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>The rotation into value stocks has lifted bank valuations across the board, especially in developed markets</li>
<li>Even if we could see a pause in the near term, we believe that the rotation has further to run</li>
<li>We screen our universe of European banks for attractive valuations and resilient balance sheets, especially on credit quality and capital, post 4Q20 results</li>
<li>We highlight <a href="https://www.smartkarma.com/entities/hsbc-holdings-plc-a723bd63-0890-486f-aaa0-3bb9ad2b95ce" target="_blank" data-smartkarma-citation="entities:21976:1" rel="noopener">HSBC Holdings (HSBA LN)</a>, <a href="https://www.smartkarma.com/entities/unicredit-spa" target="_blank" data-smartkarma-citation="entities:21234:1" rel="noopener">UniCredit SpA (UCG IM)</a> and <a href="https://www.smartkarma.com/entities/caixabank-sa" target="_blank" data-smartkarma-citation="entities:21255:1" rel="noopener">CaixaBank SA (CABK SM)</a>; we turn positive on <a href="https://www.smartkarma.com/entities/banco-bpm-spa" target="_blank" data-smartkarma-citation="entities:28121:1" rel="noopener">Banco BPM SpA (BAMI IM)</a>, where we had previously been concerned about potentially problematic M&amp;A</li>
<li>In Northern Europe, <a href="https://www.smartkarma.com/entities/jyske-bank-a-s" target="_blank" data-smartkarma-citation="entities:22404:1" rel="noopener">Jyske Bank A/S (JYSK DC)</a> in Denmark screens well amongst the smaller caps, on both valuation and balance sheet strength</li>
<li>Risks to our view include a worse than expected macro-economic recovery with slower growth impacting credit quality, demand for credit and lower for longer interest rates and spreads</li>
</ul>


The rotation into value stocks has lifted bank valuations across the board, especially in developed markets
Even if we could see a pause in the near term, we believe that the rotation has further to run
We screen our universe of European banks for attractive valuations and resilient balance sheets, especially on credit quality and capital, post 4Q20 results
We highlight HSBC Holdings (HSBA LN), UniCredit SpA (UCG IM) and CaixaBank SA (CABK SM); we turn positive on Banco BPM SpA (BAMI IM), where we had previously been concerned about potentially problematic M&amp;A
In Northern Europe, Jyske Bank A/S (JYSK DC) in Denmark screens well amongst the smaller caps, on both valuation and balance sheet strength
Risks to our view include a worse than expected macro-economic recovery with slower growth impacting credit quality, demand for credit and lower for longer interest rates and spreads


European Bank Screens 4Q20 – Our Picks in the Rotation to Value

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Equity markets applauded <a href="https://www.smartkarma.com/entities/societe-generale-sa" target="_blank" data-smartkarma-citation="entities:21478:1" rel="noopener">Société Générale's (SocGen)</a> Q4 results while credit markets were less impressed. The dichotomy resulted in additional, possibly unwarranted, spread widening between SocGen’s 10-year Additional Tier 1 (AT1) and <a href="https://www.smartkarma.com/entities/bnp-paribas" target="_blank" data-smartkarma-citation="entities:525:1" rel="noopener">BNP Paribas' (BNP)</a> similar security. BNP is clearly perceived to be a better credit. We question whether this is entirely appropriate.We find that fundamental differences between SocGen and BNP may be less than perceived in the credit markets with respect to core recurrent earnings, trading risks and asset quality. Nonetheless, SocGen’s AT1 trades at a discount of 17 to 75bps to BNP. At the same time, SocGen reports a materially higher buffer of capital to potential earnings distribution restrictions. Juxtaposed with the current interest rate environment, this is meaningful. Concurrently, upcoming, potentially positive, event risk could restrict SocGen’s spread widening relative to BNP over the near term.  Investors may be better served in SocGen’s AT1 curve over the near term. We identify our preferred entry point within.

