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.

Event-Driven

<ul>
<li>Gilinski’s higher price incremental share bids for both Grupo Suramericana and Nutresa are intended to make Gilinski the largest shareholder in Suramericana and the majority shareholder in Nutresa</li>
<li>We maintain that this strategy is the next step in Gilinski’s plan to gain control of BanColombia indirectly, and also gain control of Suramericana’s interests in asset management and pensions</li>
<li>We see further upside potential for Grupo Suramericana shares, as well as BanColombia shares; the latter are attractively valued versus LatAm peers</li>
</ul>


Gilinski’s higher price incremental share bids for both Grupo Suramericana and Nutresa are intended to make Gilinski the largest shareholder in Suramericana and the majority shareholder in Nutresa
We maintain that this strategy is the next step in Gilinski’s plan to gain control of BanColombia indirectly, and also gain control of Suramericana’s interests in asset management and pensions
We see further upside potential for Grupo Suramericana shares, as well as BanColombia shares; the latter are attractively valued versus LatAm peers


Grupo Gilinski Ups the Ante on Grupo Suramericana with Enhanced Bids

Global Bank Equity Specialist, Creative Portfolios

Paul Hollingworth

Global Bank Equity Specialist

Creative Portfolios

Thematic (Sector/Industry)

Judged by Q221 PH Scores™ , and the positive reaction to quarterly results, Colombian financials may be headed for a period of outperformance.We have been concerned about asset quality weakness in recent quarters, compounded by the Pandemic that has accentuated excessive consumer lending in recent years. At the peak of C-19, some 45% of Loans were under "relief" programmes. This has thankfully subsided.  The social unrest earlier in the year also added to the imbroglio.We had been negative on Bancolombia for some time but recent quarterly results point in the right direction. Bancolombia delivered a Q221 ROE of 16%. The bank expects to end the year with an ROE of between 8% and 10%, as the bank's equity continues to recover from the low point reached in the last quarter of 2020. Pre-pandemic estimates of ROE of between 12% and 14% are still achievable given evolution in digitalisation and fintech. The bank's two digital platforms, which also include Nequi, are supporting its fee generation, with expected combined gross fee income for both entities at about 47 billion Colombian pesos. The bank looks past the worst and on the way to recovery despite lingering C-19 provisioning challenges. Share price reaction to Q221 numbers was highly favourable. Given valuations, it may be worth playing the change in fortunes at Bancolombia via Grupo Sura which incorporates a defensive asset management business with core insurance and other investments.Grupo Aval was always in better shape than its Antioquia peer, and results are also most encouraging. Aval does well in Central America where Colombian banks have extended their tentacles in recent years. Aval trades at 10% of Deposits which is attractive relative to other LATAM lenders while PBV is a shade above 1x, Earnings Yield stands at 15%, and the Total Return Ratio fetches 2.5x. Managed by the conservative Sarmiento family, prospects appear benign. NYSE-listed, Grupo Aval is controlled by the Sarmiento family, a long-standing feature of Colombia’s Banking establishment. Banco de Bogota is the Group’s flagship operation, representing two-thirds of the Group credit book (35% in Central America) and 69.5% of Deposits (38% in Central America). After combining the Sarmiento family financial entities (Banco de Bogota, Banco Popular, Banco de Occidente, AV Villas, Porvenir pension and severance funds, and Corficolombia merchant bank) Grupo Aval Acciones y Valores S.A. was incorporated in 1994. The bank operates through a network of 1,258 branches, 3,383 ATMs, and 36,249 other points of service in Colombia; and 331 branches, 2,179 ATMs, and 8,985 other points of service in Central America.For the more intrepid investor, Corficolombiana catches the eye. Part of Aval, this is a diversified business (energy, hotels, infra, agro) with a focus on credit, investment, and financial intermediation. Delivering a net margin of 20%, a ROA OF 7.2%, and ROE of 24%, shares are too cheap, trading at 1.16 BV. Fundamental momentum is stellar with key variables in the PH Score all improving. As a financial corporation, there are structural positives. In contrast to banks, Capitalization and Liquidity are very strong. This is a lower risk investment in theory though infrastructure can be a complex business at times and palm oil needs to be managed delicately.

