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.

Event-Driven

Grupo Financiero Banorte SAB d / Event-Driven

<ul>
<li>Banorte delivered solid 1Q22 results; management is dangling the carrot of a multi-year shareholder dividend pay-out in 2022, implying a potential dividend yield of c7%</li>
<li>The potential catch is the real risk of Banorte acquiring the Citibanamex franchise, which could require capital and cash retention, thereby potentially curtailing the dividend prospects</li>
<li>In the event of Banorte acquiring Citibanamex, we believe that our calculations imply the likely risk of an equity cash call, which drives us to turn cautious on Banorte again</li>
</ul>


Banorte delivered solid 1Q22 results; management is dangling the carrot of a multi-year shareholder dividend pay-out in 2022, implying a potential dividend yield of c7%
The potential catch is the real risk of Banorte acquiring the Citibanamex franchise, which could require capital and cash retention, thereby potentially curtailing the dividend prospects
In the event of Banorte acquiring Citibanamex, we believe that our calculations imply the likely risk of an equity cash call, which drives us to turn cautious on Banorte again


Banorte – Potential M&A Raises Questions on Dividend Prospects

Equity Bottom-Up

<ul>
<li>The prospect of Russia being excluded from key emerging market indices is very real, in our view, and here we focus on the iShares MSCI Emerging Markets ETF</li>
<li>The main beneficiaries of an index re-balancing would be the dominant EM Asian economies, and select African economies, but we cannot disregard LatAm and in particular we concentrate on financials</li>
<li>Largest weightings aside, we highlight our preferred LatAm financial names based on fundamentals; Banco do Brasil, B3, BanColombia and Banco del Bajio, we also remove Banorte from the sell list</li>
</ul>


The prospect of Russia being excluded from key emerging market indices is very real, in our view, and here we focus on the iShares MSCI Emerging Markets ETF
The main beneficiaries of an index re-balancing would be the dominant EM Asian economies, and select African economies, but we cannot disregard LatAm and in particular we concentrate on financials
Largest weightings aside, we highlight our preferred LatAm financial names based on fundamentals; Banco do Brasil, B3, BanColombia and Banco del Bajio, we also remove Banorte from the sell list


EM Banks and Financials – The Rebalancing in Index Weightings from the LatAm Perspective

<ul>
<li>BBVA Mexico expanded its premium return on equity of the big nine Mexican banks to 23% to December, and through opex control, it “works” its healthy core capital ratio hard</li>
<li>The bank system trends remain healthy, with additional improvements to NPL ratios and healthy coverage; Banorte and BanBajio screen better than peers on combined credit quality metrics to December</li>
<li>We believe that mid-cap bank BanBajio is good value, and are positive on BBVA for its Mexican exposure; on balance, we remain cautious on Banorte, due largely to valuation</li>
</ul>


BBVA Mexico expanded its premium return on equity of the big nine Mexican banks to 23% to December, and through opex control, it “works” its healthy core capital ratio hard
The bank system trends remain healthy, with additional improvements to NPL ratios and healthy coverage; Banorte and BanBajio screen better than peers on combined credit quality metrics to December
We believe that mid-cap bank BanBajio is good value, and are positive on BBVA for its Mexican exposure; on balance, we remain cautious on Banorte, due largely to valuation


Mexican Banks’ December Data Adds to Positive Trend on Credit Quality, but Lending Spread Eroding

Grupo Financiero Banorte SAB d / Equity Bottom-Up

<ul>
<li>Banorte delivered a mixed bag of quarterly results, with eroded interest margins and accelerating opex growth; insurance recovered slightly in 4Q, but pandemic claims still weighed on full year results</li>
<li>The bank balance sheet, with a core capital ratio of 15%+ and the NPL ratio at 1%, is reassuring but we believe that the cost of credit is unsustainably low</li>
<li>Recovering insurance earnings will add to 2022 group returns, but will not, we believe, offset the far larger Banorte bank, challenged by opex growth and a higher cost of risk</li>
</ul>


Banorte delivered a mixed bag of quarterly results, with eroded interest margins and accelerating opex growth; insurance recovered slightly in 4Q, but pandemic claims still weighed on full year results
The bank balance sheet, with a core capital ratio of 15%+ and the NPL ratio at 1%, is reassuring but we believe that the cost of credit is unsustainably low
Recovering insurance earnings will add to 2022 group returns, but will not, we believe, offset the far larger Banorte bank, challenged by opex growth and a higher cost of risk


Banorte (GFNORTEO MM): 4Q21 Reveals Sound Asset Quality, but Returns Recovery Challenged in 2022

<ul>
<li>Citi is to sell its Mexican retail and SME banking operations, which we call new Banamex; it is an attractive banking franchise that needs investment and a focus on costs</li>
<li>Based on peer group valuations, and on new Banamex’s disclosed parameters, we estimate that the disposal entity’s valuation range could range from USD7bn to USD10bn, and we identify potential bidders</li>
<li>We believe that our new Banamex valuation range emphasizes BanBajio’s attractive valuations, we stick with our positive view on mid-cap BanBajio; we believe that Banorte is fully valued</li>
</ul>


Citi is to sell its Mexican retail and SME banking operations, which we call new Banamex; it is an attractive banking franchise that needs investment and a focus on costs
Based on peer group valuations, and on new Banamex’s disclosed parameters, we estimate that the disposal entity’s valuation range could range from USD7bn to USD10bn, and we identify potential bidders
We believe that our new Banamex valuation range emphasizes BanBajio’s attractive valuations, we stick with our positive view on mid-cap BanBajio; we believe that Banorte is fully valued


Citi’s Mexican Exit; Our Thoughts on “new Banamex”

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 – Potential M&A Raises Questions on Dividend Prospects

Banorte management is proposing a big dividend pay-out in 2022, but there's a potential catch if Banorte acquires Citibanamex; it could require...

Victor Galliano

EM Banks and Financials – The Rebalancing in Index Weightings from the LatAm Perspective

Potential Russian shares exclusion from indices is real, with Asian EMs set to gain big, but do not disregard LatAm; our preferred financials are...

Victor Galliano

Mexican Banks’ December Data Adds to Positive Trend on Credit Quality, but Lending Spread Eroding

Credit quality ends the year strong, with evidence of marginal spread erosion in December; we like mid-cap bank BanBajio and BBVA for BBVA Mexico;...

Victor Galliano

Banorte (GFNORTEO MM): 4Q21 Reveals Sound Asset Quality, but Returns Recovery Challenged in 2022

Recovering insurance earnings will add to 2022 group ROE, but will not, we believe, offset the far larger Banorte bank, challenged by opex growth...

Victor Galliano

Citi’s Mexican Exit; Our Thoughts on “new Banamex”

Citi sale of its Mexican commercial bank, new Banamex, will need the acquirer to control opex; in this report we estimate the valuation range &...

Victor Galliano

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