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 pension reform agenda moves closer to approval, with  its passage through the special commission of the lower house last week</li>
<li>We expect the Chamber of Deputies vote to be a positive one this week, as the voting intention indications seem to be constructive</li>
<li>The passage of pension reform is set to be followed with other economic reforms, such as tax code reform and an accelerated privatization program</li>
<li>Brazilian equities, especially blue chips, have re-rated and we think there is more to come, although in banks we would be selective</li>
<li>We believe that <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> stands out among the Brazilian big-cap banks, based on its attractive valuations, improving ROE and its potential to improve its CET1 ratio through non-core disposals</li>
</ul>


Brazil's pension reform agenda moves closer to approval, with  its passage through the special commission of the lower house last week
We expect the Chamber of Deputies vote to be a positive one this week, as the voting intention indications seem to be constructive
The passage of pension reform is set to be followed with other economic reforms, such as tax code reform and an accelerated privatization program
Brazilian equities, especially blue chips, have re-rated and we think there is more to come, although in banks we would be selective
We believe that Banco Do Brasil Sa (BBAS3 BZ) stands out among the Brazilian big-cap banks, based on its attractive valuations, improving ROE and its potential to improve its CET1 ratio through non-core disposals


Brazilian Pension Reform Moves Ahead; We Stick with Our Positive View on Banco Do Brasil

<ul>
<li>Neoenergia registered its IPO on June 6th; <a href="https://www.smartkarma.com/entities/banco-do-brasil-sa" target="_blank" data-smartkarma-citation="entities:24564:1">Banco Do Brasil Sa (BBAS3 BZ)</a> is expected to raise between BRL1.64bn and BRL1.92bn from its 9.35% stake</li>
<li>We estimate that the Banco do Brasil capital contribution from the Neoenergia stake disposal should be small, but it should serve to add to positive sentiment for non-core disposals</li>
<li>More importantly, its 49.9% stake in Banco Votorantim is also up for sale and its returns are improving; we estimate that BVoto's disposal would be the biggest capital relief contribution of its non-core sales </li>
<li>
<a href="https://www.smartkarma.com/entities/banco-patagonia-sa" target="_blank" data-smartkarma-citation="entities:24431:1">Banco Patagonia Sa (BPAT AR)</a>, in which Banco do Brasil has an 80.4% stake, is more of a challenge for disposal given the approaching Argentinian presidential election - and the uncertain outcome - in October 2019, but could be slated for sale in early 2020</li>
<li>Banco do Brasil management has added the 10.1% stake in reinsurance company <a href="https://www.smartkarma.com/entities/irb-brasil-resseguros-s-a" target="_blank" data-smartkarma-citation="entities:27599:1">IRB Brasil Resseguros S/A (IRBR3 BZ)</a> to its list of non-core disposals</li>
<li>Overall, we see that these key disposals in total, through capital gains and RWA reduction in the case of the banks, should bring between 93bps to 100bps of capital relief to Banco do Brasil's CET1 ratio; even if we exclude the BPAT disposal, we estimate capital build from the other disposals could reach 75bps of CET1</li>
</ul>


Neoenergia registered its IPO on June 6th; Banco Do Brasil Sa (BBAS3 BZ) is expected to raise between BRL1.64bn and BRL1.92bn from its 9.35% stake
We estimate that the Banco do Brasil capital contribution from the Neoenergia stake disposal should be small, but it should serve to add to positive sentiment for non-core disposals
More importantly, its 49.9% stake in Banco Votorantim is also up for sale and its returns are improving; we estimate that BVoto's disposal would be the biggest capital relief contribution of its non-core sales 

