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>
<a href="https://www.smartkarma.com/entities/banco-inter-sa" target="_blank" data-smartkarma-citation="entities:28162:1" rel="noopener">Banco Inter SA (BIDI11 BZ)</a> continues to grow its digital customer base, and remains the second largest digital commercial bank in Brazil by digital accounts</li>
<li>Yet 3Q21 results showed that customer acquisition costs increased further, that Inter is losing investment assets and that Inter’s capital absorption post the latest equity follow-on is set to be high</li>
<li>In addition, the largest Brazilian digital Nubank has filed for an IPO which impacts Banco Inter negatively, as Nubank’s listing will erode Inter’s scarcity value on the equity market and the IPO allows Nubank to raise fresh equity to fund its growth</li>
<li>Banco Inter is in partnership in the payments arena with its now cornerstone shareholder StoneCo; StoneCo’s main supplier of POS terminals, PAX Global Technology, saw its Florida offices raided by the FBI earlier this week, which is clearly negative for StoneCo and by extension Banco Inter</li>
<li>We remain negative on Inter, as we believe that Banco Inter is still stretched on valuations, despite the steady share price de-rating since July, and the fundamental headwinds to returns that Inter faces are real due to intensifying competition, not least with Nubank’s planned IPO</li>
<li>Risks to our negative view on Banco Inter include it achieving better than expects customer acquisition costs and higher benchmark rates in Brazil boosting its net interest income</li>
</ul>



Banco Inter SA (BIDI11 BZ) continues to grow its digital customer base, and remains the second largest digital commercial bank in Brazil by digital accounts
Yet 3Q21 results showed that customer acquisition costs increased further, that Inter is losing investment assets and that Inter’s capital absorption post the latest equity follow-on is set to be high
In addition, the largest Brazilian digital Nubank has filed for an IPO which impacts Banco Inter negatively, as Nubank’s listing will erode Inter’s scarcity value on the equity market and the IPO allows Nubank to raise fresh equity to fund its growth
Banco Inter is in partnership in the payments arena with its now cornerstone shareholder StoneCo; StoneCo’s main supplier of POS terminals, PAX Global Technology, saw its Florida offices raided by the FBI earlier this week, which is clearly negative for StoneCo and by extension Banco Inter
We remain negative on Inter, as we believe that Banco Inter is still stretched on valuations, despite the steady share price de-rating since July, and the fundamental headwinds to returns that Inter faces are real due to intensifying competition, not least with Nubank’s planned IPO
Risks to our negative view on Banco Inter include it achieving better than expects customer acquisition costs and higher benchmark rates in Brazil boosting its net interest income


Banco Inter (BIDI11 BZ):  Tough 3Q21, No Let up on the Horizon

Event-Driven

<ul>
<li>Multiple announcements from <a href="https://www.smartkarma.com/entities/banco-inter-sa" target="_blank" data-smartkarma-citation="entities:28162:1" rel="noopener">Banco Inter SA (BIDI11 BZ)</a> have been well received by the market</li>
<li>The key news item, in our view, is that <a href="https://www.smartkarma.com/entities/stoneco-ltd" target="_blank" data-smartkarma-citation="entities:27564:1" rel="noopener">StoneCo Ltd (STNE US)</a>  is to invest BRL2.5bn in Banco Inter via new shares issued in an up and coming follow on issue, as a cornerstone investor</li>
<li>StoneCo is also granted the right of first refusal in the case of change of control of Banco Inter, for a period of 6 years</li>
<li>Banco Inter and StoneCo are to explore business opportunities that can leverage the strength of both companies to enhance growth potential</li>
<li>In addition, Banco Inter is also studying and assessing a potential corporate reorganization including the migration of its Banco Inter shareholder base to holdco Inter Platform Inc, shares of which would be intended to be NASDAQ listed</li>
<li>These developments do not change our view on Banco Inter; we have argued in past reports that it would need more capital to grow and it has now announced a follow-on, even if the potential downside risks has been offset by the prospective new investor StoneCo and the potential for their commercial partnerships</li>
<li>Our view is that both Banco Inter and StoneCo, although sound partners, have a major challenge to justify their premium valuations, at a time when competition across the board in digital financial services in Brazil is only intensifying</li>
<li>Risks to our bearish views on Banco Inter and StoneCo include better than expected revenue growth from cross-selling and synergies in their partnership, as well as better than expected loan growth and merchant services penetration</li>
</ul>


