www.smartkarma.com/entities/credicorp-ltd" target="_blank" data-smartkarma-citation="entities:25963:1" rel="noopener">Credicorp Ltd (BAP US)</a> in Peru as a banking group well placed to benefit from recovery in 2021; its credit quality metrics are sound and high quality, and it is an attractive GARP choice</li>
<li>
<a href="https://www.smartkarma.com/entities/grupo-financiero-banorte-o" target="_blank" data-smartkarma-citation="entities:24780:1" rel="noopener">Grupo Financiero Banorte-O (GFNORTEO MF)</a> screens well, in our view, from both credit quality metrics and value parameters</li>
<li>Despite <a href="https://www.smartkarma.com/entities/banco-do-brasil-sa" target="_blank" data-smartkarma-citation="entities:24564:1" rel="noopener">Banco Do Brasil Sa (BBAS3 BZ)</a>’s healthy credit quality metrics, this is now overshadowed by corporate governance concerns for Brazil SOEs following the Petrobras CEO’s abrupt removal</li>
<li>Outside LatAm, select private sector Indian banks seem to screen well on credit quality, but valuations are demanding; public sector bank <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 (SBIN IN)</a> is the deep value but relatively high risk name in India. An alternative higher risk GEM bank on attractive valuations is <a href="https://www.smartkarma.com/entities/turkiye-garanti-bankasi-as" target="_blank" data-smartkarma-citation="entities:25026:1" rel="noopener">Turkiye Garanti Bankasi As (GARAN TI)</a> in Turkey</li>
<li>Risks to our positive view on Credicorp include increased political uncertainty in Peru, as well as a weaker than expected recovery leading to worsen than expected credit quality  and weak loan growth</li>
</ul>


We screen the 4Q20 results for credit quality and value, of those GEM banks that have reported to date
Specifically we identify Credicorp Ltd (BAP US) in Peru as a banking group well placed to benefit from recovery in 2021; its credit quality metrics are sound and high quality, and it is an attractive GARP choice

Grupo Financiero Banorte-O (GFNORTEO MF) screens well, in our view, from both credit quality metrics and value parameters
Despite Banco Do Brasil Sa (BBAS3 BZ)’s healthy credit quality metrics, this is now overshadowed by corporate governance concerns for Brazil SOEs following the Petrobras CEO’s abrupt removal
Outside LatAm, select private sector Indian banks seem to screen well on credit quality, but valuations are demanding; public sector bank State Bank Of India (SBIN IN) is the deep value but relatively high risk name in India. An alternative higher risk GEM bank on attractive valuations is Turkiye Garanti Bankasi As (GARAN TI) in Turkey
Risks to our positive view on Credicorp include increased political uncertainty in Peru, as well as a weaker than expected recovery leading to worsen than expected credit quality  and weak loan growth


GEM Bank Credit Quality and Value Screens; the 4Q20 Story so Far

Event-Driven

<ul>
<li>
<a href="https://www.smartkarma.com/entities/banco-bilbao-vizcaya-argentari" target="_blank" data-smartkarma-citation="entities:21251:1" rel="noopener">Banco Bilbao Vizcaya Argentari (BBVA SM)</a>  and <a href="https://www.smartkarma.com/entities/banco-de-sabadell-sa" target="_blank" data-smartkarma-citation="entities:21295:1" rel="noopener">Banco De Sabadell SA (SAB SM)</a> have broken off merger discussions</li>
<li>BBVA management can potentially deliver shareholder value through a potential share buyback, but plans o redeploy surplus capital in its core EM markets could increase perceived risk and limit the size of the buyback</li>
<li>Sabadell’s intentions to deliver improved returns, on a stand-alone basis, are, in our view, challenged by its lack of scale, the negative interest rate climate, as well as the TSB drag</li>
<li>Even after today’s sharp fall in the Sabadell share price, we would recommend a short on Sabadell shares – with no M&amp;A premium, Sabadell’s PBV ratio could fall back to close to 0.10x</li>
<li>Risks to our bearish view on Sabadell include finding buyer for TSB in the near term, as well as the potential for another domestic merger with either Liberbank or Unicaja</li>
</ul>



Banco Bilbao Vizcaya Argentari (BBVA SM)  and Banco De Sabadell SA (SAB SM) have broken off merger discussions
BBVA management can potentially deliver shareholder value through a potential share buyback, but plans o redeploy surplus capital in its core EM markets could increase perceived risk and limit the size of the buyback
Sabadell’s intentions to deliver improved returns, on a stand-alone basis, are, in our view, challenged by its lack of scale, the negative interest rate climate, as well as the TSB drag
Even after today’s sharp fall in the Sabadell share price, we would recommend a short on Sabadell shares – with no M&amp;A premium, Sabadell’s PBV ratio could fall back to close to 0.10x
Risks to our bearish view on Sabadell include finding buyer for TSB in the near term, as well as the potential for another domestic merger with either Liberbank or Unicaja