Banco Patagonia Sa (BPAT AR), in which Banco do Brasil has an 80.4% stake, is more of a challenge for disposal given the approaching Argentinian presidential election - and the uncertain outcome - in October 2019, but could be slated for sale in early 2020
Banco do Brasil management has added the 10.1% stake in reinsurance company IRB Brasil Resseguros S/A (IRBR3 BZ) to its list of non-core disposals
Overall, we see that these key disposals in total, through capital gains and RWA reduction in the case of the banks, should bring between 93bps to 100bps of capital relief to Banco do Brasil's CET1 ratio; even if we exclude the BPAT disposal, we estimate capital build from the other disposals could reach 75bps of CET1


Banco Do Brasil (BBAS3 BZ): Neoenergia IPO Kicks off Non-Core Disposals

Guararapes Confeccoes SA / Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/28023" target="_blank" data-smartkarma-citation="entities:28023:1">Guararapes Confeccoes SA (GUAR3 BZ)</a>, is a top three competitor to Brazilian market leader <a href="https://www.smartkarma.com/entities/24472" target="_blank" data-smartkarma-citation="entities:24472:1">Lojas Renner SA (LREN3 BZ)</a> in apparel retail</li>
<li>Its consumer credit book, including credit card loan exposure, of BRL4.1bn (USD1.1bn) is held by Guararapes’ 100% owned corporate vehicle for consumer credit, Midway Financiera. Midway  has delivered premium ROAE over 2015-18, and, although its NPL coverage is lower than Renner's, it has a very solid capital position</li>
<li>We apply a bear (9x) and bull (16x) range of historic (2018A) PE multiples for its consumer finance arm Midway Financiera. We estimate that this values Guararapes’ consumer credit businesses in a range of USD500-889m, equivalent to a range of 22%-38% of Guararapes' market capitalisation</li>
<li>We believe that Guararapes equity is an attractive investment, trading on consensus PE multiples of 15.6x for 2019E and 12.8x for 2020E, and EV/EBITDA multiples of 8.2x for 2019E and 7.1x for 2020E. Although we recognise that Guararapes should trade at a discount to Renner, we believe that Guararapes has potential to re-rate and narrow its discounted valuation</li>
</ul>



Guararapes Confeccoes SA (GUAR3 BZ), is a top three competitor to Brazilian market leader Lojas Renner SA (LREN3 BZ) in apparel retail
Its consumer credit book, including credit card loan exposure, of BRL4.1bn (USD1.1bn) is held by Guararapes’ 100% owned corporate vehicle for consumer credit, Midway Financiera. Midway  has delivered premium ROAE over 2015-18, and, although its NPL coverage is lower than Renner's, it has a very solid capital position
We apply a bear (9x) and bull (16x) range of historic (2018A) PE multiples for its consumer finance arm Midway Financiera. We estimate that this values Guararapes’ consumer credit businesses in a range of USD500-889m, equivalent to a range of 22%-38% of Guararapes' market capitalisation
We believe that Guararapes equity is an attractive investment, trading on consensus PE multiples of 15.6x for 2019E and 12.8x for 2020E, and EV/EBITDA multiples of 8.2x for 2019E and 7.1x for 2020E. Although we recognise that Guararapes should trade at a discount to Renner, we believe that Guararapes has potential to re-rate and narrow its discounted valuation


Guararapes: Good Value in Brazil Retailing, Sound Presence in Consumer Finance

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<ul class="">
<li>
<a href="https://www.smartkarma.com/entities/24564" target="_blank" data-smartkarma-citation="entities:24564:1">Banco Do Brasil Sa (BBAS3 BZ)</a> management is exploring non-core disposals, across its investment portfolio</li>
<li>Its stakes in Banco Votorantim, utility holding Neoenergia and its Argentinian subsidiary <a href="https://www.smartkarma.com/entities/24431" target="_blank" data-smartkarma-citation="entities:24431:1">Banco Patagonia Sa (BPAT AR)</a> have been most readily mentioned, and are the most likely candidates, in our view</li>
<li>The disposal timings, we expect, could be nearer term for domestic, Brazilian assets, with Banco Patagonia more likely to be a longer term project (2020?); still, we see such potential disposals as positive catalysts for Banco do Brasil shares</li>
<li>We estimate that the CET1 accretion from disposals could total 73-80bps, of which the net gain from these potential disposals could add between 10-17 bps , with the risk weighted asset (RWA) reduction expected to free up an additional 63bps of CET1</li>
</ul>



