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.

Thematic (Sector/Industry)

<ul>
<li>BBVA Bancomer delivered the best return on equity (ROE) of the biggest nine Mexican banks to September, at 20%, improving on a MoM basis due largely to a sub 40% efficiency ratio; in terms of ROE to core capital ratio, we identify that BBVA Bancomer and Banorte retain the best position, “working” their healthy levels of core capital harder than their peers</li>
<li>The bank system trends seem healthy, with well controlled NPL ratios and healthy coverage; one core risk to this rosy scenario is, in our view, worse than expected GDP growth leading to an up-tick in consumer delinquencies going forward, which would warrant an increase in cost of risk charges. Another factor that could upset returns is eroding credit margins due to rising funding costs</li>
<li>
<a href="https://www.smartkarma.com/entities/grupo-financiero-banorte-s-a-b-de-c-v" target="_blank" data-smartkarma-citation="entities:24780:1" rel="noopener">Grupo Financiero Banorte (GFNORTEO MF)</a>  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 to screen better than peers on credit quality metrics to August, with best-in-class combination of low NPL ratios and healthy coverage. Despite its good metrics, we recently turned negative on Banorte, due largely to valuation and increasing competition; we would highlight mid-cap bank BanBajio for its better relative value, and in the context of improving consumer credit quality</li>
</ul>


BBVA Bancomer delivered the best return on equity (ROE) of the biggest nine Mexican banks to September, at 20%, improving on a MoM basis due largely to a sub 40% efficiency ratio; in terms of ROE to core capital ratio, we identify that BBVA Bancomer and Banorte retain the best position, “working” their healthy levels of core capital harder than their peers
The bank system trends seem healthy, with well controlled NPL ratios and healthy coverage; one core risk to this rosy scenario is, in our view, worse than expected GDP growth leading to an up-tick in consumer delinquencies going forward, which would warrant an increase in cost of risk charges. Another factor that could upset returns is eroding credit margins due to rising funding costs

Grupo Financiero Banorte (GFNORTEO MF)  and Banco del Bajio SA (BBAJIOO MM) continue to screen better than peers on credit quality metrics to August, with best-in-class combination of low NPL ratios and healthy coverage. Despite its good metrics, we recently turned negative on Banorte, due largely to valuation and increasing competition; we would highlight mid-cap bank BanBajio for its better relative value, and in the context of improving consumer credit quality


Mexican Banks’ September Data Looks Benign, but Not Without Potential Challenges

Equity Bottom-Up

Grupo Financiero Banorte SAB d / Equity Bottom-Up

<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

Event-Driven

<ul>
<li>
<a href="https://www.smartkarma.com/entities/banco-santander-sa" target="_blank" data-smartkarma-citation="entities:21296:1" rel="noopener">Banco Santander Sa (SAN SM)</a>  is to offer MXN24 per share for the 8.3% of <a href="https://www.smartkarma.com/entities/banco-santander-mexico-sa-in" target="_blank" data-smartkarma-citation="entities:27672:1" rel="noopener">Banco Santander Mexico-B (BSMXB MM)</a>  held by minorities</li>
<li>Based on consensus estimates, the offer values SanMex at USD7.5bn (€6.4bn) and on a 2021E PBV ratio of 1x and a 2021E PE multiple of 8.8x</li>
<li>Santander estimates an outlay of €550m for full take up of the offer, with a positive impact to Santander Group EPS of 0.8% in 2023</li>
<li>Santander originally made an all share offer for minorities in April 2019, of Santander parent for SanMex shares; nearly two years later it is offering to sweep up the remaining minorities at an estimated 37% discount to its 2019, admittedly all share, offer</li>
<li>The offer is at least all cash, but we see it as an opportunistic offer by the parent  - SanMex is cheap relative to its LatAm peers and sister banks - to “tidy up” the shareholder structure</li>
<li>All the same, we do not believe that minorities have much bargaining power to oppose this, and based on the closing price of the 26<sup>th</sup> March, there is still 5.6% upside potential to the cash offer price</li>
<li>Our preferred name in Mexico remains <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> </li>
<li>Risks to our positive view include that Santander group withdraws its offer for the minorities, or that it does not gain regulatory approval in Mexico</li>
</ul>



Banco Santander Sa (SAN SM)  is to offer MXN24 per share for the 8.3% of Banco Santander Mexico-B (BSMXB MM)  held by minorities
Based on consensus estimates, the offer values SanMex at USD7.5bn (€6.4bn) and on a 2021E PBV ratio of 1x and a 2021E PE multiple of 8.8x
Santander estimates an outlay of €550m for full take up of the offer, with a positive impact to Santander Group EPS of 0.8% in 2023
Santander originally made an all share offer for minorities in April 2019, of Santander parent for SanMex shares; nearly two years later it is offering to sweep up the remaining minorities at an estimated 37% discount to its 2019, admittedly all share, offer
The offer is at least all cash, but we see it as an opportunistic offer by the parent  - SanMex is cheap relative to its LatAm peers and sister banks - to “tidy up” the shareholder structure
All the same, we do not believe that minorities have much bargaining power to oppose this, and based on the closing price of the 26th March, there is still 5.6% upside potential to the cash offer price
Our preferred name in Mexico remains Grupo Financiero Banorte-O (GFNORTEO MF) 
Risks to our positive view include that Santander group withdraws its offer for the minorities, or that it does not gain regulatory approval in Mexico


