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>Among EM banks, our top picks are Sberbank in Russia, Banco do Brasil and HDFC Bank in India; we are negative on recent IPO Nubank due to inflated market expectations</li>
<li>Our top picks for 2022 are BBVA and Banco BPM for Southern Europe banks. In Exchanges, we are positive on B3 of Brazil and SGX</li>
<li>In payments, we like Mastercard and Pagseguro, but we are negative on Paytm; we see BTG Pactual as an attractive pick and winner in the digital wealth managers and brokers</li>
</ul>


Among EM banks, our top picks are Sberbank in Russia, Banco do Brasil and HDFC Bank in India; we are negative on recent IPO Nubank due to inflated market expectations
Our top picks for 2022 are BBVA and Banco BPM for Southern Europe banks. In Exchanges, we are positive on B3 of Brazil and SGX
In payments, we like Mastercard and Pagseguro, but we are negative on Paytm; we see BTG Pactual as an attractive pick and winner in the digital wealth managers and brokers


2022 High Conviction Ideas in FinTech & Financials

<ul>
<li>
<a href="https://www.smartkarma.com/entities/xp-inc" target="_blank" data-smartkarma-citation="entities:28619:1" rel="noopener">XP Inc (XP US)</a>’s 1Q21 results were solid, with an improving take rate and good cost control especially relating to Independent Financial Advisors (IFAs) in the quarter</li>
<li>XP’s valuations are underpinned by its growth story, and the ability to take market share in Brazilian wealth management from the incumbents, these being the large established banks</li>
<li>The reality is that other disruptors in wealth management are competing aggressively for IFAs and new clients, namely <a href="https://www.smartkarma.com/entities/banco-btg-pactual-sa" target="_blank" data-smartkarma-citation="entities:28665:1" rel="noopener">Banco BTG Pactual SA (BPAC11 BZ)</a>, Modal and EasyInvest to name but a few</li>
<li>In particular, the IFA network “arms race” is intensifying, especially between the leaders XP and BTG Pactual; XP is allegedly taking legal action against an IFA group switching to BTG Pactual</li>
<li>This is negative for XP’s earnings and returns prospects, in our view, in terms of lost retail revenue and increased opex pressure, with XP, on its premium valuations, potentially harbouring more downside risk</li>
<li>Risks to our view include XP’s ability to better contain cost pressures as well as its ability to deliver revenue growth from institutional and issuer services segments</li>
</ul>



XP Inc (XP US)’s 1Q21 results were solid, with an improving take rate and good cost control especially relating to Independent Financial Advisors (IFAs) in the quarter
XP’s valuations are underpinned by its growth story, and the ability to take market share in Brazilian wealth management from the incumbents, these being the large established banks
The reality is that other disruptors in wealth management are competing aggressively for IFAs and new clients, namely Banco BTG Pactual SA (BPAC11 BZ), Modal and EasyInvest to name but a few
In particular, the IFA network “arms race” is intensifying, especially between the leaders XP and BTG Pactual; XP is allegedly taking legal action against an IFA group switching to BTG Pactual
This is negative for XP’s earnings and returns prospects, in our view, in terms of lost retail revenue and increased opex pressure, with XP, on its premium valuations, potentially harbouring more downside risk
Risks to our view include XP’s ability to better contain cost pressures as well as its ability to deliver revenue growth from institutional and issuer services segments


XP (XP US): The IFA “arms Race” Is Turning Nasty

Thematic (Sector/Industry)