Merger Undone: Tougher Outlook for Sabadell, BBVA Plans Buybacks and EM M&A

Banco Bilbao Vizcaya Argentari / Event-Driven

<ul>
<li>In our view, the PNC-BBVA USA Bancshares deal reflects the trend towards “in country” domestic bank consolidation in developed markets, given very low interest rates, the pressure on fees and the need to focus on opex reduction</li>
<li>The attractive price tag of USD11.6bn (€9.7bn) provides <a href="https://www.smartkarma.com/entities/banco-bilbao-vizcaya-argentari" target="_blank" data-smartkarma-citation="entities:21251:1" rel="noopener">Banco Bilbao Vizcaya Argentari (BBVA SM)</a> with a big capital uplift at a limited cost to earnings; it reflects a historic (2019A) PE multiple of 19.7x and PTBV ratio of 1.34x, equivalent to 45% of market cap on at the close of 13th November</li>
<li>The US commercial bank disposal also gives BBVA a 294bps boost to its core capital ratio, which stood at 11.52% at 3Q20 end, and post deal would result in CET1 ratio of c 14.5%</li>
<li>Even though BBVA’s disposal will be EPS dilutive post-deal, the cost of foregone earnings is relatively low, given the sale price; USA Bancshares accounted for less than 10% of groups earnings in 2019 and 13% of the group’s gross income in the first nine months of 2020</li>
<li>BBVA management intends to redeploy capital in its core markets, and also has the option to do a large share buy-back at current share prices, ECB permitting</li>
<li>The big question is how management will focus on excess capital redeployment through potential M&amp;A going forward, and will look to redress the earnings split between its core emerging (c 70%) and developed markets (c 30%), post this disposal; we put forward our views on M&amp;A options in this report</li>
<li>Risks to our positive view on BBVA include the ECB maintaining strict regulatory constraints on a share buyback; also that BBVA is selling its USA franchise at a relatively low point in the macro-economic cycle</li>
</ul>


In our view, the PNC-BBVA USA Bancshares deal reflects the trend towards “in country” domestic bank consolidation in developed markets, given very low interest rates, the pressure on fees and the need to focus on opex reduction
The attractive price tag of USD11.6bn (€9.7bn) provides Banco Bilbao Vizcaya Argentari (BBVA SM) with a big capital uplift at a limited cost to earnings; it reflects a historic (2019A) PE multiple of 19.7x and PTBV ratio of 1.34x, equivalent to 45% of market cap on at the close of 13th November
The US commercial bank disposal also gives BBVA a 294bps boost to its core capital ratio, which stood at 11.52% at 3Q20 end, and post deal would result in CET1 ratio of c 14.5%
Even though BBVA’s disposal will be EPS dilutive post-deal, the cost of foregone earnings is relatively low, given the sale price; USA Bancshares accounted for less than 10% of groups earnings in 2019 and 13% of the group’s gross income in the first nine months of 2020
BBVA management intends to redeploy capital in its core markets, and also has the option to do a large share buy-back at current share prices, ECB permitting
The big question is how management will focus on excess capital redeployment through potential M&amp;A going forward, and will look to redress the earnings split between its core emerging (c 70%) and developed markets (c 30%), post this disposal; we put forward our views on M&amp;A options in this report
Risks to our positive view on BBVA include the ECB maintaining strict regulatory constraints on a share buyback; also that BBVA is selling its USA franchise at a relatively low point in the macro-economic cycle


BBVA: So Long, Sun-Belt – What Next; Buybacks and Potentially M&A?

