Financials & FinTech research, Galliano’s Financials Research

Victor Galliano

Financials & FinTech research

Accelerating Tomorrow’s Independent Research

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Thematic (Sector/Industry)

<ul class="">
<li>Despite its challenges, the pension reform outlook in Brazil remains constructive, in our view; successful pension reform would create solid foundations for GDP growth, lowering fiscal account and inflationary pressures and lead to sustainably lower benchmark rates</li>
<li>A no or very limited reform scenario would leave Brazil stuck in the GDP growth slow lane, which would imply a growing fiscal deficit and rising public sector debt burden, with a need for higher benchmark rates. We believe that meaningful pension reform will be approved in 2019; but the possibility of a heavily diluted version of reforms is still a potential risk</li>
<li>The BCB's January bank sector data indicates a solid start to 2019, especially in seasonally adjusted new loan grantings driven by corporates, and in better yoy comparisons in NPL ratio and NPL coverage</li>
<li>We believe that successful pension reform should be positive for the bank sector, driving loan growth potential, as well as structural improvement in credit quality and sustainable lower benchmark interest rates. In conjunction, we see these factors as supportive for bank sector returns, with, over the medium term, the negative effect of lower credit spreads more than offset by the positive, structurally lower cost of risk from lower NPL ratios</li>
<li>The successful pension reform scenario implies further bank stock re-ratings, driven by multiple expansion. Our top pick in large cap banks is <a href="https://www.smartkarma.com/entities/24564" target="_blank" data-smartkarma-citation="entities:24564:1">Banco Do Brasil Sa (BBAS3 BZ)</a>, where the PBV discount to the private sector remains excessive; versus <a href="https://www.smartkarma.com/entities/24550" target="_blank" data-smartkarma-citation="entities:24550:1">Itau Unibanco Holding Sa (ITUB4 BZ)</a>, the PBV discount is 42% and versus <a href="https://www.smartkarma.com/entities/24569" target="_blank" data-smartkarma-citation="entities:24569:1">Banco Bradesco Sa (BBDC4 BZ)</a> the PBV discount is 39%</li>
</ul>


Despite its challenges, the pension reform outlook in Brazil remains constructive, in our view; successful pension reform would create solid foundations for GDP growth, lowering fiscal account and inflationary pressures and lead to sustainably lower benchmark rates
A no or very limited reform scenario would leave Brazil stuck in the GDP growth slow lane, which would imply a growing fiscal deficit and rising public sector debt burden, with a need for higher benchmark rates. We believe that meaningful pension reform will be approved in 2019; but the possibility of a heavily diluted version of reforms is still a potential risk
The BCB's January bank sector data indicates a solid start to 2019, especially in seasonally adjusted new loan grantings driven by corporates, and in better yoy comparisons in NPL ratio and NPL coverage
We believe that successful pension reform should be positive for the bank sector, driving loan growth potential, as well as structural improvement in credit quality and sustainable lower benchmark interest rates. In conjunction, we see these factors as supportive for bank sector returns, with, over the medium term, the negative effect of lower credit spreads more than offset by the positive, structurally lower cost of risk from lower NPL ratios
The successful pension reform scenario implies further bank stock re-ratings, driven by multiple expansion. Our top pick in large cap banks is Banco Do Brasil Sa (BBAS3 BZ), where the PBV discount to the private sector remains excessive; versus Itau Unibanco Holding Sa (ITUB4 BZ), the PBV discount is 42% and versus Banco Bradesco Sa (BBDC4 BZ) the PBV discount is 39%


Brazil Banks Outlook; Pension Reform, the Big Recession Hangover Cure?

