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.

Thematic (Sector/Industry)

<ul>
<li>Softbank has invested USD7bn in tech throughout Latin America since 3Q 2019, with 40% dedicated to fintech; we focus in on the listed fintech holdings, specifically Nubank and Banco Inter</li>
<li>In the 2Q22 market sell-off, we estimate that Softbank is holding 55+% unrealized losses in Nubank, with a similar level of losses on its more recent Banco Inter investments</li>
<li>These two neobanks have good client penetration but face profitability challenges; as a key shareholder, Softbank could push for transformative Nu-Inter M&amp;A, otherwise Softbank could seek to exit these investments</li>
</ul>


Softbank has invested USD7bn in tech throughout Latin America since 3Q 2019, with 40% dedicated to fintech; we focus in on the listed fintech holdings, specifically Nubank and Banco Inter
In the 2Q22 market sell-off, we estimate that Softbank is holding 55+% unrealized losses in Nubank, with a similar level of losses on its more recent Banco Inter investments
These two neobanks have good client penetration but face profitability challenges; as a key shareholder, Softbank could push for transformative Nu-Inter M&amp;A, otherwise Softbank could seek to exit these investments


Softbank (9984 JP) In Latin America: Focus on Fintechs and the LatAm Neobanks

Equity Bottom-Up

<ul>
<li>Banco Central do Brasil has been raising benchmark interest rates aggressively since 1H2021 and we believe it is approaching the peak of its tightening cycle; this feeds into loan spreads</li>
<li>1Q22 Brazil bank results showed limited evidence of widening spreads, due to a time lag, but loan quality is worsening due to the hiking interest rates amid the soft economy</li>
<li>Disciplined loan origination should support bank returns, especially in the consumer and SME segments, containing credit cost charges growth as spreads expand; deep-value Banco do Brasil remains our top pick</li>
</ul>


Banco Central do Brasil has been raising benchmark interest rates aggressively since 1H2021 and we believe it is approaching the peak of its tightening cycle; this feeds into loan spreads
1Q22 Brazil bank results showed limited evidence of widening spreads, due to a time lag, but loan quality is worsening due to the hiking interest rates amid the soft economy
Disciplined loan origination should support bank returns, especially in the consumer and SME segments, containing credit cost charges growth as spreads expand; deep-value Banco do Brasil remains our top pick


Brazil Banks – Returns Tug of War Between Spreads and Credit Costs, Stick with Banco Do Brasil

<ul>
<li>Despite the compression in the Brazil digital banks’ multiples from the FinTech de-rating, big fundamental hurdles remain, especially for Nubank</li>
<li>Nubank is delivering on increased loan penetration and this should drive revenue growth; still, this also drives higher and front loaded provisioning charges along with capital absorption</li>
<li>Banco Inter is less challenged than Nubank on most metrics, and it is modestly profitable, but we believe it is too early to turn positive; we like Banco do Brasil</li>
</ul>


Despite the compression in the Brazil digital banks’ multiples from the FinTech de-rating, big fundamental hurdles remain, especially for Nubank
Nubank is delivering on increased loan penetration and this should drive revenue growth; still, this also drives higher and front loaded provisioning charges along with capital absorption
Banco Inter is less challenged than Nubank on most metrics, and it is modestly profitable, but we believe it is too early to turn positive; we like Banco do Brasil


Brazil Digital Banks – Nubank and Banco Inter Shares Have De-Rated, but Still Face Challenges

<ul>
<li>Nubank remains challenged, in our view, based on rising customer acquisition costs (especially in its Mexican and Colombian expansions), high capital absorption and maturing consumer credit portfolios adding to delinquencies</li>
<li>Banco Inter has a better balanced portfolio than Nubank with its mortgage book, which should mean lower hurdles on delinquency and capital consumption, although customer acquisition costs remain clear headwinds</li>
<li>The two Brazilian digital banks’ premium valuations are hard to justify on growth potential; our research models’ base assumptions show that Nubank shares, in particular, trade on very rich valuations</li>
</ul>


Nubank remains challenged, in our view, based on rising customer acquisition costs (especially in its Mexican and Colombian expansions), high capital absorption and maturing consumer credit portfolios adding to delinquencies
Banco Inter has a better balanced portfolio than Nubank with its mortgage book, which should mean lower hurdles on delinquency and capital consumption, although customer acquisition costs remain clear headwinds
The two Brazilian digital banks’ premium valuations are hard to justify on growth potential; our research models’ base assumptions show that Nubank shares, in particular, trade on very rich valuations


A Tale of Two Brazil Digital Banks – Nubank Still Exposed to Challenges, Banco Inter Less So

Pan-Asia Index Rebalances/ Events/ Delta One, Periscope Analytics

Brian Freitas

Pan-Asia Index Rebalances/ Events/ Delta One

Event-Driven

<ul>
<li>Hang Seng announced the results of the March rebalance post market close Friday. Two adds for the HSI, one set of changes for HSCEI, three sets for HSTECH.</li>
<li>An ad hoc rebalance was announced for the KOSDAQ150 following Osstem being designated an 'Administrative Issue'. In IPO world, we have LIC in India and SBI Sumishin NetBank coming up.</li>
<li>Friday was the review cutoff date for the March rebalance of the ASX200 Index. The ATO has provided Aventus with the tax ruling and that creates a timing issue.</li>
</ul>


Hang Seng announced the results of the March rebalance post market close Friday. Two adds for the HSI, one set of changes for HSCEI, three sets for HSTECH.
An ad hoc rebalance was announced for the KOSDAQ150 following Osstem being designated an 'Administrative Issue'. In IPO world, we have LIC in India and SBI Sumishin NetBank coming up.
Friday was the review cutoff date for the March rebalance of the ASX200 Index. The ATO has provided Aventus with the tax ruling and that creates a timing issue.


Index Rebalance & ETF Flow Recap: HSI, HSCEI, HSTECH, HSCI, S&P/ASX, SET50, LIC, SBI Sumishin, Crown

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)

Softbank (9984 JP) In Latin America: Focus on Fintechs and the LatAm Neobanks

LatAm equity investments have added to Softbank's total equity value and rose to a 5% share in March; we expect this to go sharply into reverse at...

Victor Galliano

Brazil Banks – Returns Tug of War Between Spreads and Credit Costs, Stick with Banco Do Brasil

Higher benchmark interest rates feed into wider spreads for Brazil banks, and in the returns tug of war between higher spreads and bigger credit...

Victor Galliano

Brazil Digital Banks – Nubank and Banco Inter Shares Have De-Rated, but Still Face Challenges

The Brazil digital banks' high loan penetration should drive revenue growth, but this also accelerates NPL formation, provisioning charges and...

Victor Galliano

A Tale of Two Brazil Digital Banks – Nubank Still Exposed to Challenges, Banco Inter Less So

Nubank is more challenged than Inter, due to rising customer acquisition costs as it expands geographically, high capital absorption & with...

Victor Galliano

Index Rebalance & ETF Flow Recap: HSI, HSCEI, HSTECH, HSCI, S&P/ASX, SET50, LIC, SBI Sumishin, Crown

This recap highlights Insights covering Asian index rebalances (announcements/ forecasts/ IPO Fast Entry/ M&A driven changes). We also highlight...

Brian Freitas

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