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Risk markets rallied on expectations that a meaningful economic restart will be brought forward following news of <a href="https://www.smartkarma.com/entities/pfizer-inc" target="_blank" data-smartkarma-citation="entities:1131:1" rel="noopener">Pfizer's (PFE US)</a> preliminary success rate of 90% in its Coronavirus vaccine trials. Combined with a Goldilocks election outcome whereby President Trump loses the election, but Joe Biden does not win a mandate, Caa rated corporates continued to tighten by more than the Asia High Yield (HY) index and other components of the US HY complex.Following two days of initial euphoria, markets consolidated on news of increased Coronavirus contagion. The growing footprint of Coronavirus related, pre-Christmas, restrictions across Europe and the US may be a headwind for economic growth over the near term.In the rate markets, a sharp jump in US yields early in the week retraced as the week progressed and attracted end-user buying, particularly in Asia. Japanese investors were reported to have been strong buyers of 7- to 10-year Treasuries. One of the developing risks at this point is that the reflation trade does not resurface while federal stimulus is constrained, and near-term economic prospects reduce. A tepid increase in yields could limit the effectiveness of any fresh Fed action. Against this background, almost all Asia-headquartered bonds tightened relative to their benchmark spreads as vaccine progress and US Treasury curve steepening increased prospects for higher net interest margins. Amongst Additional Tier 1 bonds, Thai-headquartered banks led advances as the Bank of Thailand lifted a dividend ban and stated that the financial institutions have sufficient capital and loan-loss provisions to withstand the impact of COVID-19. This sounds like cheer-leading and we are tempted to fade this rally. Concurrently, Turkish HY Senior Unsecured bank bonds materially outperformed their global peers in anticipation of more orthodox monetary and economic policies. Given the starting point for a potential Turkish bank bond rally, we may see higher returns from Turkish- as opposed to Thai-bank bonds.In the debt capital markets, over US$30 billion was raised by financial institutions in USD, Euros and Sterling across the credit continuum. When we noted last week that issuers were likely to bring 2021 issuance needs forward, we did not anticipate a flood like this. In what may have been the busiest bank bond issuance week of the year, the amount issued was almost one-half the amount brought in the prior eight weeks.Market Outlook: Over the near term, positive vaccine news combined with a goldilocks US election outcome lowers the likelihood of excessive US federal stimulus. This should cap additional upward pressure on US Treasury yields until vision increases on likely H2 ’21 US economic growth, post-vaccine distribution. Reflation remains on hold. This could limit US dollar weakness and limit positive impacts on reflationary beneficiaries such as bank valuations and Emerging Markets (EM) assets. Over the medium term, a less expansionary US fiscal policy should reduce upward pressure on U.S. rates and is likely to support yield-seeking, including EM fixed income securities over time.

Risk markets rallied on expectations that a meaningful economic restart will be brought forward following news of Pfizer's (PFE US) preliminary success rate of 90% in its Coronavirus vaccine trials. Combined with a Goldilocks election outcome whereby President Trump loses the election, but Joe Biden does not win a mandate, Caa rated corporates continued to tighten by more than the Asia High Yield (HY) index and other components of the US HY complex.Following two days of initial euphoria, markets consolidated on news of increased Coronavirus contagion. The growing footprint of Coronavirus related, pre-Christmas, restrictions across Europe and the US may be a headwind for economic growth over the near term.In the rate markets, a sharp jump in US yields early in the week retraced as the week progressed and attracted end-user buying, particularly in Asia. Japanese investors were reported to have been strong buyers of 7- to 10-year Treasuries. One of the developing risks at this point is that the reflation trade does not resurface while federal stimulus is constrained, and near-term economic prospects reduce. A tepid increase in yields could limit the effectiveness of any fresh Fed action. Against this background, almost all Asia-headquartered bonds tightened relative to their benchmark spreads as vaccine progress and US Treasury curve steepening increased prospects for higher net interest margins. Amongst Additional Tier 1 bonds, Thai-headquartered banks led advances as the Bank of Thailand lifted a dividend ban and stated that the financial institutions have sufficient capital and loan-loss provisions to withstand the impact of COVID-19. This sounds like cheer-leading and we are tempted to fade this rally. Concurrently, Turkish HY Senior Unsecured bank bonds materially outperformed their global peers in anticipation of more orthodox monetary and economic policies. Given the starting point for a potential Turkish bank bond rally, we may see higher returns from Turkish- as opposed to Thai-bank bonds.In the debt capital markets, over US$30 billion was raised by financial institutions in USD, Euros and Sterling across the credit continuum. When we noted last week that issuers were likely to bring 2021 issuance needs forward, we did not anticipate a flood like this. In what may have been the busiest bank bond issuance week of the year, the amount issued was almost one-half the amount brought in the prior eight weeks.Market Outlook: Over the near term, positive vaccine news combined with a goldilocks US election outcome lowers the likelihood of excessive US federal stimulus. This should cap additional upward pressure on US Treasury yields until vision increases on likely H2 ’21 US economic growth, post-vaccine distribution. Reflation remains on hold. This could limit US dollar weakness and limit positive impacts on reflationary beneficiaries such as bank valuations and Emerging Markets (EM) assets. Over the medium term, a less expansionary US fiscal policy should reduce upward pressure on U.S. rates and is likely to support yield-seeking, including EM fixed income securities over time.

