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>BPCE, the co-operative banking group and majority shareholder of <a href="https://www.smartkarma.com/entities/natixis-sa" target="_blank" data-smartkarma-citation="entities:21493:1" rel="noopener">Natixis SA (KN FP)</a> , is offering €4 per share to 29.3% owned by Natixis minority shareholders</li>
<li>Since the replacement of Francois Riahi as CEO by Nicolas Namais last August, Natixis has been brought under closer control by BPCE</li>
<li>We believe that this move will tighten BPCE control and accelerate the restructuring in the asset management and investment banking arenas</li>
<li>Even though this deal is a specific case, in broader terms, it reflects there is appetite for banking deals at current valuations, and that European bank M&amp;A is largely focused on intra-country deals, as has recently been seen in Spain and Italy</li>
<li>A successful offer would result in Natixis being delisting and it implies a “take out” PBV ratio of 0.7x and PE multiple of 15.8x for 2021, based on consensus estimates, which should be appealing to minorities</li>
<li>Risks to our constructive views on European banks M&amp;A prospects include regulatory hurdles, at the national and supra-national levels, as well as capital constraints and credit quality challenges</li>
</ul>


BPCE, the co-operative banking group and majority shareholder of Natixis SA (KN FP) , is offering €4 per share to 29.3% owned by Natixis minority shareholders
Since the replacement of Francois Riahi as CEO by Nicolas Namais last August, Natixis has been brought under closer control by BPCE
We believe that this move will tighten BPCE control and accelerate the restructuring in the asset management and investment banking arenas
Even though this deal is a specific case, in broader terms, it reflects there is appetite for banking deals at current valuations, and that European bank M&amp;A is largely focused on intra-country deals, as has recently been seen in Spain and Italy
A successful offer would result in Natixis being delisting and it implies a “take out” PBV ratio of 0.7x and PE multiple of 15.8x for 2021, based on consensus estimates, which should be appealing to minorities
Risks to our constructive views on European banks M&amp;A prospects include regulatory hurdles, at the national and supra-national levels, as well as capital constraints and credit quality challenges


Natixis (KN FP) - BPCE: European Bank Consolidation Rolls On

<ul>
<li>The elephant in the Italian bank M&amp;A room is government controlled <a href="https://www.smartkarma.com/entities/banca-monte-dei-paschi-di-siena" target="_blank" data-smartkarma-citation="entities:21162:1" rel="noopener">Banca Monte dei Paschi di Siena (BMPS IM)</a>, which needs to find a merger partner in 2021; will that be <a href="https://www.smartkarma.com/entities/unicredit-spa" target="_blank" data-smartkarma-citation="entities:21234:1" rel="noopener">UniCredit SpA (UCG IM)</a>, post-Mustier, and who could be its new CEO?</li>
<li>We believe that, in the event of a Unicredit acquisition of BMPS, it would require meaningful “government sponsorship”; in effect, for BMPS, pre-deal, to dispose of the bulk of its NPLs – which is underway – and for a capital infusion that renders the deal to be capital neutral for Unicredit</li>
<li>The other big M&amp;A unknowns relate to the listed mid-cap banks especially <a href="https://www.smartkarma.com/entities/banco-bpm-spa" target="_blank" data-smartkarma-citation="entities:28121:1" rel="noopener">Banco BPM SpA (BAMI IM)</a> and <a href="https://www.smartkarma.com/entities/bper-banca-s-p-a" target="_blank" data-smartkarma-citation="entities:21165:1" rel="noopener">BPER Banca S.p.A (BPE IM)</a>; these banks need to cut costs and branch networks, which can be more readily incorporated into a merger restructuring plan</li>
<li>We believe that the risk of a BMPS acquisition is largely priced into Unicredit shares, and we expect its wide PBV discount to premium valued <a href="https://www.smartkarma.com/entities/intesa-sanpaolo-spa" target="_blank" data-smartkarma-citation="entities:21200:1" rel="noopener">Intesa Sanpaolo (ISP IM)</a> to narrow;  our recommendation is to go long Unicredit, short Intesa</li>
<li>We think <a href="https://www.smartkarma.com/entities/credit-agricole-sa" target="_blank" data-smartkarma-citation="entities:21373:1" rel="noopener">Credit Agricole Sa (ACA FP)</a> is unlikely to sweeten the <a href="https://www.smartkarma.com/entities/credito-valtellinese-spa" target="_blank" data-smartkarma-citation="entities:21175:1" rel="noopener">Credito Valtellinese Sc (CVAL IM)</a> cash offer of €10.50 per share, and with CreVal shares trading at a 7% offer premium, there could be downside risk</li>
<li>We remain negative on Banco BPM shares, as, in the wake of the CredAg offer for CreVal, we believe that BPM’s options are limited, and that it may be the potential “back-stop” merger candidate with BMPS, in the event of no deal with Unicredit; the alternative could be a BPM-BPER merger, and we turn constructive on BPER, after its protracted underperformance</li>
<li>Risks to our view include Unicredit acquiring BMPS on worse than expected terms, with Intesa on the other hand delivering better than expected synergies and savings from the UBI integration; other risks also include a bidder emerging for BPM, as well as no merger or bid for BPER</li>
</ul>