Multiple announcements from Banco Inter SA (BIDI11 BZ) have been well received by the market
The key news item, in our view, is that StoneCo Ltd (STNE US)  is to invest BRL2.5bn in Banco Inter via new shares issued in an up and coming follow on issue, as a cornerstone investor
StoneCo is also granted the right of first refusal in the case of change of control of Banco Inter, for a period of 6 years
Banco Inter and StoneCo are to explore business opportunities that can leverage the strength of both companies to enhance growth potential
In addition, Banco Inter is also studying and assessing a potential corporate reorganization including the migration of its Banco Inter shareholder base to holdco Inter Platform Inc, shares of which would be intended to be NASDAQ listed
These developments do not change our view on Banco Inter; we have argued in past reports that it would need more capital to grow and it has now announced a follow-on, even if the potential downside risks has been offset by the prospective new investor StoneCo and the potential for their commercial partnerships
Our view is that both Banco Inter and StoneCo, although sound partners, have a major challenge to justify their premium valuations, at a time when competition across the board in digital financial services in Brazil is only intensifying
Risks to our bearish views on Banco Inter and StoneCo include better than expected revenue growth from cross-selling and synergies in their partnership, as well as better than expected loan growth and merchant services penetration


Banco Inter & StoneCo – Interesting Concept, Challenging on Execution

<ul>
<li>
<a href="https://www.smartkarma.com/entities/banco-inter-sa" target="_blank" data-smartkarma-citation="entities:28162:1" rel="noopener">Banco Inter SA (BIDI11 BZ)</a> is a leading digital bank in Brazil, only second to Nubank in scale and scope, with over 10m clients at the end of March 2021</li>
<li>It is also seeing accelerating loan growth to 1Q21 and broadening its service base deriving fees from its services and shopping platform</li>
<li>Yet, even on comparable FinTech valuations, as well as on the PEG ratio metric, Banco Inter’s market value seems stretched</li>
<li>In addition, given the acceleration in loan growth and the resultant absorption in capital, we see a real risk of a further equity cash call in coming quarters</li>
<li>We explore three scenarios for Banco Inter in this report; in our view, none of these scenarios’ implied returns make Banco Inter stock compelling at current valuations</li>
<li>Banco Inter’s upside risks include better than expected opex control especially on new customer acquisition driving better than expected returns</li>
</ul>



Banco Inter SA (BIDI11 BZ) is a leading digital bank in Brazil, only second to Nubank in scale and scope, with over 10m clients at the end of March 2021
It is also seeing accelerating loan growth to 1Q21 and broadening its service base deriving fees from its services and shopping platform
Yet, even on comparable FinTech valuations, as well as on the PEG ratio metric, Banco Inter’s market value seems stretched
In addition, given the acceleration in loan growth and the resultant absorption in capital, we see a real risk of a further equity cash call in coming quarters
We explore three scenarios for Banco Inter in this report; in our view, none of these scenarios’ implied returns make Banco Inter stock compelling at current valuations
Banco Inter’s upside risks include better than expected opex control especially on new customer acquisition driving better than expected returns


Banco Inter (BIDI11 BZ): Too Much Optimism Built into Valuations

Thematic (Sector/Industry)

<ul>
<li>We think of value based on traditional valuation metrics, such as PE multiples and PBV ratios, and supplement these by metrics like PE to growth ratios to identify the more attractive names amongst growth – including FinTech – stocks</li>
<li>In Brazil, we continue to like <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>  and we add <a href="https://www.smartkarma.com/entities/banco-bradesco-sa" target="_blank" data-smartkarma-citation="entities:24569:1" rel="noopener">Banco Bradesco Sa (BBDC4 BZ)</a> to the attractive value category</li>
<li>We turn cautious on Brazilian challenger <a href="https://www.smartkarma.com/entities/banco-inter-sa" target="_blank" data-smartkarma-citation="entities:28162:1" rel="noopener">Banco Inter SA (BIDI11 BZ)</a>, based on valuation; it trades on a consensus 2022E PBV ratio of 17.8x and even compared to Nubank’s estimated valuation, and those of other digital banks, Inter seems expensive</li>
<li>In Mexico, <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 much more of a positive consensus recommendation, yet we still believe that the stock has further to run</li>
<li>There is heightened political risk in Peru; <a href="https://www.smartkarma.com/entities/credicorp-ltd" target="_blank" data-smartkarma-citation="entities:25963:1" rel="noopener">Credicorp Ltd (BAP US)</a>  has de-rated and is a stock to watch</li>
<li>Among the LatAm payments companies, we are positive on <a href="https://www.smartkarma.com/entities/pagseguro-digital-ltd" target="_blank" data-smartkarma-citation="entities:27939:1" rel="noopener">Pagseguro Digital Ltd (PAGS US)</a> </li>
<li>Despite its premium growth in AUM, we are cautious on <a href="https://www.smartkarma.com/entities/xp-inc" target="_blank" data-smartkarma-citation="entities:28619:1" rel="noopener">XP Inc (XP US)</a>, due to eroding take rate and rising IFA costs</li>
<li>In exchanges, <a href="https://www.smartkarma.com/entities/b3-sa-brasil-bolsa-balcao" target="_blank" data-smartkarma-citation="entities:24580:1" rel="noopener">B3 Sa - Brasil Bolsa Balcao (B3SA3 BZ)</a>’s valuations have descended from the stratosphere but we believe that this stock could have further downside risk</li>
<li>Risks to our positive view on Banco do Brasil and Bradesco include higher than expected NPLs and lower than expected credit spreads, as well as soft fee growth; similar risks apply to Banorte, BanBajio and in the case of Credicorp we also add political risk; Banco Inter’s upside risks include better than expected opex control especially on new customer acquisition driving better than expected returns; XP upside risks include higher than expected take rate and lower than expected opex, and B3 could deliver stronger than expected revenue growth in FICC and derivatives especially</li>
</ul>