<ul>
<li>We think of value based on traditional valuation metrics, such as PE multiples and PBV ratios, and supplement these by metrics like PE to growth ratios to identify the more attractive names amongst growth – including FinTech – stocks</li>
<li>In Brazil, we continue to like <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>  and we add <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> to the attractive value category</li>
<li>We turn cautious on Brazilian challenger <a href="https://www.smartkarma.com/entities/banco-inter-sa" target="_blank" data-smartkarma-citation="entities:28162:1" rel="noopener">Banco Inter SA (BIDI11 BZ)</a>, based on valuation; it trades on a consensus 2022E PBV ratio of 17.8x and even compared to Nubank’s estimated valuation, and those of other digital banks, Inter seems expensive</li>
<li>In Mexico, <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> is much more of a positive consensus recommendation, yet we still believe that the stock has further to run</li>
<li>There is heightened political risk in Peru; <a href="https://www.smartkarma.com/entities/credicorp-ltd" target="_blank" data-smartkarma-citation="entities:25963:1" rel="noopener">Credicorp Ltd (BAP US)</a>  has de-rated and is a stock to watch</li>
<li>Among the LatAm payments companies, we are positive on <a href="https://www.smartkarma.com/entities/pagseguro-digital-ltd" target="_blank" data-smartkarma-citation="entities:27939:1" rel="noopener">Pagseguro Digital Ltd (PAGS US)</a> </li>
<li>Despite its premium growth in AUM, we are cautious on <a href="https://www.smartkarma.com/entities/xp-inc" target="_blank" data-smartkarma-citation="entities:28619:1" rel="noopener">XP Inc (XP US)</a>, due to eroding take rate and rising IFA costs</li>
<li>In exchanges, <a href="https://www.smartkarma.com/entities/b3-sa-brasil-bolsa-balcao" target="_blank" data-smartkarma-citation="entities:24580:1" rel="noopener">B3 Sa - Brasil Bolsa Balcao (B3SA3 BZ)</a>’s valuations have descended from the stratosphere but we believe that this stock could have further downside risk</li>
<li>Risks to our positive view on Banco do Brasil and Bradesco include higher than expected NPLs and lower than expected credit spreads, as well as soft fee growth; similar risks apply to Banorte, BanBajio and in the case of Credicorp we also add political risk; Banco Inter’s upside risks include better than expected opex control especially on new customer acquisition driving better than expected returns; XP upside risks include higher than expected take rate and lower than expected opex, and B3 could deliver stronger than expected revenue growth in FICC and derivatives especially</li>
</ul>


We think of value based on traditional valuation metrics, such as PE multiples and PBV ratios, and supplement these by metrics like PE to growth ratios to identify the more attractive names amongst growth – including FinTech – stocks
In Brazil, we continue to like Banco Do Brasil Sa (BBAS3 BZ)  and we add Banco Bradesco Sa (BBDC4 BZ) to the attractive value category
We turn cautious on Brazilian challenger Banco Inter SA (BIDI11 BZ), based on valuation; it trades on a consensus 2022E PBV ratio of 17.8x and even compared to Nubank’s estimated valuation, and those of other digital banks, Inter seems expensive
In Mexico, Grupo Financiero Banorte-O (GFNORTEO MF) is much more of a positive consensus recommendation, yet we still believe that the stock has further to run
There is heightened political risk in Peru; Credicorp Ltd (BAP US)  has de-rated and is a stock to watch
Among the LatAm payments companies, we are positive on Pagseguro Digital Ltd (PAGS US) 
Despite its premium growth in AUM, we are cautious on XP Inc (XP US), due to eroding take rate and rising IFA costs
In exchanges, B3 Sa - Brasil Bolsa Balcao (B3SA3 BZ)’s valuations have descended from the stratosphere but we believe that this stock could have further downside risk
Risks to our positive view on Banco do Brasil and Bradesco include higher than expected NPLs and lower than expected credit spreads, as well as soft fee growth; similar risks apply to Banorte, BanBajio and in the case of Credicorp we also add political risk; Banco Inter’s upside risks include better than expected opex control especially on new customer acquisition driving better than expected returns; XP upside risks include higher than expected take rate and lower than expected opex, and B3 could deliver stronger than expected revenue growth in FICC and derivatives especially