Judged by Q221 PH Scores™ , and the positive reaction to quarterly results, Colombian financials may be headed for a period of outperformance.We have been concerned about asset quality weakness in recent quarters, compounded by the Pandemic that has accentuated excessive consumer lending in recent years. At the peak of C-19, some 45% of Loans were under "relief" programmes. This has thankfully subsided.  The social unrest earlier in the year also added to the imbroglio.We had been negative on Bancolombia for some time but recent quarterly results point in the right direction. Bancolombia delivered a Q221 ROE of 16%. The bank expects to end the year with an ROE of between 8% and 10%, as the bank's equity continues to recover from the low point reached in the last quarter of 2020. Pre-pandemic estimates of ROE of between 12% and 14% are still achievable given evolution in digitalisation and fintech. The bank's two digital platforms, which also include Nequi, are supporting its fee generation, with expected combined gross fee income for both entities at about 47 billion Colombian pesos. The bank looks past the worst and on the way to recovery despite lingering C-19 provisioning challenges. Share price reaction to Q221 numbers was highly favourable. Given valuations, it may be worth playing the change in fortunes at Bancolombia via Grupo Sura which incorporates a defensive asset management business with core insurance and other investments.Grupo Aval was always in better shape than its Antioquia peer, and results are also most encouraging. Aval does well in Central America where Colombian banks have extended their tentacles in recent years. Aval trades at 10% of Deposits which is attractive relative to other LATAM lenders while PBV is a shade above 1x, Earnings Yield stands at 15%, and the Total Return Ratio fetches 2.5x. Managed by the conservative Sarmiento family, prospects appear benign. NYSE-listed, Grupo Aval is controlled by the Sarmiento family, a long-standing feature of Colombia’s Banking establishment. Banco de Bogota is the Group’s flagship operation, representing two-thirds of the Group credit book (35% in Central America) and 69.5% of Deposits (38% in Central America). After combining the Sarmiento family financial entities (Banco de Bogota, Banco Popular, Banco de Occidente, AV Villas, Porvenir pension and severance funds, and Corficolombia merchant bank) Grupo Aval Acciones y Valores S.A. was incorporated in 1994. The bank operates through a network of 1,258 branches, 3,383 ATMs, and 36,249 other points of service in Colombia; and 331 branches, 2,179 ATMs, and 8,985 other points of service in Central America.For the more intrepid investor, Corficolombiana catches the eye. Part of Aval, this is a diversified business (energy, hotels, infra, agro) with a focus on credit, investment, and financial intermediation. Delivering a net margin of 20%, a ROA OF 7.2%, and ROE of 24%, shares are too cheap, trading at 1.16 BV. Fundamental momentum is stellar with key variables in the PH Score all improving. As a financial corporation, there are structural positives. In contrast to banks, Capitalization and Liquidity are very strong. This is a lower risk investment in theory though infrastructure can be a complex business at times and palm oil needs to be managed delicately.

