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>Fintechs and neobanks suffered a valuations reality check in 2022, due to rising interest (and discount) rates, poor fundamental results coupled with - in certain cases - high cash burn</li>
<li>Most neobanks need to improve customer activity rates as well as product and revenue penetration; legacy banks are responding to disruptors and in developed markets megafintechs are encroaching on neobanks</li>
<li>We see 2023 neobank picks driven by bottom-up calls on focused execution; we turn constructive on Nubank, stay negative on Inter and Jago and neutral on Kakaobank and Banco PAN</li>
</ul>


Fintechs and neobanks suffered a valuations reality check in 2022, due to rising interest (and discount) rates, poor fundamental results coupled with - in certain cases - high cash burn
Most neobanks need to improve customer activity rates as well as product and revenue penetration; legacy banks are responding to disruptors and in developed markets megafintechs are encroaching on neobanks
We see 2023 neobank picks driven by bottom-up calls on focused execution; we turn constructive on Nubank, stay negative on Inter and Jago and neutral on Kakaobank and Banco PAN


EM and DM Neobanks in 2023; Selective Opportunity Driven by Bottom-Up Execution

Thematic (Sector/Industry)

<ul>
<li>Among the EM digital banks covered, we remain negative on Inter and continue to see Bank Jago as an over-valued growth play; we are neutral on Nubank and Kakaobank</li>
<li>Client penetration is improving, yet digital banks, with the exception of Nubank, need to achieve better product penetration to enhance digital efficiency and better leverage off their lower cost bases</li>
<li>Neobanks’ other key hurdles to enhanced profitability are delinquency and cost of risk charges along with increased regulatory risk; high capital absorption from fast loan growth is another investor concern</li>
</ul>


Among the EM digital banks covered, we remain negative on Inter and continue to see Bank Jago as an over-valued growth play; we are neutral on Nubank and Kakaobank
Client penetration is improving, yet digital banks, with the exception of Nubank, need to achieve better product penetration to enhance digital efficiency and better leverage off their lower cost bases
Neobanks’ other key hurdles to enhanced profitability are delinquency and cost of risk charges along with increased regulatory risk; high capital absorption from fast loan growth is another investor concern


EM Digital Banks Review – Inter and Bank Jago in the Negative Spotlight

<ul>
<li>Lula’s narrow win in the second round of the Brazilian Presential election has so far passed in relative calm, although sitting President Jair Bolsonaro has yet to concede defeat</li>
<li>Markets will be hoping for a peaceful transition, and influential Bolsonaro allies have asked Brazilians to respect the result, to avoid social unrest and any potential intervention by the military</li>
<li>It is unclear how anti-market Lula’s policies will be but we expect downside risk for Brazilian financials and fintechs; Banco do Brasil is in for volatility, Itausa may be defensive</li>
</ul>


Lula’s narrow win in the second round of the Brazilian Presential election has so far passed in relative calm, although sitting President Jair Bolsonaro has yet to concede defeat
Markets will be hoping for a peaceful transition, and influential Bolsonaro allies have asked Brazilians to respect the result, to avoid social unrest and any potential intervention by the military
It is unclear how anti-market Lula’s policies will be but we expect downside risk for Brazilian financials and fintechs; Banco do Brasil is in for volatility, Itausa may be defensive


Brazilian Presidential Election; What Could a Lula Victory Mean for Financials and Fintech?

Event-Driven

<ul>
<li>Softbank Group’s share price has been supported by the share buyback programme since late September, but 2Q FY2022 results are likely act as a negative catalyst for Softbank shares</li>
<li>Alibaba and its core listed holdings in the Vision Funds have seen market values go lower in recent months; see the diverging market price chart trends in this report</li>
<li>In addition, valuations among the unlisted holdings are also under pressure into October, so 2Q results may not capture the full extent of the down rounds</li>
</ul>


Softbank Group’s share price has been supported by the share buyback programme since late September, but 2Q FY2022 results are likely act as a negative catalyst for Softbank shares
Alibaba and its core listed holdings in the Vision Funds have seen market values go lower in recent months; see the diverging market price chart trends in this report
In addition, valuations among the unlisted holdings are also under pressure into October, so 2Q results may not capture the full extent of the down rounds


Softbank Group (9984 JP) – Defying Gravity into 4Q 2022

<ul>
<li>Brazil caps interchange fees on prepaid and debit cards, as from 1st April 2023, limiting revenues for Brazilian card issuers; Nubank and Inter seem most exposed, less so PagSeguro</li>
<li>We expect that Brazil fintechs StoneCo and Cielo, with their small card issuance operations, should be broadly unaffected</li>
<li>Nubank’s prospective revenue hit is more than 5%, Inter close to 5% and PagSeguro’s hit at 1-2%; we remain negative on Nubank, turn cautious on Inter, but find PagSeguro attractive</li>
</ul>


Brazil caps interchange fees on prepaid and debit cards, as from 1st April 2023, limiting revenues for Brazilian card issuers; Nubank and Inter seem most exposed, less so PagSeguro
We expect that Brazil fintechs StoneCo and Cielo, with their small card issuance operations, should be broadly unaffected
Nubank’s prospective revenue hit is more than 5%, Inter close to 5% and PagSeguro’s hit at 1-2%; we remain negative on Nubank, turn cautious on Inter, but find PagSeguro attractive


Brazil Fintech: New Cap on Card Interchange Fees, Nubank and Inter Look Most Exposed

Brazil

NU Holdings Ltd. of the Cayman Islands operates as a holding company. The Company, through its subsidiaries, provides loans and digital banking services, as well as issues, administrates, processes, and transfers payments to post-paid credit cards and equity investments in other entities. NU Holdings serves clients worldwide.

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NU Holdings (NU US)

EM and DM Neobanks in 2023; Selective Opportunity Driven by Bottom-Up Execution

Neobank shareholder success stories are rare, but Nubank combines high customer activation and revenue conversion, with low cost to acquire; we...

Victor Galliano

EM Digital Banks Review – Inter and Bank Jago in the Negative Spotlight

EM digital banks need to deliver better product penetration on the back of client penetration to enhance returns; we stay negative on Inter and...

Victor Galliano

Brazilian Presidential Election; What Could a Lula Victory Mean for Financials and Fintech?

Lula's victory is near term negative for Brazil risk assets; in fintech & financials, we see volatility risk for Banco do Brasil, we are negative...

Victor Galliano

Softbank Group (9984 JP) – Defying Gravity into 4Q 2022

Softbank's share price has defied gravity of late, diverging from the trends of its listed holdings but we see clear hurdles going forward from the...

Victor Galliano

Brazil Fintech: New Cap on Card Interchange Fees, Nubank and Inter Look Most Exposed

Regulatory pressure, due to the interchange fee cap, worsens the revenue outlook for Nubank especially, as well as that of Inter; we see...

Victor Galliano

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