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>Brazil’s credit quality trends to May remain broadly positive</li>
<li>Loan growth on a YoY basis is steady in the mid-teens</li>
<li>Compared to April, consumer credit quality seems controlled and arrears (15-90 days delay) data is an encouraging signal for medium-term NPLs</li>
<li>Credit quality of corporates shows that risks are increasing in micro-enterprises and SMEs whereas large corporate NPLs are well contained</li>
<li>NPLs are rising fastest in the case of public sector banks, yet these are well covered by provisions as in the banking system generally</li>
<li>Credit spreads trended lower in May for individual borrowers</li>
<li>We continue to see value in the sector and find <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> attractive</li>
<li>Risks to positive view on these big cap Brazil banks include worse than expected credit quality, weak opex control and erosion of credit spreads</li>
</ul>


Brazil’s credit quality trends to May remain broadly positive
Loan growth on a YoY basis is steady in the mid-teens
Compared to April, consumer credit quality seems controlled and arrears (15-90 days delay) data is an encouraging signal for medium-term NPLs
Credit quality of corporates shows that risks are increasing in micro-enterprises and SMEs whereas large corporate NPLs are well contained
NPLs are rising fastest in the case of public sector banks, yet these are well covered by provisions as in the banking system generally
Credit spreads trended lower in May for individual borrowers
We continue to see value in the sector and find Banco Do Brasil Sa (BBAS3 BZ) attractive
Risks to positive view on these big cap Brazil banks include worse than expected credit quality, weak opex control and erosion of credit spreads


Brazil Bank Sector Trends to May in Ten Charts

<ul>
<li>We screen 35 GEM Banks in this report with its accompanying charts, and identify the following names as investment opportunities</li>
<li>In LatAm, we highlight <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> , <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> and <a href="https://www.smartkarma.com/entities/credicorp-ltd" target="_blank" data-smartkarma-citation="entities:25963:1" rel="noopener">Credicorp Ltd (BAP US)</a> </li>
<li>In Asia, our preferred stocks are <a href="https://www.smartkarma.com/entities/postal-savings-bank-of-china" target="_blank" data-smartkarma-citation="entities:22848:1" rel="noopener">Postal Savings Bank of China (1658 HK)</a> , <a href="https://www.smartkarma.com/entities/china-construction-bank-h" target="_blank" data-smartkarma-citation="entities:45:1" rel="noopener">China Construction Bank H (939 HK)</a> , <a href="https://www.smartkarma.com/entities/hana-financial-group" target="_blank" data-smartkarma-citation="entities:12843:1" rel="noopener">Hana Financial (086790 KS)</a> and <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> </li>
<li>
<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> and <a href="https://www.smartkarma.com/entities/sberbank-of-russia-pjsc-cde59529-fb78-4659-85d0-127942b44ba7" target="_blank" data-smartkarma-citation="entities:27581:1" rel="noopener">Sberbank of Russia PJSC (SBER RM)</a> stand out in CEMEA</li>
<li>Risks to our positive view on these select GEM banks include worse than expected GDP growth leading to worse than anticipated credit quality and slower than expected loan growth, along with limited investor appetite for GEM banks</li>
</ul>


We screen 35 GEM Banks in this report with its accompanying charts, and identify the following names as investment opportunities
In LatAm, we highlight Banco Do Brasil Sa (BBAS3 BZ) , Grupo Financiero Banorte-O (GFNORTEO MF) and Credicorp Ltd (BAP US) 
In Asia, our preferred stocks are Postal Savings Bank of China (1658 HK) , China Construction Bank H (939 HK) , Hana Financial (086790 KS) and State Bank Of India (SBIN IN) 

Commercial International Bank (COMI EY) and Sberbank of Russia PJSC (SBER RM) stand out in CEMEA
Risks to our positive view on these select GEM banks include worse than expected GDP growth leading to worse than anticipated credit quality and slower than expected loan growth, along with limited investor appetite for GEM banks


Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: A liquidity driven melt-up combined with month-end rebalancing to drive bank credit spread performance over the last week. Remove the month-end rebalancing and short duration positioning may remain the best strategy over the next few weeks, absent a material inflection point in the upcoming non-farm payroll numbers. The short end of the rates market continued to push investors up the curve to generate returns. Awash with still rising liquidity, this melt-up was the key driver of credit spread outperformance.Risk asset volatility and talking about, talking about, talking about tapering had little lasting impact on US interest rates over the last few weeks. In fact, rate curve flattening, and falling forward breakeven rates, suggest that the interest rate market may buy the Fed’s assessment of inflation as being transitory.While the transitory mantra is believed, whispers of supply driven growth constraints are being mentioned. This would be interest rate and credit spread positive as it would extend the duration of the recovery and thereby delay late-stage economic cycle repositioning. Although not consensus, this thought is disconcerting, as it suggests the rising rates consensus is very wrong.Therefore, the risk is clearly that the rates market is underpricing the potential for an extended period of higher than anticipated inflation. However, holding cash is expensive. Moving too early to position for higher or longer than anticipated inflation may be career ending. Extending duration to take advantage of declining rates is considered insane. Carry trades remain unloved. Ergo, the silent self-doubtful suffering of the rate and credit markets. Security selection based on fundamental analysis, in so much as one avoids unexpected spread widening, may be the differentiator for outsized total returns over the next few weeks.  We elaborate on these themes within.Market Outlook: The question is whether the over-heating narrative will make a comeback and bring rate and tapering expectations closer. Financial stability risks appear binary from here. Either the Fed is over-accommodative, and it sits on its hands too long while asset bubbles over-inflate so that it gets nasty when it moves, or the Fed gets impatient, and it lowers accommodation unexpectedly which creates a risk off reaction. In both cases, curves flatten in a risk-off environment. We suspect the former is more likely, and for now, the Fed remains the bartender rather than the bouncer.

Executive Summary: A liquidity driven melt-up combined with month-end rebalancing to drive bank credit spread performance over the last week. Remove the month-end rebalancing and short duration positioning may remain the best strategy over the next few weeks, absent a material inflection point in the upcoming non-farm payroll numbers. The short end of the rates market continued to push investors up the curve to generate returns. Awash with still rising liquidity, this melt-up was the key driver of credit spread outperformance.Risk asset volatility and talking about, talking about, talking about tapering had little lasting impact on US interest rates over the last few weeks. In fact, rate curve flattening, and falling forward breakeven rates, suggest that the interest rate market may buy the Fed’s assessment of inflation as being transitory.While the transitory mantra is believed, whispers of supply driven growth constraints are being mentioned. This would be interest rate and credit spread positive as it would extend the duration of the recovery and thereby delay late-stage economic cycle repositioning. Although not consensus, this thought is disconcerting, as it suggests the rising rates consensus is very wrong.Therefore, the risk is clearly that the rates market is underpricing the potential for an extended period of higher than anticipated inflation. However, holding cash is expensive. Moving too early to position for higher or longer than anticipated inflation may be career ending. Extending duration to take advantage of declining rates is considered insane. Carry trades remain unloved. Ergo, the silent self-doubtful suffering of the rate and credit markets. Security selection based on fundamental analysis, in so much as one avoids unexpected spread widening, may be the differentiator for outsized total returns over the next few weeks.  We elaborate on these themes within.Market Outlook: The question is whether the over-heating narrative will make a comeback and bring rate and tapering expectations closer. Financial stability risks appear binary from here. Either the Fed is over-accommodative, and it sits on its hands too long while asset bubbles over-inflate so that it gets nasty when it moves, or the Fed gets impatient, and it lowers accommodation unexpectedly which creates a risk off reaction. In both cases, curves flatten in a risk-off environment. We suspect the former is more likely, and for now, the Fed remains the bartender rather than the bouncer.

Bank Credit Weekly: Month-End Rebalancing Takes Risk-Off Before Take-Off

<ul>
<li>Brazil’s credit quality trends to April seem positive, on balance</li>
<li>Compared to March, there appear to be less concerning consumer credit quality and arrears (15-90 days delay) data</li>
<li>Credit quality to corporates shows that  even though credit risks are rising, the rate of growth is “shallow” in both large corporates as well as micro-enterprises and SMEs</li>
<li>In essence, we believe that credit quality risks may be moderating going forward, especially in higher risk consumer and in micro-enterprise and SME categories</li>
<li>In addition, the bank system’s generally high provisioning levels relative to delinquency provides a healthy buffer, in our view</li>
<li>Credit spreads ticked lower in April, and are still well below their recent highs of early 2020</li>
<li>We continue to see value in the sector and find <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 <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> attractive</li>
<li>Risks to positive view on these big cap Brazil banks include worse than expected credit quality, weak opex control and erosion of credit spreads</li>
</ul>