Equity Bottom-Up

Grupo Aval Acciones y Valores / Equity Bottom-Up

Colombia is recovering from a traumatic bout of civil unrest, fuelled no doubt by frustrations with a tough Lockdown. Similar to Chile’s protests awhile back, there was an eruption of popular protest against what was perceived to be unfair government policy. Similar to South Africa, unemployment is way too high. However, there are signs that the economy is gradually on the mend (judging by GDP pickup at Q121) and that Colombia, like Chile, still remains a less unstable proposition, though still far from ideal, when compared to populist jurisdictions elsewhere in the region such as Brazil, Peru, and Argentina and to some extent Mexico. There is though a real risk that Colombia will lose its Investment Grade status (as it did in the Samper-Pastrana years) as attempts to “fix” its burgeoning Fiscal Deficit, the result of C-19, are politically challenging.NYSE-listed, Grupo Aval is controlled by the Sarmiento family, a long-standing feature of Colombia’s Banking establishment. Banco de Bogota is the Group’s flagship operation, representing two-thirds of the Group credit book (35% in Central America) and 69.5% of Deposits (38% in Central America). After combining the Sarmiento family financial entities (Banco de Bogota, Banco Popular, Banco de Occidente, AV Villas, Porvenir pension and severance funds, and Corficolombia merchant bank) Grupo Aval Acciones y Valores S.A. was incorporated in 1994. The bank operates through a network of 1,258 branches, 3,383 ATMs, and 36,249 other points of service in Colombia; and 331 branches, 2,179 ATMs, and 8,985 other points of service in Central America.Colombia accounts for 64% of Aval Assets while Central America contributes 36% of the total. Colombian operations generally show better Profitability and Efficiency though Asset Quality and CoR, growth of Deposits, Income Diversification, and NIM are more advantageous in Central America. While once seen as a weak link in the Sarmiento chain, Central America is progressively showing its merits within the Group and adding value to the Group.In terms of trends and value-quality, a PH Score™ of 5.6 understates the fundamental momentum of the Group. Liquidity, Provisioning, and Efficiency are all moving in the right direction while well above-average Profitability has not eroded greatly. Common Equity/Assets is broadly stable: with Basel 111 Solvency rules, now implemented, key Capitalisation ratios are improving.  NIM (still relatively elevated versus Asia or Europe for example) and Asset Quality (controlled) showed some softness.While Earnings Quality looks optically poor, it rather reflects the weight of the contribution of hotels, gas, and energy holdings plus non-controlling interest in Grupo Aval (the minority stakes that third party shareholders hold in each of its direct consolidated subsidiaries (Banco de Bogotá, Banco de Occidente, Banco Popular, Banco AV Villas and Corficolombiana), and the minority stakes that third party shareholders hold in the consolidated subsidiaries at the bank level (mainly Porvenir pension fund)).<div class="content-highlight">A FV of 11%, a PBV of 1.15x, an Earnings Yield of 11.9%, a Dividend Yield of 5.1% and a Total Return Ratio of 1.6x should raise animal spirits somewhat. While the bank commands moderate fundamental momentum, the combination of an oversold trading position and a quite attractive valuation all place Aval in the the top global quartile by VFM (Valuation, Fundamentals, and Momentum).</div>

Colombia is recovering from a traumatic bout of civil unrest, fuelled no doubt by frustrations with a tough Lockdown. Similar to Chile’s protests awhile back, there was an eruption of popular protest against what was perceived to be unfair government policy. Similar to South Africa, unemployment is way too high. However, there are signs that the economy is gradually on the mend (judging by GDP pickup at Q121) and that Colombia, like Chile, still remains a less unstable proposition, though still far from ideal, when compared to populist jurisdictions elsewhere in the region such as Brazil, Peru, and Argentina and to some extent Mexico. There is though a real risk that Colombia will lose its Investment Grade status (as it did in the Samper-Pastrana years) as attempts to “fix” its burgeoning Fiscal Deficit, the result of C-19, are politically challenging.NYSE-listed, Grupo Aval is controlled by the Sarmiento family, a long-standing feature of Colombia’s Banking establishment. Banco de Bogota is the Group’s flagship operation, representing two-thirds of the Group credit book (35% in Central America) and 69.5% of Deposits (38% in Central America). After combining the Sarmiento family financial entities (Banco de Bogota, Banco Popular, Banco de Occidente, AV Villas, Porvenir pension and severance funds, and Corficolombia merchant bank) Grupo Aval Acciones y Valores S.A. was incorporated in 1994. The bank operates through a network of 1,258 branches, 3,383 ATMs, and 36,249 other points of service in Colombia; and 331 branches, 2,179 ATMs, and 8,985 other points of service in Central America.Colombia accounts for 64% of Aval Assets while Central America contributes 36% of the total. Colombian operations generally show better Profitability and Efficiency though Asset Quality and CoR, growth of Deposits, Income Diversification, and NIM are more advantageous in Central America. While once seen as a weak link in the Sarmiento chain, Central America is progressively showing its merits within the Group and adding value to the Group.In terms of trends and value-quality, a PH Score™ of 5.6 understates the fundamental momentum of the Group. Liquidity, Provisioning, and Efficiency are all moving in the right direction while well above-average Profitability has not eroded greatly. Common Equity/Assets is broadly stable: with Basel 111 Solvency rules, now implemented, key Capitalisation ratios are improving.  NIM (still relatively elevated versus Asia or Europe for example) and Asset Quality (controlled) showed some softness.While Earnings Quality looks optically poor, it rather reflects the weight of the contribution of hotels, gas, and energy holdings plus non-controlling interest in Grupo Aval (the minority stakes that third party shareholders hold in each of its direct consolidated subsidiaries (Banco de Bogotá, Banco de Occidente, Banco Popular, Banco AV Villas and Corficolombiana), and the minority stakes that third party shareholders hold in the consolidated subsidiaries at the bank level (mainly Porvenir pension fund)).A FV of 11%, a PBV of 1.15x, an Earnings Yield of 11.9%, a Dividend Yield of 5.1% and a Total Return Ratio of 1.6x should raise animal spirits somewhat. While the bank commands moderate fundamental momentum, the combination of an oversold trading position and a quite attractive valuation all place Aval in the the top global quartile by VFM (Valuation, Fundamentals, and Momentum).

