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 May; <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>  retained its second place with mid-teens ROE</li>
<li>Mexican banks continue to address the pandemic’s credit quality challenges by taking bigger bad loan write-offs</li>
<li>To May 2021, bank system returns continued their recovery from historically low levels helped by low cost of risk</li>
<li>Top line returns have been supported by limited erosion of credit spreads, and BanXico raised benchmark rates in June</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> continue screen better than peers on credit quality metrics, particularly on NPL ratio and to a lesser degree on coverage; they both also have healthy 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 May; Grupo Financiero Banorte-O (GFNORTEO MF)  retained its second place with mid-teens ROE
Mexican banks continue to address the pandemic’s credit quality challenges by taking bigger bad loan write-offs
To May 2021, bank system returns continued their recovery from historically low levels helped by low cost of risk
Top line returns have been supported by limited erosion of credit spreads, and BanXico raised benchmark rates in June
Banorte and Banco del Bajio SA (BBAJIOO MM) continue screen better than peers on credit quality metrics, particularly on NPL ratio and to a lesser degree on coverage; they both also have healthy 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


Mexican Banks Continue to Address NPL Issues in May

<ul>
<li>The politics in Mexico is not a major concern, and the macro-economic outlook remains constructive</li>
<li>We continue to recommend <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> , seeing it as a core holding in EM portfolios</li>
<li>
<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> is also attractive, as a mid-cap holding and it has potential for a further re-rating</li>
<li>
<a href="https://www.smartkarma.com/entities/banco-santander-mexico-s-a" target="_blank" data-smartkarma-citation="entities:27672:1" rel="noopener">Banco Santander Mexico-B (BSMXB MM)</a> shares are trading at an 6% premium to the share offer from the parent (MXN24.45 cum dividend); even factoring in the dividend yield, the potential for further SanMex share price upside seems limited</li>
<li>Risks to our positive view on Banorte, BanBajio include worse than expected credit quality and softer than expected loan demand impacting volumes and spreads; risks to our cautious view on SanMex shares include an enhanced offer by Santander or an increased dividend attributable to current shareholders</li>
</ul>


The politics in Mexico is not a major concern, and the macro-economic outlook remains constructive
We continue to recommend Grupo Financiero Banorte-O (GFNORTEO MF) , seeing it as a core holding in EM portfolios

Banco del Bajio SA (BBAJIOO MM) is also attractive, as a mid-cap holding and it has potential for a further re-rating

Banco Santander Mexico-B (BSMXB MM) shares are trading at an 6% premium to the share offer from the parent (MXN24.45 cum dividend); even factoring in the dividend yield, the potential for further SanMex share price upside seems limited
Risks to our positive view on Banorte, BanBajio include worse than expected credit quality and softer than expected loan demand impacting volumes and spreads; risks to our cautious view on SanMex shares include an enhanced offer by Santander or an increased dividend attributable to current shareholders


Mexican Banks: Stay the Course with Our Two Key Positive Picks, Cautious on SanMex

<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

Mexico

Banco del Bajio S.A. provides a full range of commercial banking services. The Bank offers mortgages loans, saving, investment option, pension advice, and electronic billing services. Banco del Bajio operates in Mexico.

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Banco del Bajio SA (BBAJIOO MM)

Mexican Banks Continue to Address NPL Issues in May

Mexican banks' May data shows rising write-offs as pandemic-related NPLs are addressed (Fig2), with better cost of risk; NPL coverage is healthy...

Victor Galliano

Mexican Banks: Stay the Course with Our Two Key Positive Picks, Cautious on SanMex

Political checks to the AMLO political agenda are market positive, as is the US economic recovery; we stick with the Banorte & BanBajio bull calls,...

Victor Galliano

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

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