Brazil’s credit quality trends to April seem positive, on balance
Compared to March, there appear to be less concerning consumer credit quality and arrears (15-90 days delay) data
Credit quality to corporates shows that  even though credit risks are rising, the rate of growth is “shallow” in both large corporates as well as micro-enterprises and SMEs
In essence, we believe that credit quality risks may be moderating going forward, especially in higher risk consumer and in micro-enterprise and SME categories
In addition, the bank system’s generally high provisioning levels relative to delinquency provides a healthy buffer, in our view
Credit spreads ticked lower in April, and are still well below their recent highs of early 2020
We continue to see value in the sector and find Banco Do Brasil Sa (BBAS3 BZ) and Banco Bradesco Sa (BBDC4 BZ) attractive
Risks to positive view on these big cap Brazil banks include worse than expected credit quality, weak opex control and erosion of credit spreads


Brazil Bank Sector Trends to April in Ten Charts

<ul>
<li>
<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> is a leading digital bank in Brazil, only second to Nubank in scale and scope, with over 10m clients at the end of March 2021</li>
<li>It is also seeing accelerating loan growth to 1Q21 and broadening its service base deriving fees from its services and shopping platform</li>
<li>Yet, even on comparable FinTech valuations, as well as on the PEG ratio metric, Banco Inter’s market value seems stretched</li>
<li>In addition, given the acceleration in loan growth and the resultant absorption in capital, we see a real risk of a further equity cash call in coming quarters</li>
<li>We explore three scenarios for Banco Inter in this report; in our view, none of these scenarios’ implied returns make Banco Inter stock compelling at current valuations</li>
<li>Banco Inter’s upside risks include better than expected opex control especially on new customer acquisition driving better than expected returns</li>
</ul>



Banco Inter SA (BIDI11 BZ) is a leading digital bank in Brazil, only second to Nubank in scale and scope, with over 10m clients at the end of March 2021
It is also seeing accelerating loan growth to 1Q21 and broadening its service base deriving fees from its services and shopping platform
Yet, even on comparable FinTech valuations, as well as on the PEG ratio metric, Banco Inter’s market value seems stretched
In addition, given the acceleration in loan growth and the resultant absorption in capital, we see a real risk of a further equity cash call in coming quarters
We explore three scenarios for Banco Inter in this report; in our view, none of these scenarios’ implied returns make Banco Inter stock compelling at current valuations
Banco Inter’s upside risks include better than expected opex control especially on new customer acquisition driving better than expected returns


Banco Inter (BIDI11 BZ): Too Much Optimism Built into Valuations

Brazil

Banco do Brasil S.A. attracts deposits and offers retail and commercial banking services.  The Bank offers consumer, commercial, and agribusiness loans, asset management, foreign exchange, private pension, insurance, lease financing, credit cards, and Internet banking services.

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Banco do Brasil (BBAS3 BZ)

Brazil Bank Sector Trends to May in Ten Charts

Brazil system YoY loan growth to May accelerated, with mixed credit quality data; NPLs worse in consumer credit but arrears are improving; SME &...

Victor Galliano

GEM Banks 1Q21 Screens

Our GEM bank picks are derived from value and growth, plus balance sheet, metrics; we highlight Banco do Brasil, Banorte, Credicorp, PSBC, CCB,...

Victor Galliano

Bank Credit Weekly: Month-End Rebalancing Takes Risk-Off Before Take-Off

Short duration positioning may remain the best strategy over the next few weeks, absent a material inflection point in the upcoming non-farm...

Hank Calenti, CFA

Brazil Bank Sector Trends to April in Ten Charts

April credit quality data is better than March, the bank system has good NPL coverage & the debt servicing burden is declining with falling lending...

Victor Galliano

Banco Inter (BIDI11 BZ): Too Much Optimism Built into Valuations

Banco Inter, as a leading Brazilian digital challenger bank, is growing fast. Yet our 3 scenarios show that premium growth does not mean premium...

Victor Galliano

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