Grupo Aval: Calm After the Tropical Storm

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

We progressed from melt-up to full risk-on duration admiration as the week progressed. The improved risk sentiment drove spreads tighter last week, with almost all bonds tightening  globally. China’s return from Lunar New Year holidays also pushed Asia’s financial spreads materially lower. Asia’s financial indexes outperformed European notes as Additional Tier 1 bonds in both regions continued to tighten.Debt investors continue to look to banks as a means to play the economic recovery trade. Every Asia bank headquartered Additional Tier 1 (AT1), Tier 2 and X-over rated bank bond compressed over the week. Almost all High Yield bank bonds tightened globally. <a href="https://www.smartkarma.com/entities/yes-bank-ltd" target="_blank" data-smartkarma-citation="entities:767:1" rel="noopener">Yes Bank (YES IN)</a> and <a href="https://www.smartkarma.com/entities/indiabulls-housing-finance-ltd" target="_blank" data-smartkarma-citation="entities:13086:1" rel="noopener">Indiabulls Housing Finance (IHFL IN)</a> bonds were among the few bonds that did not strengthen during the week. Meanwhile <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings (HSBA LN)</a> and <a href="https://www.smartkarma.com/entities/standard-chartered-plc" target="_blank" data-smartkarma-citation="entities:193:1" rel="noopener">Standard Chartered (STAN LN)</a> are expected to report results this week. These results may impact global bank investor sentiment.In addition, HSBC may entreat us to another strategic review. It is hard to not be cynical regarding these, given the lack of success with the last two. Nonetheless, the main risk for credit investors is that of a substantial geographic reorganization which negatively impacts holding company cash flows or attempts to push holding company bonds to less attractive subsidiary operations. While we think both outcomes are unlikely, we will be watching for any potential hints of this. Globally, <a href="https://www.smartkarma.com/entities/svenska-handelsbanken-ab" target="_blank" data-smartkarma-citation="entities:22480:1" rel="noopener">Svenska Handelsbanken's (SHBA SS)</a> 4¾% coupon 2031 callable note led Additional Tier 1 (AT1) and broader bank US$-bond performance. This bond also led global spread performance in the week prior. Other long-callable AT1 bonds also outperformed during the week, including Standard Chartered’s and UBS’s 2031 maturity bonds, as well as HSBC’s coupon 2030 maturity note. These each compressed by 13bps.Given the rate of change over the last two weeks, there are clear opportunities within the credit curves of some banks. These are potential buy or sell opportunities, depending on whether your expectations are for the current risk-on rally to continue.  We identify these by security type within.Market Outlook: Unlike 2019 when we experienced a rally that everyone loved to hate, everyone loves this rally. Combined with the strength of the risk-on moves, this makes us uneasy. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ. There is limited price discover as the market is simply sentiment driven. Credit value should remain driven by larger market forces. However, we may be fast approaching a point where the market outpaces the rate of expected economic recovery, and / or the market outpaces the rate that can be achieved without incurring substantial financial stability concerns. Our preference is for lower duration bonds, preferably in the belly of the curve, but the market has duration admiration. Please see our recent <a href="https://www.smartkarma.com/insights/bank-macro-manifest-risk-rally-gathers-steam-as-bad-news-more-stimulus" target="_blank" rel="noopener">Bank Macro Manifest</a> and <a href="https://www.smartkarma.com/insights/bank-credit-strategy-melt-up-before-meltdown-where-to-position" target="_blank" rel="noopener">Bank Credit Strategy</a> notes for more details.

