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 November showed a broader deterioration in consumer credit categories than in October</li>
<li>System loan growth was 15.6% on a YoY basis in November which was a slowdown from October (16%), largely due to the deceleration in corporate loan growth</li>
<li>Benchmark rates continue to rise sharply to combat inflation, so we expect consumer credit quality to come under pressure going forward; nonetheless, commercial banks are well provisioned</li>
</ul>


Brazil’s credit quality trends to November showed a broader deterioration in consumer credit categories than in October
System loan growth was 15.6% on a YoY basis in November which was a slowdown from October (16%), largely due to the deceleration in corporate loan growth
Benchmark rates continue to rise sharply to combat inflation, so we expect consumer credit quality to come under pressure going forward; nonetheless, commercial banks are well provisioned


Brazil Banking Data Trends to November in Ten Charts – Consumer Credit Delinquencies Worsen Further

<ul>
<li>Among EM banks, our top picks are Sberbank in Russia, Banco do Brasil and HDFC Bank in India; we are negative on recent IPO Nubank due to inflated market expectations</li>
<li>Our top picks for 2022 are BBVA and Banco BPM for Southern Europe banks. In Exchanges, we are positive on B3 of Brazil and SGX</li>
<li>In payments, we like Mastercard and Pagseguro, but we are negative on Paytm; we see BTG Pactual as an attractive pick and winner in the digital wealth managers and brokers</li>
</ul>


Among EM banks, our top picks are Sberbank in Russia, Banco do Brasil and HDFC Bank in India; we are negative on recent IPO Nubank due to inflated market expectations
Our top picks for 2022 are BBVA and Banco BPM for Southern Europe banks. In Exchanges, we are positive on B3 of Brazil and SGX
In payments, we like Mastercard and Pagseguro, but we are negative on Paytm; we see BTG Pactual as an attractive pick and winner in the digital wealth managers and brokers


2022 High Conviction Ideas in FinTech & Financials

Equity Capital Markets

<ul>
<li>Nubank’s shares are above the issue price post-IPO, with investors buying into the digital banking opportunity in Brazil as well as Mexico and Colombia</li>
<li>The bulls argue that the growth potential is not yet reflected in valuations; it has very low costs, and its positive returns will follow from greater loan and product penetration</li>
<li>Nubanks’s valuation is very stretched; good customer penetration does not yet equal deep product penetration which drives revenue growth, and new markets – Mexico and Colombia – will pressure costs</li>
</ul>


Nubank’s shares are above the issue price post-IPO, with investors buying into the digital banking opportunity in Brazil as well as Mexico and Colombia
The bulls argue that the growth potential is not yet reflected in valuations; it has very low costs, and its positive returns will follow from greater loan and product penetration
Nubanks’s valuation is very stretched; good customer penetration does not yet equal deep product penetration which drives revenue growth, and new markets – Mexico and Colombia – will pressure costs


Nubank (NU US) – IPO Done, Now Comes the Hard Part

<ul>
<li>Brazil’s credit quality trends to October were generally benign, with the notable exception of credit card delinquencies and arrears</li>
<li>System loan growth was 16% on a YoY basis in October unchanged from September, although corporate loan growth did slow slightly whilst consumer loan growth accelerated</li>
<li>Benchmark rates continue to rise sharply to combat inflation, so we expect consumer credit quality to continue to suffer going forward; nonetheless, commercial banks are well provisioned  </li>
</ul>


Brazil’s credit quality trends to October were generally benign, with the notable exception of credit card delinquencies and arrears
System loan growth was 16% on a YoY basis in October unchanged from September, although corporate loan growth did slow slightly whilst consumer loan growth accelerated
Benchmark rates continue to rise sharply to combat inflation, so we expect consumer credit quality to continue to suffer going forward; nonetheless, commercial banks are well provisioned  


Brazil Banking Data Trends to October in Ten Charts – Credit Card Delinquencies Rising

<ul>
<li>Brazil’s credit quality trends to September are diverging, with individual trends deteriorating and corporates improving</li>
<li>System loan growth was 16% on a YoY basis in September from 15.9% in August, driven by faster growth in household loans</li>
<li>Compared to August, consumer credit quality worsened across the board to September with household arrears (15-90 days delay) also deteriorating MoM</li>
<li>Credit quality of corporates, based on the data in our charts, was almost entirely positive to September with default rates further improved for all corporate types</li>
<li>The NPL ratio worsened further in the case of private international banks, whilst domestic banks NPL ratio improved MoM</li>
<li>Credit spreads edged higher in September, on a MoM basis, with the sharp rise in benchmark rates expected to feed through with a time lag</li>
<li>We remain constructive on the Brazil bank sector, and see that the latest data is supportive of public domestic banks; we retain our positive view on <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> </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 September are diverging, with individual trends deteriorating and corporates improving
System loan growth was 16% on a YoY basis in September from 15.9% in August, driven by faster growth in household loans
Compared to August, consumer credit quality worsened across the board to September with household arrears (15-90 days delay) also deteriorating MoM
Credit quality of corporates, based on the data in our charts, was almost entirely positive to September with default rates further improved for all corporate types
The NPL ratio worsened further in the case of private international banks, whilst domestic banks NPL ratio improved MoM
Credit spreads edged higher in September, on a MoM basis, with the sharp rise in benchmark rates expected to feed through with a time lag
We remain constructive on the Brazil bank sector, and see that the latest data is supportive of public domestic banks; we retain our positive view on Banco Do Brasil Sa (BBAS3 BZ) 
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 Banking Data Trends to September in Ten Charts – Credit Quality Divergence

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 Banking Data Trends to November in Ten Charts – Consumer Credit Delinquencies Worsen Further

November data gives us early signals about worsening consumer credit delinquencies (Figs 2, 3 & 4), with these trends being exacerbated by BCB’s...

Victor Galliano

2022 High Conviction Ideas in FinTech & Financials

Our 2022 high conviction ideas include buys on Sberbank, Banco do Brasil and HDFC Bank, as well as BBVA, Banco BPM, B3, SGX, Mastercard and...

Victor Galliano

Nubank (NU US) – IPO Done, Now Comes the Hard Part

More than other digital banks, Nubank suffers from a disconnect between size of customer base & loan & deposit balances; also, we estimate that...

Victor Galliano

Brazil Banking Data Trends to October in Ten Charts – Credit Card Delinquencies Rising

The data in the October charts give us early warnings about worsening delinquency in consumer credit, and that these trends are being exacerbated...

Victor Galliano

Brazil Banking Data Trends to September in Ten Charts – Credit Quality Divergence

Healthy loan growth but credit quality stress is rising in the consumer and household space, even if Corporate credit quality seems benign; public...

Victor Galliano

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