LatAm Financials Review: Focus on the Value Opportunities

<ul>
<li>The investor rotation into value focusing in on EM and DM banks; our key picks are <a href="https://www.smartkarma.com/entities/credicorp-ltd" target="_blank" data-smartkarma-citation="entities:25963:1" rel="noopener">Credicorp Ltd (BAP US)</a>, <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>, <a href="https://www.smartkarma.com/entities/commercial-international-bank" target="_blank" data-smartkarma-citation="entities:27625:1" rel="noopener">Commercial International Bank (COMI EY)</a> in EM banks, and <a href="https://www.smartkarma.com/entities/unicredit-spa" target="_blank" data-smartkarma-citation="entities:21234:1" rel="noopener">UniCredit SpA (UCG IM)</a>, <a href="https://www.smartkarma.com/entities/caixabank-sa" target="_blank" data-smartkarma-citation="entities:21255:1" rel="noopener">CaixaBank SA (CABK SM)</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> in Southern Europe banks</li>
<li>Exchanges and Big Data, the convergence; <a href="https://www.smartkarma.com/entities/intercontinental-exchange-inc" target="_blank" data-smartkarma-citation="entities:10221:1" rel="noopener">Intercontinental Exchange (ICE US)</a> is strong on recurring revenues, and both ICE and <a href="https://www.smartkarma.com/entities/s-p-global-inc" target="_blank" data-smartkarma-citation="entities:9735:1" rel="noopener">S&amp;P Global Inc. (SPGI US)</a> should deliver shareholder value creation from transformative M&amp;A</li>
<li>Potential for premium growth and returns in digital payments; we like <a href="https://www.smartkarma.com/entities/nexi-spa" target="_blank" data-smartkarma-citation="entities:28921:1" rel="noopener">Nexi SpA (NEXI IM)</a>, where we see clear benefits from its M&amp;A, and we see <a href="https://www.smartkarma.com/entities/paypal-holdings-inc" target="_blank" data-smartkarma-citation="entities:4747:1" rel="noopener">Paypal Holdings (PYPL US)</a> as a core holding</li>
<li>Digital wealth managers focus on the mass affluent; <a href="https://www.smartkarma.com/entities/finecobank-banca-fineco-spa" target="_blank" data-smartkarma-citation="entities:21188:1" rel="noopener">Finecobank Banca Fineco (FBK IM)</a> stands out in Europe, <a href="https://www.smartkarma.com/entities/xp-inc" target="_blank" data-smartkarma-citation="entities:28619:1" rel="noopener">XP Inc (XP US)</a> is the leader in Brazil but looks over-valued and exposed to increased competition, in our view</li>
<li>Risks to our positive views on our themes includes slower than expected growth in digital payments, transactions and increased regulation on big data; a slower than expected global GDP recovery also could adversely impact bank fundamentals</li>
</ul>


The investor rotation into value focusing in on EM and DM banks; our key picks are Credicorp Ltd (BAP US), Turkiye Garanti Bankasi As (GARAN TI), Commercial International Bank (COMI EY) in EM banks, and UniCredit SpA (UCG IM), CaixaBank SA (CABK SM), and BPER Banca S.p.A (BPE IM) in Southern Europe banks
Exchanges and Big Data, the convergence; Intercontinental Exchange (ICE US) is strong on recurring revenues, and both ICE and S&amp;P Global Inc. (SPGI US) should deliver shareholder value creation from transformative M&amp;A
Potential for premium growth and returns in digital payments; we like Nexi SpA (NEXI IM), where we see clear benefits from its M&amp;A, and we see Paypal Holdings (PYPL US) as a core holding
Digital wealth managers focus on the mass affluent; Finecobank Banca Fineco (FBK IM) stands out in Europe, XP Inc (XP US) is the leader in Brazil but looks over-valued and exposed to increased competition, in our view
Risks to our positive views on our themes includes slower than expected growth in digital payments, transactions and increased regulation on big data; a slower than expected global GDP recovery also could adversely impact bank fundamentals


FinTech & Financial Investment Themes 2021

Equity Capital Markets

<ul>
<li>In the follow-on issue, the primary portion announced by <a href="https://www.smartkarma.com/entities/xp-inc" target="_blank" data-smartkarma-citation="entities:28619:1" rel="noopener">XP Inc (XP US)</a>  is small relative to its current market value (c 1.5%), but coupled with the Itaú partial disposal of a maximum 4.3% stake in XP, it creates a clear share over-hang</li>
<li>In addition, <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>’s spin-off of its remaining stake in XP (c 41.2% post follow-on) into single-purpose company named NewCo was approved by its board on 26<sup>th</sup> November, and shares in the forthcoming NewCo are exempt from any lock-up agreement</li>
<li>HoldCo <a href="https://www.smartkarma.com/entities/itausa-investimentos-itau-pr" target="_blank" data-smartkarma-citation="entities:24513:1" rel="noopener">Itausa-Investimentos Itau-Pr (ITSA4 BZ)</a> will become a large shareholder in XP post Itaú Unibanco’s spin-off, and although it has stated that it does not intend to dispose of its stake in the short term, Itausa does not consider the XP stake as a long term, strategic holding</li>
<li>The spin-off, lack of lock-up for spun-off shares and Itausa’s non-strategic classification of its XP holding creates further medium term over-hang for XP shares, in our view, post the follow-on issue; add to this the challenging fundamental outlook (especially related to the IFA “arms race”) and XP’s demanding valuations, it all contributes to our caution on XP shares</li>
<li>We prefer indirect, and diluted, exposure through holdco Itausa, in which we estimate Itausa will have an 15.6% economic stake in XP post follow-on issue and NewCo formation</li>
<li>Risks to our view include better than expected fundamental performance by XP, and less than expected pressure on costs related to incentives for IFAs, which would continue to drive premium growth and justify the premium multiples, and smaller than expected secondary share offerings in XP over the medium term</li>
</ul>


