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>
<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

Thematic (Sector/Industry)

<ul><li>EM Bank shares have lifted off their recent lows, as investor sentiment turns in favour of value in general, and attractive value EM assets in particular</li></ul><ul><li>We highlight 5 EM banks we see as standouts on our bank screens, and in which EM investors have reduced weightings throughout 2020, and are likely to rebuild positions going forward; <a href="https://www.smartkarma.com/entities/credicorp-ltd" target="_blank" data-smartkarma-citation="entities:25963:1" rel="noopener">Credicorp Ltd (BAP US)</a>, <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>, <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>, <a href="https://www.smartkarma.com/entities/sberbank-of-russia-pjsc-cde59529-fb78-4659-85d0-127942b44ba7" target="_blank" data-smartkarma-citation="entities:27581:1" rel="noopener">Sberbank of Russia PJSC (SBER RM)</a> and <a href="https://www.smartkarma.com/entities/turkiye-garanti-bankasi-as" target="_blank" data-smartkarma-citation="entities:25026:1" rel="noopener">Turkiye Garanti Bankasi As (GARAN TI)</a> </li></ul><ul><li>We like <a href="https://www.smartkarma.com/entities/shinhan-financial-group-adr" target="_blank" data-smartkarma-citation="entities:4534:1" rel="noopener">Shinhan Financial Group Adr (SHG US)</a> and <a href="https://www.smartkarma.com/entities/bank-of-china-ltd-h" target="_blank" data-smartkarma-citation="entities:656:1" rel="noopener">Bank Of China Ltd (H) (3988 HK)</a> as other positive re-rating plays, based on attractive valuations and sound balance sheet metrics</li></ul><ul><li>We also believe that EM bank core holdings throughout the pandemic crisis, such as <a href="https://www.smartkarma.com/entities/kotak-mahindra-bank-ltd" target="_blank" data-smartkarma-citation="entities:126:1" rel="noopener">Kotak Mahindra Bank (KMB IN)</a> and <a href="https://www.smartkarma.com/entities/bank-central-asia-tbk-pt" target="_blank" data-smartkarma-citation="entities:440:1" rel="noopener">Bank Central Asia (BBCA IJ)</a>, may, in valuation terms, now be more exposed to negative rotation</li></ul><ul><li>Risks to our view include a worsening of sentiment towards EM equities and banks in particular, due to a deterioration in the pandemic outlook and a worsening of the macro-economic outlook for emerging markets</li></ul>

EM Bank shares have lifted off their recent lows, as investor sentiment turns in favour of value in general, and attractive value EM assets in particularWe highlight 5 EM banks we see as standouts on our bank screens, and in which EM investors have reduced weightings throughout 2020, and are likely to rebuild positions going forward; Credicorp Ltd (BAP US), Banco Do Brasil Sa (BBAS3 BZ), Grupo Financiero Banorte-O (GFNORTEO MF), Sberbank of Russia PJSC (SBER RM) and Turkiye Garanti Bankasi As (GARAN TI) We like Shinhan Financial Group Adr (SHG US) and Bank Of China Ltd (H) (3988 HK) as other positive re-rating plays, based on attractive valuations and sound balance sheet metricsWe also believe that EM bank core holdings throughout the pandemic crisis, such as Kotak Mahindra Bank (KMB IN) and Bank Central Asia (BBCA IJ), may, in valuation terms, now be more exposed to negative rotationRisks to our view include a worsening of sentiment towards EM equities and banks in particular, due to a deterioration in the pandemic outlook and a worsening of the macro-economic outlook for emerging markets

EM Banks: Screening for Value and Resilience

<ul>
<li>3Q20 Results for <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>  saw a significant improvement in cost of risk, charge-offs, the NPL ratio and NPL coverage</li>
<li>In addition, core capital is strong with CET1 ratio at 13.7%</li>
<li>We believe that, despite the continuing challenges ahead, the credit quality and NPL coverage outlook is constructive, with 3Q20 being a short term reprieve to cost of risk</li>
<li>We estimate that Banorte’s charge-offs as a share of gross loans for full year 2020 should be comparable to those for 2009, at the peak of the GFC, with the bulk of these already taken; yet we expect NPL coverage to remain above 100% at YE 2020</li>
<li>Non-bank operations, which account for approximately one third of group earnings, should continue to support returns going forward</li>
<li>Valuations are attractive for Banorte, in our view, with our proprietary estimates close to consensus estimates for 2020 and 2021</li>
<li>Risks to our view include worse than expected delinquencies and charge offs going forward, as well as increased interest margin pressure and high opex</li>
</ul>


3Q20 Results for Grupo Financiero Banorte-O (GFNORTEO MF)  saw a significant improvement in cost of risk, charge-offs, the NPL ratio and NPL coverage
In addition, core capital is strong with CET1 ratio at 13.7%
We believe that, despite the continuing challenges ahead, the credit quality and NPL coverage outlook is constructive, with 3Q20 being a short term reprieve to cost of risk
We estimate that Banorte’s charge-offs as a share of gross loans for full year 2020 should be comparable to those for 2009, at the peak of the GFC, with the bulk of these already taken; yet we expect NPL coverage to remain above 100% at YE 2020
Non-bank operations, which account for approximately one third of group earnings, should continue to support returns going forward
Valuations are attractive for Banorte, in our view, with our proprietary estimates close to consensus estimates for 2020 and 2021
Risks to our view include worse than expected delinquencies and charge offs going forward, as well as increased interest margin pressure and high opex