Santander Mexico (BSMXB MM) – Opportunistic Cash Offer for Minorities

<ul>
<li>Payment holidays and deferrals on loans came to an end in 4Q20 in Mexico, and this is reflected in the credit quality metrics</li>
<li>Loan balances fell in the year, as shown in Figure 2</li>
<li>We are starting to see the impact of the end of pandemic programmes, such as loan payment holidays and deferrals, translating into higher delinquency</li>
<li>Consequently, the rising cost of risk impacted Mexican bank sector returns for the full year, as shown in Figure 4</li>
<li>Yet banks seem well provisioned with system NPL coverage at 160% at YE 2020, and Banorte’s at 228%</li>
<li>We reiterate our positive view on <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>, and believe that it is in a stronger position than BBVA Bancomer and <a href="https://www.smartkarma.com/entities/banco-santander-mexico-sa-in" target="_blank" data-smartkarma-citation="entities:27672:1" rel="noopener">Banco Santander Mexico-B (BSMXB MM)</a> in terms of restructurings and deferrals; <a href="https://www.smartkarma.com/entities/grupo-financiero-inbursa-o" target="_blank" data-smartkarma-citation="entities:24776:1" rel="noopener">Grupo Financiero Inbursa-O (GFINBURO MM)</a> also seems to screen well, in our view</li>
<li>Risks to our positive view on Banorte include much worse than expected delinquency, especially in the consumer and SME segments, as a result of the pandemic induced economic contraction driving worse than expected cost of risk</li>
</ul>


Payment holidays and deferrals on loans came to an end in 4Q20 in Mexico, and this is reflected in the credit quality metrics
Loan balances fell in the year, as shown in Figure 2
We are starting to see the impact of the end of pandemic programmes, such as loan payment holidays and deferrals, translating into higher delinquency
Consequently, the rising cost of risk impacted Mexican bank sector returns for the full year, as shown in Figure 4
Yet banks seem well provisioned with system NPL coverage at 160% at YE 2020, and Banorte’s at 228%
We reiterate our positive view on Grupo Financiero Banorte-O (GFNORTEO MF), and believe that it is in a stronger position than BBVA Bancomer and Banco Santander Mexico-B (BSMXB MM) in terms of restructurings and deferrals; Grupo Financiero Inbursa-O (GFINBURO MM) also seems to screen well, in our view
Risks to our positive view on Banorte include much worse than expected delinquency, especially in the consumer and SME segments, as a result of the pandemic induced economic contraction driving worse than expected cost of risk


Mexican Banks YE 2020 Credit Quality Data Points; Banorte Screens Better than Peers

<ul>
<li>
<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> announced that it is to boost loan loss provisions by MXN2bn in 4Q20 reflecting the heightened pandemic credit risks</li>
<li>We see this as a “kitchen sinking” of 2020 earnings via cost of risk charges, but this creates a base for earnings recovery into 2021 and 2022</li>
<li>The Mexican banks’ November data underscores the need for bolstering provisions among the big banks; BBVA Bancomer, <a href="https://www.smartkarma.com/entities/banco-santander-mexico-sa-in" target="_blank" data-smartkarma-citation="entities:27672:1" rel="noopener">Banco Santander Mexico-B (BSMXB MM)</a>, HSBC Mexico and CitiBanamex could all take a similar path to Banorte</li>
<li>We reiterate our positive view on Banorte, which screens well versus other EM banks on valuation and compares favourably in terms of credit quality and capital adequacy to its key Mexican peers</li>
<li>Risks to our positive Banorte view include worse than expected credit quality going forward, leading to higher credit charges, as well as soft loan growth and credit spread erosion</li>
</ul>



Grupo Financiero Banorte-O (GFNORTEO MF) announced that it is to boost loan loss provisions by MXN2bn in 4Q20 reflecting the heightened pandemic credit risks
We see this as a “kitchen sinking” of 2020 earnings via cost of risk charges, but this creates a base for earnings recovery into 2021 and 2022
The Mexican banks’ November data underscores the need for bolstering provisions among the big banks; BBVA Bancomer, Banco Santander Mexico-B (BSMXB MM), HSBC Mexico and CitiBanamex could all take a similar path to Banorte
We reiterate our positive view on Banorte, which screens well versus other EM banks on valuation and compares favourably in terms of credit quality and capital adequacy to its key Mexican peers
Risks to our positive Banorte view include worse than expected credit quality going forward, leading to higher credit charges, as well as soft loan growth and credit spread erosion


Banorte (GFNORTEO MF) To Boost Provisions; November Banks Data in Charts Reflects System’s Strength

Mexico

Banco Santander Mexico, S.A., Institucion de Banca Multiple, Grupo Financiero Santander Mexico provides commercial banking services. The Bank offers personal and corporate loans, saving accounts, deposits, credit cards, mutual funds, lease financing, investment facilities, and business consulting services. Banco Santander Mexico serves its customers in Mexico.

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Banco Santander Mexico-B (BSMXB MM)

Mexican Banks’ September Data Looks Benign, but Not Without Potential Challenges

Mexican banks data to September are healthy, but rising funding costs threaten credit spreads, and any potential GDP slowdown could worsen consumer...

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

Santander Mexico (BSMXB MM) – Opportunistic Cash Offer for Minorities

Opportunistic offer by Santander for the SanMex minorities, at a c37% discount to the April 2019 all share offer. Activist rejection of offer is...

Victor Galliano

Mexican Banks YE 2020 Credit Quality Data Points; Banorte Screens Better than Peers

Mexican banks' YE 2020 credit data points to the coming wave of worsening credit quality; Banorte is best positioned among its peers to confront...

Victor Galliano

Banorte (GFNORTEO MF) To Boost Provisions; November Banks Data in Charts Reflects System’s Strength

Banorte will top up credit charges in 4Q20, boosting NPL coverage; for 2021 and 2022 we see lesser earnings risk for attractively valued Banorte,...

Victor Galliano

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