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

Grupo Financiero Banorte SAB d / Equity Bottom-Up

<ul>
<li>BBVA Bancomer delivered the best returns of the biggest five Mexican banks, on a trailing twelve months basis to April; <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>  was second with mid-teens ROE</li>
<li>The rising bad loan charge offs show that Mexican banks continue to be proactive in addressing credit quality risks</li>
<li>To April 2021, bank system returns continued to recover from historically low levels; in large part, future returns depends upon the direction of cost of risk and efficiency ratio</li>
<li>Returns have been supported by limited erosion of credit spreads; spreads ticked up in April due to lower funding costs</li>
<li>Banorte and <a href="https://www.smartkarma.com/entities/banco-del-bajio-sa" target="_blank" data-smartkarma-citation="entities:28382:1" rel="noopener">Banco del Bajio SA (BBAJIOO MM)</a>  screen well on credit quality metrics, particularly on NPL coverage and ratio; they both also have higher than average core capital ratios</li>
<li>Risks to our positive view on Banorte and BanBajio include higher than expected opex, greater than expected spread pressure and a further worsening of credit quality resulting in higher credit charges</li>
</ul>


BBVA Bancomer delivered the best returns of the biggest five Mexican banks, on a trailing twelve months basis to April; Grupo Financiero Banorte-O (GFNORTEO MF)  was second with mid-teens ROE
The rising bad loan charge offs show that Mexican banks continue to be proactive in addressing credit quality risks
To April 2021, bank system returns continued to recover from historically low levels; in large part, future returns depends upon the direction of cost of risk and efficiency ratio
Returns have been supported by limited erosion of credit spreads; spreads ticked up in April due to lower funding costs
Banorte and Banco del Bajio SA (BBAJIOO MM)  screen well on credit quality metrics, particularly on NPL coverage and ratio; they both also have higher than average core capital ratios
Risks to our positive view on Banorte and BanBajio include higher than expected opex, greater than expected spread pressure and a further worsening of credit quality resulting in higher credit charges


<ul>
<li>BBVA Bancomer delivered the best returns of the biggest five Mexican banks, on a trailing twelve months basis; <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> was a close second</li>
<li>Mexican banks have generally been proactive in addressing credit quality risks, through cost of risk and bad loan charge offs</li>
<li>To March 2021, bank system returns have started to recover from historically low levels; in part, future returns depends upon the direction of cost of risk and efficiency ratio</li>
<li>Returns have been supported by limited erosion of credit spreads, despite historically low benchmark rates</li>
<li>Banorte and <a href="https://www.smartkarma.com/entities/banco-del-bajio-sa" target="_blank" data-smartkarma-citation="entities:28382:1" rel="noopener">Banco del Bajio SA (BBAJIOO MM)</a> screen well on credit quality metrics, particularly on NPL coverage and ratio</li>
<li>Risks to our positive view on Banorte and BanBajio include higher than expected opex, greater than expected spread pressure and a further worsening of credit quality resulting in higher credit charges</li>
</ul>


BBVA Bancomer delivered the best returns of the biggest five Mexican banks, on a trailing twelve months basis; Grupo Financiero Banorte-O (GFNORTEO MF) was a close second
Mexican banks have generally been proactive in addressing credit quality risks, through cost of risk and bad loan charge offs
To March 2021, bank system returns have started to recover from historically low levels; in part, future returns depends upon the direction of cost of risk and efficiency ratio
Returns have been supported by limited erosion of credit spreads, despite historically low benchmark rates
Banorte and Banco del Bajio SA (BBAJIOO MM) screen well on credit quality metrics, particularly on NPL coverage and ratio
Risks to our positive view on Banorte and BanBajio include higher than expected opex, greater than expected spread pressure and a further worsening of credit quality resulting in higher credit charges


Thoughts on Mexican Bank Trends to March 2021

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>Among EM funds, <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 one of the most widely held value stocks</li>
<li>The consensus on Banorte is positive, and we do not challenge this broadly held positive view on the stock, at least not yet</li>
<li>We would agree with management that there is potential to reverse past provisioning charges going forward, as credit quality seems more benign than expected</li>
<li>A very solid capital position, furthermore, adds to the potential for dividend pay-out recovery to at least 50% in 2022</li>
<li>Furthermore core profitability prospects remain sound, even though these have been eroded due to the pandemic effects</li>
<li>Risks to our positive view on Banorte include weaker than expected earnings in non-bank operations going forward, especially in insurance and pensions</li>
</ul>


