In this briefing:
- Intesa Swoops on UBI for a Win-Win Deal
- HDFC AMC
- Banco Do Brasil (BBAS3 BZ): Actuarial Adjustments to Capital – Are We Nearly There?
- HSBC – Move Along, There’s Nothing To See Here
- SBI Cards and Payment IPO: Valuation Insights
Intesa Sanpaolo (ISP IM) today announced one of the largest and certainly one of the boldest bank takeovers in Europe in the past ten years in an all-share deal for Unione Di Banche Italiane (UBI IM), Italy’s 5th largest lender and probably the strongest among the second tier.
The thing is, it’s hostile/unsolicited.
And it’s all shares – which is relatively unusual – executed through a Voluntary Public Exchange Offer.
Various media are reporting that the deal was launched without informing UBI’s board, on the day after UBI presented its 2022 Strategic Plan (which among other things included cutting 2000+ jobs, the closure of 175 branches in the next three years, and a plan for a 40% payout ratio).
The announcement by Intesa Sanpaolo is laudatory of UBI:
Intesa Sanpaolo considers UBI Banca amongst the best Italian banks. UBI Banca has local entrenchment in the most dynamic regions of the country, enjoys outstanding results that have been achieved thanks to the excellent job of both its CEO and its management team, and has a sound Business Plan. All this can continue to be achieved and be indeed further enhanced in the combined Group. UBI Banca stands out for its similarities with Intesa Sanpaolo, specifically as regards the business model and the corporate values – many UBI Banca managers have had previous job experience at the Intesa Sanpaolo Group. In view of the shared corporate values in terms of sustainability and inclusion and social and environmental responsibility, a new unit of the combined Group’s Impact Bank will be based in Brescia and in Bergamo. The presence of the large number of Italian shareholders of UBI Banca, specifically the foundations, among the shareholders of the combined Group would reinforce the shared values, including in terms of shareholder base.
The Intesa announcement is here, and the UBI 2022 Strategic Plan is here.
Early days, and UBI is trading 5% through terms almost immediately, on what could be short-covering given the declared shorts in the name.
More discussion below.
HDFC Asset Management Co Ltd (HDFCAMC IN) is our preferred Asset Management play in spite of rich valuations thanks to the HDFC Parentage. With a focus on Individual Investor, HDFC AMC has carved out a unique space in the asset management industry, which offers substantial revenue visibility backed with strong industry tailwinds.
A strong fund management team, high market share in B30 cities, and growth in preference for Equity as an asset class by individual investors are some of the key catalysts which could help maintain AAUM Growth.
Our Target Price based on 45x FY21 EPS works out INR 3,334.50 offering a mere 3% return over the previous close of INR 3,244. Investors with a short term horizon will be better off waiting for an attractive entry point that can provide a more attractive return.
However, the HDFC Parentage and strong structural tailwinds in the Industry keep us bullish on this stock.
- Banco Do Brasil Sa (BBAS3 BZ) delivered a solid 4Q19 to broadly comply with all aspects of its 2019 guidance, even if loan growth was at the lower end of the range
- Credit quality trends are constructive, with new NPL formation very low and healthy NPL coverage
- On the balance sheet, one fly in the ointment of the YE 2019 report is the lack of core capital build in terms of CET1, due mainly to the full implementation of Basel III, but more significantly due to actuarial adjustments
- Banco do Brasil has reduced its discount rate on its pension fund liabilities, as domestic interest rates and sovereign bond yields have declined, since 2Q18 which has led to actuarial adjustments that have hit Banco do Brasil’s equity most recently in 4Q19
- We have seen this movie before, at the publication of 2Q19 results; the difference now is that we believe the discount rate is close to where it needs to be, over the long term, with the current historically low Brazilian real interest rates likely to limit the risk of further downward adjustments
- Banco Do Brasil Sa (BBAS3 BZ) is our core value pick in the big-cap LatAm banks; it is one of the most attractive of Brazilian and LatAm big-cap banks based on earnings and dividend yield
- Risks to our assumptions for Banco do Brasil include significantly lower than expected Brazilian inflation driving interest – and discount – rates lower and hitting core capital with deductions, along with worse than expected credit quality and higher than expected opex
It was 20 years ago that HSBC Holdings (5 HK) bought CCF in France. The conservative Scottish lender paid USD10.6bn for the French bank that had shareholders’ equity of USD3.2bn in 1999. Perhaps this was another poor purchase, at an inflated price? We all know the more fabled story of Household International, which become HSBC Finance, and forever changed the face of HSBC Holdings. The results just out once again show how past poor decisions are not always historical events. HSBC recorded a USD7.3bn goodwill impairment charge for Europe, causing a loss during 4Q19.
SBI Cards (SBICARDS IN) is the second-largest credit card issuer in India, with an 18.0% market share of the Indian credit card market as measured by the number of credit cards outstanding as of 30 September 2019. SBI Cards will likely raise around Rs95 billion ($1.3 billion) at a valuation of Rs600 billion ($8.4 billion) and the IPO will be launched in the first week of March, according to press reports.
In our initiation note, we stated that peeling back the benefit of market growth, SBI Cards’ fundamentals offer more positives than negatives. Our valuation analysis suggests that that the rumoured Rs600 billion valuation will be attractive particularly for growth-oriented investors.