Banorte (GFNORTEO MM): Prepared for the Next Wave…of NPLs

<ul>
<li>
<a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings (HSBA LN)</a> delivered an encouraging set of results, driven primarily by lower expected credit losses and a very healthy core capital ratio</li>
<li>In addition, there was positive progress in the European and US restructuring, and in the group’s cost reduction programme</li>
<li>Updates on the strategic review of HSBC France retail and the US operations will be provided by management in February 2021</li>
<li>On the negative side, there was Asian interest margin erosion in the quarter due largely to the lower HIBOR, HSBC MENA loss deepened and the group’s 3Q20 cost of risk may be unsustainably low</li>
<li>HSBC Mexico offers some constructive read across for <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> 3Q20 results on cost of risk and also on revenues</li>
<li>HSBC has a very strong and liquid balance sheet, and has contained credit delinquency while maintaining NPL coverage</li>
<li>We are cautiously optimistic that medium term returns will exceed consensus expectations, on the back of management’s non-core business restructurings and cost attrition supported by growth in fee generating business in Asia</li>
<li>Risks to our view include worse than expected credit quality, intensifying competition in Asia putting pressure on fees and loan margins and slower than expected execution on restructurings</li>
</ul>



HSBC Holdings (HSBA LN) delivered an encouraging set of results, driven primarily by lower expected credit losses and a very healthy core capital ratio
In addition, there was positive progress in the European and US restructuring, and in the group’s cost reduction programme
Updates on the strategic review of HSBC France retail and the US operations will be provided by management in February 2021
On the negative side, there was Asian interest margin erosion in the quarter due largely to the lower HIBOR, HSBC MENA loss deepened and the group’s 3Q20 cost of risk may be unsustainably low
HSBC Mexico offers some constructive read across for Grupo Financiero Banorte-O (GFNORTEO MF) 3Q20 results on cost of risk and also on revenues
HSBC has a very strong and liquid balance sheet, and has contained credit delinquency while maintaining NPL coverage
We are cautiously optimistic that medium term returns will exceed consensus expectations, on the back of management’s non-core business restructurings and cost attrition supported by growth in fee generating business in Asia
Risks to our view include worse than expected credit quality, intensifying competition in Asia putting pressure on fees and loan margins and slower than expected execution on restructurings


HSBC (HSBA LN): Signs of Progress, Within a Mixed Set of 3Q20 Results

<ul>
<li>CNBV’s August banks data this week is positive at the sector level</li>
<li>Credit quality trends in particular are constructive at the sector level, and credit spreads stable even if loan growth has slowed</li>
<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>  is also looking positive with a notable downturn in cost of risk in August, steady loan growth, well controlled opex and a healthy credit spread trend</li>
<li>Banorte also bucks the sector trend with a slight improvement in the adjusted credit card NPL ratio to August</li>
<li>Names to watch are <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> and <a href="https://www.smartkarma.com/entities/regional-sab-de-cv" target="_blank" data-smartkarma-citation="entities:27996:1" rel="noopener">Regional SAB de CV (RA MM)</a>, even though the trends to August suggest that the cost of risk could continue to pressure returns</li>
<li>Investor sentiment towards Mexico – and Banorte – seems to be improving, and Banorte’s valuations look attractive, in our view</li>
<li>Risks to our positive view on Banorte include a further worsening of credit quality, an erosion of credit spreads and a spike in opex</li>
</ul>


CNBV’s August banks data this week is positive at the sector level
Credit quality trends in particular are constructive at the sector level, and credit spreads stable even if loan growth has slowed

Grupo Financiero Banorte-O (GFNORTEO MF)  is also looking positive with a notable downturn in cost of risk in August, steady loan growth, well controlled opex and a healthy credit spread trend
Banorte also bucks the sector trend with a slight improvement in the adjusted credit card NPL ratio to August
Names to watch are Banco del Bajio SA (BBAJIOO MM) and Regional SAB de CV (RA MM), even though the trends to August suggest that the cost of risk could continue to pressure returns
Investor sentiment towards Mexico – and Banorte – seems to be improving, and Banorte’s valuations look attractive, in our view
Risks to our positive view on Banorte include a further worsening of credit quality, an erosion of credit spreads and a spike in opex


Mexican Banks Data for August Is Positive for Banorte (GFNORTEO MM)

Mexico

Grupo Financiero Banorte S.A.B. de C.V. is a financial institution in Mexico. The Company offers banking services, premium banking, wholesale banking, leasing and factoring, warehousing, insurance, pensions and retirement savings.

Grupo Financiero Banorte SAB d (GFNORTEO MF)

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Grupo Financiero Banorte SAB d (GFNORTEO MF)

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

EM Banks: Screening for Value and Resilience

We highlight 5 EM banks we see as standouts on our bank screens, Credicorp, Banco do Brasil, Banorte, Sberbank and Garanti. EM investors reduced...

Victor Galliano

Banorte (GFNORTEO MM): Prepared for the Next Wave…of NPLs

Banorte gets a short term reprieve on cost of risk in 3Q20, but is well positioned to tackle worse credit quality into 1H 2021, as the Mexican...

Victor Galliano

HSBC (HSBA LN): Signs of Progress, Within a Mixed Set of 3Q20 Results

HSBC's 3Q20 results were constructive, with signs of restructuring benefits coming through, as well as well contained delinquencies; there is much...

Victor Galliano

Mexican Banks Data for August Is Positive for Banorte (GFNORTEO MM)

August data for the Mexican bank sector adds conviction to our positive view on Banorte, in terms of credit quality, cost control and credit spreads

Victor Galliano

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