The elephant in the Italian bank M&amp;A room is government controlled Banca Monte dei Paschi di Siena (BMPS IM), which needs to find a merger partner in 2021; will that be UniCredit SpA (UCG IM), post-Mustier, and who could be its new CEO?
We believe that, in the event of a Unicredit acquisition of BMPS, it would require meaningful “government sponsorship”; in effect, for BMPS, pre-deal, to dispose of the bulk of its NPLs – which is underway – and for a capital infusion that renders the deal to be capital neutral for Unicredit
The other big M&amp;A unknowns relate to the listed mid-cap banks especially Banco BPM SpA (BAMI IM) and BPER Banca S.p.A (BPE IM); these banks need to cut costs and branch networks, which can be more readily incorporated into a merger restructuring plan
We believe that the risk of a BMPS acquisition is largely priced into Unicredit shares, and we expect its wide PBV discount to premium valued Intesa Sanpaolo (ISP IM) to narrow;  our recommendation is to go long Unicredit, short Intesa
We think Credit Agricole Sa (ACA FP) is unlikely to sweeten the Credito Valtellinese Sc (CVAL IM) cash offer of €10.50 per share, and with CreVal shares trading at a 7% offer premium, there could be downside risk
We remain negative on Banco BPM shares, as, in the wake of the CredAg offer for CreVal, we believe that BPM’s options are limited, and that it may be the potential “back-stop” merger candidate with BMPS, in the event of no deal with Unicredit; the alternative could be a BPM-BPER merger, and we turn constructive on BPER, after its protracted underperformance
Risks to our view include Unicredit acquiring BMPS on worse than expected terms, with Intesa on the other hand delivering better than expected synergies and savings from the UBI integration; other risks also include a bidder emerging for BPM, as well as no merger or bid for BPER


Italian Banks M&A Scenarios: The Italian Job in 2021

European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

On 23 November, <a href="https://www.smartkarma.com/entities/credit-agricole-sa" target="_blank" data-smartkarma-citation="entities:21373:1" rel="noopener">Credit Agricole Sa (ACA FP)</a> , through its Italian subsidiary, launched a voluntary public tender offer entirely in cash for all ordinary shares of <a href="https://www.smartkarma.com/entities/credito-valtellinese-spa" target="_blank" data-smartkarma-citation="entities:21175:1" rel="noopener">Credito Valtellinese Sc (CVAL IM)</a> at €10.50 per share.
<ul>
<li>The offer is addressed to the remaining 90.15% shares of Creval that Crédit Agricole does not already own, for a total amount of €664.39 mn.</li>
<li>Valuing the total equity of Creval at c. €736.57 mn. (for comparison, Crédit Agricole's market cap is €28.5 bn).</li>
<li>Representing 22.8x P/Forward EPS, and 0.43x P/TBV.</li>
</ul>
Creval closed on 26 November at €11.5.
<ul>
<li>8.7% above Crédit Agricole's offer and 0.47x P/TBV.</li>
<li>which indicates that the market expects a sweetened bid.</li>
</ul>
The Board of Directors of Creval issued a press release on 25 November calling the offer "unexpected and unsolicited", and indicating that it will hire financial and legal advisors.
<ul>
<li>Of course this should be read as "the offer is too low".</li>
</ul>
The offer seems a tad opportunistic on the back of cheap bank valuations, to which ECB's negative-interest rates policy and the fact that banks aren't allowed to distribute dividends are contributing.
The median target price on Capital IQ is €10.45, so the offer at €10.50 seems bang on, but Creval's Board has signalled it considers the offer too low. The stock is no longer trading on fundamentals, but the bid price will act as support.
<ul>
<li>I believe in the end shareholders will likely accept a sweetened offer, which could come at around €12.0 per share, a 38% premium and c. 0.49x P/TBV, which does not sound excessive.</li>
</ul>

On 23 November, Credit Agricole Sa (ACA FP) , through its Italian subsidiary, launched a voluntary public tender offer entirely in cash for all ordinary shares of Credito Valtellinese Sc (CVAL IM) at €10.50 per share.