Banco Do Brasil Sa (BBAS3 BZ) management is exploring non-core disposals, across its investment portfolio
Its stakes in Banco Votorantim, utility holding Neoenergia and its Argentinian subsidiary Banco Patagonia Sa (BPAT AR) have been most readily mentioned, and are the most likely candidates, in our view
The disposal timings, we expect, could be nearer term for domestic, Brazilian assets, with Banco Patagonia more likely to be a longer term project (2020?); still, we see such potential disposals as positive catalysts for Banco do Brasil shares
We estimate that the CET1 accretion from disposals could total 73-80bps, of which the net gain from these potential disposals could add between 10-17 bps , with the risk weighted asset (RWA) reduction expected to free up an additional 63bps of CET1


Banco Do Brasil (BBAS3) - Capital Contributions from Potential Non-Core Disposals

Thematic (Sector/Industry)

<ul class="">
<li>The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit cards</li>
<li>De-regulation and new entrants have brought challenges for the incumbents, especially for the largest player <a href="https://www.smartkarma.com/entities/24750" target="_blank">Cielo SA (CIEL3 BZ)</a>, with the challengers taking market share, squeezing margins and promoting better service for SME merchants in particular</li>
<li>Competitive pressures continue in the Brazil payments market, reflected in the declining merchant discount rate (MDR), lower rental rates and sale prices for POS terminals, as well as pressure on the commissions for early payment of merchant receivables; the near-term prospects for Cielo remain challenging in our view</li>
<li>Due to the ongoing headwinds, we expect Cielo to show negative earnings growth to 2021; management has announced that Cielo will defend its market share against the challengers; we see further downside risk to consensus earnings and the real risk of a greater than consensus 2019 DPS cut</li>
<li>
<a href="https://www.smartkarma.com/entities/27564" target="_blank">StoneCo Ltd (STNE US)</a>and <a href="https://www.smartkarma.com/entities/27939" target="_blank">Pagseguro Digital Ltd (PAGS US)</a> are two of the payment challengers in this de-regulated market, growing faster than the Brazilian non-cash transactions market and taking incumbents' market share; we see StoneCo to be the preferred entity to PagSeguro, based on StoneCo’s higher revenue yielding SME segment of focus and on its more attractive PEG ratio valuation</li>
</ul>


The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit cards
De-regulation and new entrants have brought challenges for the incumbents, especially for the largest player Cielo SA (CIEL3 BZ), with the challengers taking market share, squeezing margins and promoting better service for SME merchants in particular
Competitive pressures continue in the Brazil payments market, reflected in the declining merchant discount rate (MDR), lower rental rates and sale prices for POS terminals, as well as pressure on the commissions for early payment of merchant receivables; the near-term prospects for Cielo remain challenging in our view
Due to the ongoing headwinds, we expect Cielo to show negative earnings growth to 2021; management has announced that Cielo will defend its market share against the challengers; we see further downside risk to consensus earnings and the real risk of a greater than consensus 2019 DPS cut

StoneCo Ltd (STNE US)and Pagseguro Digital Ltd (PAGS US) are two of the payment challengers in this de-regulated market, growing faster than the Brazilian non-cash transactions market and taking incumbents' market share; we see StoneCo to be the preferred entity to PagSeguro, based on StoneCo’s higher revenue yielding SME segment of focus and on its more attractive PEG ratio valuation


Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers

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)

Brazilian Pension Reform Moves Ahead; We Stick with Our Positive View on Banco Do Brasil

Brazil's pension reform agenda moves closer to approval, with its passage through the special commission of the lower house last week We expect...

Victor Galliano