Bank Credit Weekly: Vaccine Rally, Then Consolidation, Drives Outperformance & Turkey Vs Thai Banks

Asian bank high yield (HY) Tier 2 bonds are perceived to have lower extension risk than their global Emerging Market peers. Combined with relatively lower spread levels, Asian bank Tier 2 bonds may not look good value; however, this overlooks the value of call certainty. The call versus non-call decision makes a difference to investor returns.We find that the gain from not calling <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia's (23 HK)</a> 4% coupon 2021 callable Tier 2 bond is lowest amongst Asian-headquartered banks. This is reflected in the bond’s relatively low spreads. At the same time, the potential gain from not calling Dah Sing Bank’s 2024 callable Tier 2 bond is highest amongst Asian-headquartered banks. This is not reflected in the bond’s relative low spread, not should it be at this point in time.Meanwhile, perceived extension risk is relatively high for the 2022 callable Tier 2 bonds of some Turkish banks. This may suggest market concerns regarding both the willingness to call and, given their low bond ratings, the ability to source sufficient US$ liquidity to retire these bonds.In this, the second of a series of notes on Tier 2 debt instruments, we undertake an assessment of the perceived non-call risk in Asia-headquartered bank bonds as compared to higher yielding bonds in other Emerging Markets. Future reports will consider fundamental perspectives as we identify our top picks and pans in this segment of the bank credit continuum.

Asian bank high yield (HY) Tier 2 bonds are perceived to have lower extension risk than their global Emerging Market peers. Combined with relatively lower spread levels, Asian bank Tier 2 bonds may not look good value; however, this overlooks the value of call certainty. The call versus non-call decision makes a difference to investor returns.We find that the gain from not calling Bank of East Asia's (23 HK) 4% coupon 2021 callable Tier 2 bond is lowest amongst Asian-headquartered banks. This is reflected in the bond’s relatively low spreads. At the same time, the potential gain from not calling Dah Sing Bank’s 2024 callable Tier 2 bond is highest amongst Asian-headquartered banks. This is not reflected in the bond’s relative low spread, not should it be at this point in time.Meanwhile, perceived extension risk is relatively high for the 2022 callable Tier 2 bonds of some Turkish banks. This may suggest market concerns regarding both the willingness to call and, given their low bond ratings, the ability to source sufficient US$ liquidity to retire these bonds.In this, the second of a series of notes on Tier 2 debt instruments, we undertake an assessment of the perceived non-call risk in Asia-headquartered bank bonds as compared to higher yielding bonds in other Emerging Markets. Future reports will consider fundamental perspectives as we identify our top picks and pans in this segment of the bank credit continuum.

Asian Bank HY Tier 2: Extension Risk Perceptions Vs Global Emerging Market Peers

Turkey

Turkiye Garanti Bankasi A.S. attracts deposits and offers retail and commercial banking services.  The Group offers lease financing, insurance, asset management, securities brokerage, automobile and mortgage loans, credit cards, and other financial services.  Turkiye Garanti Bankasi operates in Turkey, the Netherlands, Germany, Romania, Russia, Luxembourg, Malta, and Bahrain.

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Turkiye Garanti Bankasi As (GARAN TI)

GEM Bank Credit Quality and Value Screens; the 4Q20 Story so Far

Screening GEM banks for sound credit quality and capital metrics among those that have reported 4Q20; of the standouts, we highlight Credicorp for...

Victor Galliano

Merger Undone: Tougher Outlook for Sabadell, BBVA Plans Buybacks and EM M&A

Merger breakup equals the end of merger premium for Sabadell shares; despite the share price drop, it is challenged by its lack of scale, the...

Victor Galliano

BBVA: So Long, Sun-Belt – What Next; Buybacks and Potentially M&A?

BBVA's sale of its US bank will give it excess capital to redeploy, in both share buybacks and potentially M&A too; we explore some potential M&A...

Victor Galliano

Bank Credit Weekly: Vaccine Rally, Then Consolidation, Drives Outperformance & Turkey Vs Thai Banks

Positive vaccine news and the US election result lowers the likelihood of excessive US stimulus. This should cap pressure on Treasury yields and...

Hank Calenti, CFA

Asian Bank HY Tier 2: Extension Risk Perceptions Vs Global Emerging Market Peers

Asian bank high yield (HY) Tier 2 bonds are perceived to have lower extension risk than their global Emerging Market peers. Combined with...

Hank Calenti, CFA

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