We progressed from melt-up to full risk-on duration admiration as the week progressed. The improved risk sentiment drove spreads tighter last week, with almost all bonds tightening  globally. China’s return from Lunar New Year holidays also pushed Asia’s financial spreads materially lower. Asia’s financial indexes outperformed European notes as Additional Tier 1 bonds in both regions continued to tighten.Debt investors continue to look to banks as a means to play the economic recovery trade. Every Asia bank headquartered Additional Tier 1 (AT1), Tier 2 and X-over rated bank bond compressed over the week. Almost all High Yield bank bonds tightened globally. Yes Bank (YES IN) and Indiabulls Housing Finance (IHFL IN) bonds were among the few bonds that did not strengthen during the week. Meanwhile HSBC Holdings (HSBA LN) and Standard Chartered (STAN LN) are expected to report results this week. These results may impact global bank investor sentiment.In addition, HSBC may entreat us to another strategic review. It is hard to not be cynical regarding these, given the lack of success with the last two. Nonetheless, the main risk for credit investors is that of a substantial geographic reorganization which negatively impacts holding company cash flows or attempts to push holding company bonds to less attractive subsidiary operations. While we think both outcomes are unlikely, we will be watching for any potential hints of this. Globally, Svenska Handelsbanken's (SHBA SS) 4¾% coupon 2031 callable note led Additional Tier 1 (AT1) and broader bank US$-bond performance. This bond also led global spread performance in the week prior. Other long-callable AT1 bonds also outperformed during the week, including Standard Chartered’s and UBS’s 2031 maturity bonds, as well as HSBC’s coupon 2030 maturity note. These each compressed by 13bps.Given the rate of change over the last two weeks, there are clear opportunities within the credit curves of some banks. These are potential buy or sell opportunities, depending on whether your expectations are for the current risk-on rally to continue.  We identify these by security type within.Market Outlook: Unlike 2019 when we experienced a rally that everyone loved to hate, everyone loves this rally. Combined with the strength of the risk-on moves, this makes us uneasy. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ. There is limited price discover as the market is simply sentiment driven. Credit value should remain driven by larger market forces. However, we may be fast approaching a point where the market outpaces the rate of expected economic recovery, and / or the market outpaces the rate that can be achieved without incurring substantial financial stability concerns. Our preference is for lower duration bonds, preferably in the belly of the curve, but the market has duration admiration. Please see our recent Bank Macro Manifest and Bank Credit Strategy notes for more details.