<ul class="">
<li>The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit cards</li>
<li>De-regulation and new entrants have brought challenges for the incumbents, especially for the largest player <a href="https://www.smartkarma.com/entities/24750" target="_blank">Cielo SA (CIEL3 BZ)</a>, with the challengers taking market share, squeezing margins and promoting better service for SME merchants in particular</li>
<li>Competitive pressures continue in the Brazil payments market, reflected in the declining merchant discount rate (MDR), lower rental rates and sale prices for POS terminals, as well as pressure on the commissions for early payment of merchant receivables; the near-term prospects for Cielo remain challenging in our view</li>
<li>Due to the ongoing headwinds, we expect Cielo to show negative earnings growth to 2021; management has announced that Cielo will defend its market share against the challengers; we see further downside risk to consensus earnings and the real risk of a greater than consensus 2019 DPS cut</li>
<li>
<a href="https://www.smartkarma.com/entities/27564" target="_blank">StoneCo Ltd (STNE US)</a>and <a href="https://www.smartkarma.com/entities/27939" target="_blank">Pagseguro Digital Ltd (PAGS US)</a> are two of the payment challengers in this de-regulated market, growing faster than the Brazilian non-cash transactions market and taking incumbents' market share; we see StoneCo to be the preferred entity to PagSeguro, based on StoneCo’s higher revenue yielding SME segment of focus and on its more attractive PEG ratio valuation</li>
</ul>


The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit cards
De-regulation and new entrants have brought challenges for the incumbents, especially for the largest player Cielo SA (CIEL3 BZ), with the challengers taking market share, squeezing margins and promoting better service for SME merchants in particular
Competitive pressures continue in the Brazil payments market, reflected in the declining merchant discount rate (MDR), lower rental rates and sale prices for POS terminals, as well as pressure on the commissions for early payment of merchant receivables; the near-term prospects for Cielo remain challenging in our view
Due to the ongoing headwinds, we expect Cielo to show negative earnings growth to 2021; management has announced that Cielo will defend its market share against the challengers; we see further downside risk to consensus earnings and the real risk of a greater than consensus 2019 DPS cut

StoneCo Ltd (STNE US)and Pagseguro Digital Ltd (PAGS US) are two of the payment challengers in this de-regulated market, growing faster than the Brazilian non-cash transactions market and taking incumbents' market share; we see StoneCo to be the preferred entity to PagSeguro, based on StoneCo’s higher revenue yielding SME segment of focus and on its more attractive PEG ratio valuation


Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers

Equity Bottom-Up

<ul>
<li>
<a href="https://www.smartkarma.com/entities/24513" target="_blank" data-smartkarma-citation="entities:24513:1">Itausa-Investimentos Itau-Pr (ITSA4 BZ)</a> is the main indirect vehicle through which to gain discounted equity exposure to premium ROE-generating Brazilian bank, <a href="https://www.smartkarma.com/entities/24550" target="_blank" data-smartkarma-citation="entities:24550:1">Itau Unibanco Holding Sa (ITUB4 BZ)</a>.</li>
<li>Itausa trades at a 24% discount to its NAV, with Itau Unibanco accounting for 91% of the asset value of the holding.</li>
<li>The current NAV discount is close to the 10-year high of 28%, and wider than the 10-year average discount of 21% and the 10-year low of 16%.</li>
</ul>



Itausa-Investimentos Itau-Pr (ITSA4 BZ) is the main indirect vehicle through which to gain discounted equity exposure to premium ROE-generating Brazilian bank, Itau Unibanco Holding Sa (ITUB4 BZ).
Itausa trades at a 24% discount to its NAV, with Itau Unibanco accounting for 91% of the asset value of the holding.
The current NAV discount is close to the 10-year high of 28%, and wider than the 10-year average discount of 21% and the 10-year low of 16%.