The offer is addressed to the remaining 90.15% shares of Creval that Crédit Agricole does not already own, for a total amount of €664.39 mn.
Valuing the total equity of Creval at c. €736.57 mn. (for comparison, Crédit Agricole's market cap is €28.5 bn).
Representing 22.8x P/Forward EPS, and 0.43x P/TBV.

Creval closed on 26 November at €11.5.

8.7% above Crédit Agricole's offer and 0.47x P/TBV.
which indicates that the market expects a sweetened bid.

The Board of Directors of Creval issued a press release on 25 November calling the offer "unexpected and unsolicited", and indicating that it will hire financial and legal advisors.

Of course this should be read as "the offer is too low".

The offer seems a tad opportunistic on the back of cheap bank valuations, to which ECB's negative-interest rates policy and the fact that banks aren't allowed to distribute dividends are contributing.
The median target price on Capital IQ is €10.45, so the offer at €10.50 seems bang on, but Creval's Board has signalled it considers the offer too low. The stock is no longer trading on fundamentals, but the bid price will act as support.

I believe in the end shareholders will likely accept a sweetened offer, which could come at around €12.0 per share, a 38% premium and c. 0.49x P/TBV, which does not sound excessive.


Creval - Crédit Agricole: Playing Hard to Get

<ul>
<li>
<a href="https://www.smartkarma.com/entities/credit-agricole-sa" target="_blank" data-smartkarma-citation="entities:21373:1" rel="noopener">Credit Agricole Sa (ACA FP)</a> -  CASA – has made a cash offer of €10.50 per share for <a href="https://www.smartkarma.com/entities/credito-valtellinese-spa" target="_blank" data-smartkarma-citation="entities:21175:1" rel="noopener">Credito Valtellinese Sc (CVAL IM)</a> which values it at €736m, equivalent to 0.4x PBV</li>
<li>The successful acquisition will consolidate Credit Agricole Italia as the seventh largest bank by total assets in the country, with a 5% bank branch market share</li>
<li>The cash acquisition is expected to impact CredAg’s CET1 ratio – which was 12.6% at 3Q20 – by less than 20bps</li>
<li>CredAg Italia’s NPL ratio was 6.6% at 3Q20, with CreVal’s favourably comparable NPL ratio of 6.4%; CredAg Italia does, nonetheless, have better NPL coverage than CreVal</li>
<li>CredAg was rumoured to be a potential bidder for <a href="https://www.smartkarma.com/entities/banco-bpm-spa" target="_blank" data-smartkarma-citation="entities:28121:1" rel="noopener">Banco BPM SpA (BAMI IM)</a>, but management has opted for the smaller and more digestible CreVal as its Italian acquisition, with limited impact on CASA’S and CredAg Italia’s capital adequacy and credit quality</li>
<li>Banco BPM, with its market capitalisation of €2.8bn, its NPL ratio of 8.6% and NPL coverage of 48% at 3Q20 is a riskier proposition</li>
<li>Shares in Banco BPM were down 3.7% on the 23rd November, with CASA’s shares rising 4%, no doubt on shareholder relief that it did not acquire Banco BPM</li>
<li>We see further near term downside for Banco BPM shares, in view of the CreVal news; yet we are positive on BPM’s medium term fundamentals as management continues to successful de-risk the credit portfolio going forward and build core capital</li>
<li>BPM management should be thinking more in terms of domestic consolidation candidates</li>
<li>Risks to our near term negative view on Banco BPM include the emergence of a bidder or merger partner in the near term</li>
</ul>



Credit Agricole Sa (ACA FP) -  CASA – has made a cash offer of €10.50 per share for Credito Valtellinese Sc (CVAL IM) which values it at €736m, equivalent to 0.4x PBV
The successful acquisition will consolidate Credit Agricole Italia as the seventh largest bank by total assets in the country, with a 5% bank branch market share
The cash acquisition is expected to impact CredAg’s CET1 ratio – which was 12.6% at 3Q20 – by less than 20bps
CredAg Italia’s NPL ratio was 6.6% at 3Q20, with CreVal’s favourably comparable NPL ratio of 6.4%; CredAg Italia does, nonetheless, have better NPL coverage than CreVal
CredAg was rumoured to be a potential bidder for Banco BPM SpA (BAMI IM), but management has opted for the smaller and more digestible CreVal as its Italian acquisition, with limited impact on CASA’S and CredAg Italia’s capital adequacy and credit quality
Banco BPM, with its market capitalisation of €2.8bn, its NPL ratio of 8.6% and NPL coverage of 48% at 3Q20 is a riskier proposition
Shares in Banco BPM were down 3.7% on the 23rd November, with CASA’s shares rising 4%, no doubt on shareholder relief that it did not acquire Banco BPM
We see further near term downside for Banco BPM shares, in view of the CreVal news; yet we are positive on BPM’s medium term fundamentals as management continues to successful de-risk the credit portfolio going forward and build core capital
BPM management should be thinking more in terms of domestic consolidation candidates
Risks to our near term negative view on Banco BPM include the emergence of a bidder or merger partner in the near term