We think of value based on traditional valuation metrics, such as PE multiples and PBV ratios, and supplement these by metrics like PE to growth ratios to identify the more attractive names amongst growth – including FinTech – stocks
In Brazil, we continue to like Banco Do Brasil Sa (BBAS3 BZ)  and we add Banco Bradesco Sa (BBDC4 BZ) to the attractive value category
We turn cautious on Brazilian challenger Banco Inter SA (BIDI11 BZ), based on valuation; it trades on a consensus 2022E PBV ratio of 17.8x and even compared to Nubank’s estimated valuation, and those of other digital banks, Inter seems expensive
In Mexico, Grupo Financiero Banorte-O (GFNORTEO MF) is much more of a positive consensus recommendation, yet we still believe that the stock has further to run
There is heightened political risk in Peru; Credicorp Ltd (BAP US)  has de-rated and is a stock to watch
Among the LatAm payments companies, we are positive on Pagseguro Digital Ltd (PAGS US) 
Despite its premium growth in AUM, we are cautious on XP Inc (XP US), due to eroding take rate and rising IFA costs
In exchanges, B3 Sa - Brasil Bolsa Balcao (B3SA3 BZ)’s valuations have descended from the stratosphere but we believe that this stock could have further downside risk
Risks to our positive view on Banco do Brasil and Bradesco include higher than expected NPLs and lower than expected credit spreads, as well as soft fee growth; similar risks apply to Banorte, BanBajio and in the case of Credicorp we also add political risk; Banco Inter’s upside risks include better than expected opex control especially on new customer acquisition driving better than expected returns; XP upside risks include higher than expected take rate and lower than expected opex, and B3 could deliver stronger than expected revenue growth in FICC and derivatives especially


LatAm Financials Review: Focus on the Value Opportunities

Technical Analyst, Vermilion Research

Joe Jasper

Technical Analyst

Technical and Quantitative Research

Vermilion Research

Vermilion’s objective is to deliver timely, actionable, and unique technical research to professional investors through the application of our various technical indicators.

Our research strategists seek to highlight securities which we believe are at major inflection points, based on our various technical and quantitative indicators, and offer asymmetric risk/return profiles. Our unique research methodology, centered on relative strength, enables our strategists to deliver superior investment recommendations.

Our process begins by organizing the universe of actively traded stocks into discrete sectors, then into industry groups. We then apply our technical and quantitative tools to identify developing price trends. Once attractive trends are identified within a selected sector or group, we screen for individual stocks which we believe offer the best risk/reward profile. We provide a historical perspective that often reveals, through our long-term charts, how price patterns often repeat themselves over time.

Technical Analysis

<p>Our bullish outlook remains intact and is supported by the absence of breakdowns across major global indexes (MSCI ACWI, ACWI ex-US, EM, and EAFE) and ongoing positive market dynamics. Until this changes, we believe global equities are headed higher in the coming weeks and months.</p>

Our bullish outlook remains intact and is supported by the absence of breakdowns across major global indexes (MSCI ACWI, ACWI ex-US, EM, and EAFE) and ongoing positive market dynamics. Until this changes, we believe global equities are headed higher in the coming weeks and months.

Global Equity Strategy: Stick With Reflation & Reopening Theme

Brazil

Inter & Co, Inc. operates as an investment holding company. The Company, through its subsidiaries, serves customers in Brazil.

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Inter & Co (INTR US)

Banco Inter (BIDI11 BZ): Tough 3Q21, No Let up on the Horizon

We stay negative on Banco Inter due to the intensifying competition among Brazilian digital and legacy banks, with the prospective Nubank IPO...

Victor Galliano

Banco Inter & StoneCo – Interesting Concept, Challenging on Execution

We believe that Inter and StoneCo are sound business partners, but have a big challenge to justify their premium valuations, when competition in...

Victor Galliano

Banco Inter (BIDI11 BZ): Too Much Optimism Built into Valuations

Banco Inter, as a leading Brazilian digital challenger bank, is growing fast. Yet our 3 scenarios show that premium growth does not mean premium...

Victor Galliano

LatAm Financials Review: Focus on the Value Opportunities

We identify the most attractive LatAm financials on value and GARP metrics; Banco do Brasil, Bradesco, Banorte, BanBajio, PagSeguro; we are...

Victor Galliano

Global Equity Strategy: Stick With Reflation & Reopening Theme

Our bullish outlook remains intact supported by the absence of breakdowns across major global indexes. Until this changes, we believe global...

Vermilion Research

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