The novel coronavirus (nCov-2019) is likely to pressure greater-China and China trade area risk assets over the near term, if the economic and market fallout from the SARS epidemic is anything to judge by. This will create long-term credit buying opportunities. We assess recent credit spread movements and highlight debt capital new issue that may have potential implications for Asian bank debt in this weekly report.Extension- and risk-avoidance dominated the Asia US$ bond market this week as callable and higher risk assets sold-off. The Bloomberg Barclays Asia US$ High Yield bond index rose 27bp over the week, almost reversing year-to-date gains, while the Asia US$ Investment Grade bond index rose 6bp. The Asia IG index is now 4bps higher than at year-end. By the end of the week, Asian bank Subordinated US$-bond spreads were notably wider while Asian bank Senior Unsecured US$-bonds were largely unchanged. Each callable bond that we track widened on extension risk concerns. As we stated last week, we expect the economic fallout from the virus to pressure Asian bank Additional Tier 1 (AT1) bonds over the near term. This will most likely create long-term buying opportunities in this space. In the intervening time-period, Asian bank X-over and bullet maturity Tier 2 debt appears to be better positioned to hold their value. We believe that once the virus appears to have subsided, US Treasury prices could spike downwards as yields re-set to pre-virus levels.At the same time, nCov-2019 and the Federal Reserve’s FOMC meeting conspired to close Asia’s US$ benchmark debt issuance window. The Lunar New Year holiday in China, now extended in some provinces, also likely contributed to a dampening of regional market activity. We expect nCov-2019 to keep the market closed for new AT1 issuance from banks in the greater China area. Further afield, borrowers took advantage of credit investors’ need for yield.

The novel coronavirus (nCov-2019) is likely to pressure greater-China and China trade area risk assets over the near term, if the economic and market fallout from the SARS epidemic is anything to judge by. This will create long-term credit buying opportunities. We assess recent credit spread movements and highlight debt capital new issue that may have potential implications for Asian bank debt in this weekly report.Extension- and risk-avoidance dominated the Asia US$ bond market this week as callable and higher risk assets sold-off. The Bloomberg Barclays Asia US$ High Yield bond index rose 27bp over the week, almost reversing year-to-date gains, while the Asia US$ Investment Grade bond index rose 6bp. The Asia IG index is now 4bps higher than at year-end. By the end of the week, Asian bank Subordinated US$-bond spreads were notably wider while Asian bank Senior Unsecured US$-bonds were largely unchanged. Each callable bond that we track widened on extension risk concerns. As we stated last week, we expect the economic fallout from the virus to pressure Asian bank Additional Tier 1 (AT1) bonds over the near term. This will most likely create long-term buying opportunities in this space. In the intervening time-period, Asian bank X-over and bullet maturity Tier 2 debt appears to be better positioned to hold their value. We believe that once the virus appears to have subsided, US Treasury prices could spike downwards as yields re-set to pre-virus levels.At the same time, nCov-2019 and the Federal Reserve’s FOMC meeting conspired to close Asia’s US$ benchmark debt issuance window. The Lunar New Year holiday in China, now extended in some provinces, also likely contributed to a dampening of regional market activity. We expect nCov-2019 to keep the market closed for new AT1 issuance from banks in the greater China area. Further afield, borrowers took advantage of credit investors’ need for yield.

Asian Bank HY Credit Weekly: The Novel Coronavirus and Credit

Colombia

Grupo Aval Acciones y Valores S.A. operates as a holding company of investments in stocks, bonds and other financial instruments in Colombia, primarily in the financial sector.

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Grupo Aval Acciones y Valores (AVAL CB)

Grupo Gilinski Ups the Ante on Grupo Suramericana with Enhanced Bids

Gilinski upped the bids on Sura & Nutresa, with the end-game being to gain control of BanColombia & merge it with Gilinski-controlled Banco GNB...

Victor Galliano

Colombian Financials: Turning Around

Colombian financials look set for a phase of outperformance. PH Scores ™ are improving and valuations are not stretched. We favour Grupo Aval,...

Paul Hollingworth

Grupo Aval: Calm After the Tropical Storm

Grupo Aval shares look oversold given prospects of a better macro environment in Colombia and continuing progress in Central America.

Paul Hollingworth

Bank Credit Weekly: Duration Admiration

We moved from melt-up to full risk-on duration admiration. Almost all bank bonds tightened globally. Given the rate of change, there are mispriced...

Hank Calenti, CFA

Asian Bank HY Credit Weekly: The Novel Coronavirus and Credit

The novel coronavirus (nCov-2019) is likely to pressure greater-China and China trade area risk assets over the near term, if the economic and...

Hank Calenti, CFA

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