Credit Agricole SA Opts for CreVal M&A, Banco BPM (BAMI IM) Side-Lined

<ul>
<li>The Italian Prime Minister Giuseppe Conte resigned on Tuesday resulting in the collapse of the anti-establishment coalition, between the right-wing League and left-wing Five Star Movement</li>
<li>There are on-going discussions between the opposition centre-left Democratic Party (PD) and the Five Star Movement (M5S), historically political rivals, which could potentially form a government. The other main political outcomes could be a caretaker government to see through the budget, or an Italian snap general election which could favour the far-right League</li>
<li>Markets have reacted mildly positively to the resignation news, with sovereign bond yields trending lower, as investors are hopeful of a PD-M5S alliance</li>
<li>A potential headwind to Italian banks would be a failure to structure a left-wing alliance, opening the door for a general election, which could usher in the far-right League and drive up sovereign bond yields</li>
<li>Despite the political uncertainty, we see deep value in the Italian banks, with <a href="https://www.smartkarma.com/entities/unicredit-spa" target="_blank" data-smartkarma-citation="entities:21234:1" rel="noopener">UniCredit SpA (UCG IM)</a> as the most attractive Italian bank on its "self-help" credentials along with its defensive qualities in the case of an-election-with-League-victory scenario</li>
<li>In the case of a more benign PD-M5S alliance scenario, which could imply lesser political headwinds, we would opt for higher "octane" banks <a href="https://www.smartkarma.com/entities/banca-popolare-dell-emilia-rom" target="_blank" data-smartkarma-citation="entities:21165:1" rel="noopener">Banca Popolare Dell'Emilia Rom (BPE IM) </a>and <a href="https://www.smartkarma.com/entities/banco-bpm-spa" target="_blank" data-smartkarma-citation="entities:28121:1" rel="noopener">Banco BPM SpA (BAMI IM)</a>
</li>
</ul>


The Italian Prime Minister Giuseppe Conte resigned on Tuesday resulting in the collapse of the anti-establishment coalition, between the right-wing League and left-wing Five Star Movement
There are on-going discussions between the opposition centre-left Democratic Party (PD) and the Five Star Movement (M5S), historically political rivals, which could potentially form a government. The other main political outcomes could be a caretaker government to see through the budget, or an Italian snap general election which could favour the far-right League
Markets have reacted mildly positively to the resignation news, with sovereign bond yields trending lower, as investors are hopeful of a PD-M5S alliance
A potential headwind to Italian banks would be a failure to structure a left-wing alliance, opening the door for a general election, which could usher in the far-right League and drive up sovereign bond yields
Despite the political uncertainty, we see deep value in the Italian banks, with UniCredit SpA (UCG IM) as the most attractive Italian bank on its "self-help" credentials along with its defensive qualities in the case of an-election-with-League-victory scenario
In the case of a more benign PD-M5S alliance scenario, which could imply lesser political headwinds, we would opt for higher "octane" banks Banca Popolare Dell'Emilia Rom (BPE IM) and Banco BPM SpA (BAMI IM)



Italian Banks: Value Opportunities, Despite Political Uncertainty

Italy

Credito Valtellinese S.p.A. operates as a commercial bank. The Bank provides financial products and services. Credito Valtellinese serves households, small and medium enterprises, artisans, professionals, and non-profit organizations customers in Italy.

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Credito Valtellinese SpA (CVAL IM)

Natixis (KN FP) - BPCE: European Bank Consolidation Rolls On

Even if this case is specific , BPCE's offer for Natixis shows that European bank consolidation continues, mainly on an intra-national level; we...

Victor Galliano

Italian Banks M&A Scenarios: The Italian Job in 2021

Italian banks M&A is gathering and we take a largely contrarian stance on stocks; pairs trade long Unicredit, short Intesa; positive on BPER,...

Victor Galliano

Creval - Crédit Agricole: Playing Hard to Get

I believe in the end Creval's shareholders will likely accept a sweetened offer, which could come at around €12.0 per share, a 38% premium and c....

Jesus Rodriguez Aguilar

Credit Agricole SA Opts for CreVal M&A, Banco BPM (BAMI IM) Side-Lined

CredAg was rumoured to be a potential bidder for Banco BPM, but management has opted for the smaller CreVal as its Italian consolidation choice; we...

Victor Galliano

Italian Banks: Value Opportunities, Despite Political Uncertainty

The Italian Prime Minister Giuseppe Conte resigned on Tuesday resulting in the collapse of the anti-establishment coalition, between the...

Victor Galliano

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