Among EM funds, Grupo Financiero Banorte-O (GFNORTEO MF)  is one of the most widely held value stocks
The consensus on Banorte is positive, and we do not challenge this broadly held positive view on the stock, at least not yet
We would agree with management that there is potential to reverse past provisioning charges going forward, as credit quality seems more benign than expected
A very solid capital position, furthermore, adds to the potential for dividend pay-out recovery to at least 50% in 2022
Furthermore core profitability prospects remain sound, even though these have been eroded due to the pandemic effects
Risks to our positive view on Banorte include weaker than expected earnings in non-bank operations going forward, especially in insurance and pensions


Banorte (GFNORTEO MX): Don’t Fight the Positive Consensus Call

<ul>
<li>
<a href="https://www.smartkarma.com/entities/citigroup-inc" target="_blank" data-smartkarma-citation="entities:279:1" rel="noopener">Citigroup Inc (C US)</a>  1Q21 results shows that Citi’s LatAm business – with Mexico at its core – continues to be a drag on its earnings</li>
<li>The main headwind in Citibanamex’s core business of Mexican consumer banking, bar weak revenue trends, was the sharp rise in credit provisions and charge-offs which served to lower its delinquency ratio</li>
<li>Citibanamex’s earnings hit from credit charges is not an early warning for Banorte’s upcoming 1Q21 results; <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> management bit that bullet early, and took large provision expenses and charge-offs “kitchen sinking” its 2Q20 results</li>
<li>In addition, according to the latest CNBV data on the Mexican bank system to February 2021, Banorte’s consumer NPL ratio was far lower than that of Banamex, with Banorte’s overall NPL ratio being less than half of that of Citibanamex</li>
<li>Banorte reports 1Q21 results on 23<sup>rd</sup> April, and we do not expect a large credit provisioning hit to earnings, which should underpin its attractive valuations</li>
<li>Risks to our positive view on Banorte include softer than expected revenue growth, from fee and credit spread pressure and higher than expected opex as well as higher than expected credit charges</li>
</ul>



Citigroup Inc (C US)  1Q21 results shows that Citi’s LatAm business – with Mexico at its core – continues to be a drag on its earnings
The main headwind in Citibanamex’s core business of Mexican consumer banking, bar weak revenue trends, was the sharp rise in credit provisions and charge-offs which served to lower its delinquency ratio
Citibanamex’s earnings hit from credit charges is not an early warning for Banorte’s upcoming 1Q21 results; Grupo Financiero Banorte-O (GFNORTEO MF) management bit that bullet early, and took large provision expenses and charge-offs “kitchen sinking” its 2Q20 results
In addition, according to the latest CNBV data on the Mexican bank system to February 2021, Banorte’s consumer NPL ratio was far lower than that of Banamex, with Banorte’s overall NPL ratio being less than half of that of Citibanamex
Banorte reports 1Q21 results on 23rd April, and we do not expect a large credit provisioning hit to earnings, which should underpin its attractive valuations
Risks to our positive view on Banorte include softer than expected revenue growth, from fee and credit spread pressure and higher than expected opex as well as higher than expected credit charges


Citigroup 1Q21 Results – Mexican Consumer Banking’s Charge-Offs Are Not an Early Warning for Banorte

Mexico

Grupo Financiero Banorte S.A.B. de C.V. is a financial institution in Mexico. The Company offers banking services, premium banking, wholesale banking, leasing and factoring, warehousing, insurance, pensions and retirement savings.

Grupo Financiero Banorte SAB d (GFNORTEO MF)

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Grupo Financiero Banorte SAB d (GFNORTEO MF)

Mexican Bank Trends to April 2021

April was another solid month for credit quality among Mexican banks; BBVA Bancomer continues to lead on TTM returns, followed by Banorte with its...

Victor Galliano

Thoughts on Mexican Bank Trends to March 2021

Our key metrics spider charts for the top 5 Mexican banks highlight BBVA Bancomer and Banorte for premium returns; system data is reassuring,...

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

Banorte (GFNORTEO MX): Don’t Fight the Positive Consensus Call

Banorte is a consensus positive among EM banks, which we support based on its premium 2022 dividend yield of 7%+, undemanding PE and PBV ratios and...

Victor Galliano

Citigroup 1Q21 Results – Mexican Consumer Banking’s Charge-Offs Are Not an Early Warning for Banorte

Another weak quarter from Citi's Mexican entity is not, we believe, an amber light for Banorte's upcoming 1Q21 results; Banorte pre-empted with...

Victor Galliano

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