Itausa: Discounted Access to Premium Quality Itau

<ul>
<li>A rising pro-market tide has lifted the big-cap banks, but now it is time to be more selective. We see further potential for stock re-rating among the Brazilian banks, as the new Bolosonaro administration executes its pro-market policies.</li>
<li>Our top pick is <a href="https://www.smartkarma.com/entities/24564" target="_blank">Banco Do Brasil Sa (BdoBAS3 BZ)</a> , with a target price of BRL57, which implies 19% re-rating potential. We believe that Banco do Brasil (BdoB) shareholders are set to benefit from less of a “social programme” agenda which in turn should help improve ROE going forward.</li>
<li>Yet the PBV discount between BdoB and its private sector peers - especially against Itaú Unibanco at 52% - has barely narrowed, and we believe that the discount has potential to narrow further as BdoB’s ROE expands and narrows the gap with its private sector peers.</li>
</ul>


A rising pro-market tide has lifted the big-cap banks, but now it is time to be more selective. We see further potential for stock re-rating among the Brazilian banks, as the new Bolosonaro administration executes its pro-market policies.
Our top pick is Banco Do Brasil Sa (BdoBAS3 BZ) , with a target price of BRL57, which implies 19% re-rating potential. We believe that Banco do Brasil (BdoB) shareholders are set to benefit from less of a “social programme” agenda which in turn should help improve ROE going forward.
Yet the PBV discount between BdoB and its private sector peers - especially against Itaú Unibanco at 52% - has barely narrowed, and we believe that the discount has potential to narrow further as BdoB’s ROE expands and narrows the gap with its private sector peers.


Brazil Banks: Banco Do Brasil Focus - Prospects for Improved Returns, Narrowing PBV Discount

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 cautious outlook and expectation for continued downward consolidation for global equities remains intact. Broad global indexes (MSCI ACWI, ACWI ex-U.S., EAFE, and EM) are all trading within patterns of lower highs and lower lows, leading us to believe the most likely scenario is that this near-term bounce is likely nothing more than a countertrend rally before longer-term downtrends reassert themselves. The one bright spot is EM.  In this report we highlight a number of attractive set-ups within the Financial, Communication, Engineering &amp; Construction, and Transportation Sectors.</p>

Our cautious outlook and expectation for continued downward consolidation for global equities remains intact. Broad global indexes (MSCI ACWI, ACWI ex-U.S., EAFE, and EM) are all trading within patterns of lower highs and lower lows, leading us to believe the most likely scenario is that this near-term bounce is likely nothing more than a countertrend rally before longer-term downtrends reassert themselves. The one bright spot is EM.  In this report we highlight a number of attractive set-ups within the Financial, Communication, Engineering &amp; Construction, and Transportation Sectors.

Global Equity Strategy: Bearish with the Exception of EM.

Brazil

Itau Unibanco Holding S.A. attracts deposits and offer retail, commercial, corporate, and private banking services. The Bank offers consumer loans, financial management, insurance, pension plans, treasury services, mortgage loans, lease financing, securities brokerage, and foreign exchange services.

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Itau Unibanco Holding (ITUB4 BZ)

Brazil Banks Outlook; Pension Reform, the Big Recession Hangover Cure?

Despite its challenges, the pension reform outlook in Brazil remains constructive, in our view; successful pension reform would create solid...

Boost Research

Brazilian Payments Report: Cielo on the Defensive Against Disruptive Challengers

The non-cash payments market continues to grow at a double-digit rate in Brazil, driven primarily by growing usage of credit and debit...

Boost Research

Itausa: Discounted Access to Premium Quality Itau

Itausa-Investimentos Itau-Pr (ITSA4 BZ) is the main indirect vehicle through which to gain discounted equity exposure to premium ROE-generating...

Boost Research

Brazil Banks: Banco Do Brasil Focus - Prospects for Improved Returns, Narrowing PBV Discount

A rising pro-market tide has lifted the big-cap banks, but now it is time to be more selective. We see further potential for stock re-rating among...

Boost Research

Global Equity Strategy: Bearish with the Exception of EM.

Our cautious outlook and expectation for continued downward consolidation for global equities remains intact. Broad global indexes (MSCI ACWI, ACWI...

Vermilion Research

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