In the follow-on issue, the primary portion announced by XP Inc (XP US)  is small relative to its current market value (c 1.5%), but coupled with the Itaú partial disposal of a maximum 4.3% stake in XP, it creates a clear share over-hang
In addition, Itau Unibanco Holding Sa (ITUB4 BZ)’s spin-off of its remaining stake in XP (c 41.2% post follow-on) into single-purpose company named NewCo was approved by its board on 26th November, and shares in the forthcoming NewCo are exempt from any lock-up agreement
HoldCo Itausa-Investimentos Itau-Pr (ITSA4 BZ) will become a large shareholder in XP post Itaú Unibanco’s spin-off, and although it has stated that it does not intend to dispose of its stake in the short term, Itausa does not consider the XP stake as a long term, strategic holding
The spin-off, lack of lock-up for spun-off shares and Itausa’s non-strategic classification of its XP holding creates further medium term over-hang for XP shares, in our view, post the follow-on issue; add to this the challenging fundamental outlook (especially related to the IFA “arms race”) and XP’s demanding valuations, it all contributes to our caution on XP shares
We prefer indirect, and diluted, exposure through holdco Itausa, in which we estimate Itausa will have an 15.6% economic stake in XP post follow-on issue and NewCo formation
Risks to our view include better than expected fundamental performance by XP, and less than expected pressure on costs related to incentives for IFAs, which would continue to drive premium growth and justify the premium multiples, and smaller than expected secondary share offerings in XP over the medium term


XP (XP US) Follow-On Issue Highlights Over-Hang, Potential for More Share Sales Post Itaú Spin-Off

Brazil

XP Inc operates as an investment management company. The Company offers fixed income, equities, investment funds, and private pension products, as well as offers wealth management and other financial services. XP serves customers in Brazil.

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XP (XP US)

2022 High Conviction Ideas in FinTech & Financials

Our 2022 high conviction ideas include buys on Sberbank, Banco do Brasil and HDFC Bank, as well as BBVA, Banco BPM, B3, SGX, Mastercard and...

Victor Galliano

XP (XP US): The IFA “arms Race” Is Turning Nasty

In Brazilian wealth management, the "arms race" for IFAs is intensifying, especially between XP & BTG Pactual; XP, with its premium valuation, is...

Victor Galliano

LatAm Financials Review: Focus on the Value Opportunities

We identify the most attractive LatAm financials on value and GARP metrics; Banco do Brasil, Bradesco, Banorte, BanBajio, PagSeguro; we are...

Victor Galliano

FinTech & Financial Investment Themes 2021

Our key 2021 investment themes and ideas in EM and S Europe banks, exchanges and data providers, digital payments companies and digital wealth...

Victor Galliano

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

2022 High Conviction Ideas in FinTech & Financials

Our 2022 high conviction ideas include buys on Sberbank, Banco do Brasil and HDFC Bank, as well as BBVA, Banco BPM, B3, SGX, Mastercard and...

Victor Galliano

XP (XP US): The IFA “arms Race” Is Turning Nasty

In Brazilian wealth management, the "arms race" for IFAs is intensifying, especially between XP & BTG Pactual; XP, with its premium valuation, is...

Victor Galliano

LatAm Financials Review: Focus on the Value Opportunities

We identify the most attractive LatAm financials on value and GARP metrics; Banco do Brasil, Bradesco, Banorte, BanBajio, PagSeguro; we are...

Victor Galliano

FinTech & Financial Investment Themes 2021

Our key 2021 investment themes and ideas in EM and S Europe banks, exchanges and data providers, digital payments companies and digital wealth...

Victor Galliano

XP (XP US) Follow-On Issue Highlights Over-Hang, Potential for More Share Sales Post Itaú Spin-Off

Post XP's follow-on, we see the spin-off, lack of lock-up for spun-off shares and Itausa’s non-strategic view of its XP shares adding to risk of...

Victor Galliano