Equity markets applauded Société Générale's (SocGen) Q4 results while credit markets were less impressed. The dichotomy resulted in additional, possibly unwarranted, spread widening between SocGen’s 10-year Additional Tier 1 (AT1) and BNP Paribas' (BNP) similar security. BNP is clearly perceived to be a better credit. We question whether this is entirely appropriate.We find that fundamental differences between SocGen and BNP may be less than perceived in the credit markets with respect to core recurrent earnings, trading risks and asset quality. Nonetheless, SocGen’s AT1 trades at a discount of 17 to 75bps to BNP. At the same time, SocGen reports a materially higher buffer of capital to potential earnings distribution restrictions. Juxtaposed with the current interest rate environment, this is meaningful. Concurrently, upcoming, potentially positive, event risk could restrict SocGen’s spread widening relative to BNP over the near term.  Investors may be better served in SocGen’s AT1 curve over the near term. We identify our preferred entry point within.

Société Générale’s AT1: Better Fundamental and Relative Value than BNP

Executive Summary: European bank AT1 significantly outperformed Asia as each EU benchmark Basel III bond tightened during the week. Concurrently, increased risk appetite resulted in performance across the credit continuum in Asia bank bonds. A steepening US Treasury yield curve and risk-on market sentiment drove bank credit spreads tighter, globally. Please see our <a href="https://www.smartkarma.com/insights/bank-macro-manifest-risk-rally-gathers-steam-as-bad-news-more-stimulus" target="_blank" data-smartkarma-citation="insights:47886" rel="noopener">Bank Macro Manifest: Risk Rally Gathers Steam as Bad News = More Stimulus</a> for more details.Europe’s AT1 performance further compressed option adjusted spreads between European AT1 and Asia financial institutions to 50bps inside 2019 levels. This begs the question of how much more spread compression is possible.Globally, <a href="https://www.smartkarma.com/entities/unicredit-spa" target="_blank" data-smartkarma-citation="entities:21234:1" rel="noopener">UniCredit's (UCG IM)</a> 8% coupon 2024 callable note led AT1 and broader bank bond performance, tightening 102bps over the week. This outperformance coincided with positive risk asset sentiment following the announcement that former ECB President Mario Draghi was asked to form Italy’s next government. Investors may wish to consider what additional catalyst could drive spreads tighter. UniCredit is expected to report earnings on Thursday, 11 February.In Asia, Nanyang Commercial Bank led AT1 bond performance by tightening another 54bps on the week. Relative to <a href="https://www.smartkarma.com/entities/bank-of-east-asia-ltd" target="_blank" data-smartkarma-citation="entities:341:1" rel="noopener">Bank of East Asia's (23 HK)</a> 5 5/8% coupon 2022 callable note, the Nanyang outperformance is beginning to look overdone. Please see <a href="https://www.smartkarma.com/insights/bank-credit-compass-credit-tourist-may-vacate-if-real-fundamentals-do-not-catch-up" target="_blank" rel="noopener">Bank Credit Compass: Credit Tourist May Vacate if Real Fundamentals Do Not Catch-Up</a> for more details.<a href="https://www.smartkarma.com/entities/state-bank-of-india" target="_blank" rel="noopener">State Bank of India's (SBIIN)</a> prediction of double-digit returns following results that were better than expectations, drove its shares to a 40% gain during the week. SBIIN’s credit was already there, in our view, but other India-headquartered bank credits may benefit.Meanwhile, in the broader Emerging Market (EM) Senior Unsecured HY area, Turkish bank bonds continued to catch-up with their higher rated EM peers with several notes tightening by +60bps over the week. Given the positive developments in Turkey over the last few weeks and the global risk-on environment, several of these banks continue to trade wide relative to most other EM banks.Market Outlook: Investors remain susceptible to management’s prophecies. Asset quality indicators may greatly underestimate the level of troubled debt due to continued forbearance, restructuring efforts and early-stage aging. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these reports is significantly diminished for credit investors. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ. There is limited price discovery.  As such, credit value should remain driven by larger market forces.

Executive Summary: European bank AT1 significantly outperformed Asia as each EU benchmark Basel III bond tightened during the week. Concurrently, increased risk appetite resulted in performance across the credit continuum in Asia bank bonds. A steepening US Treasury yield curve and risk-on market sentiment drove bank credit spreads tighter, globally. Please see our Bank Macro Manifest: Risk Rally Gathers Steam as Bad News = More Stimulus for more details.Europe’s AT1 performance further compressed option adjusted spreads between European AT1 and Asia financial institutions to 50bps inside 2019 levels. This begs the question of how much more spread compression is possible.Globally, UniCredit's (UCG IM) 8% coupon 2024 callable note led AT1 and broader bank bond performance, tightening 102bps over the week. This outperformance coincided with positive risk asset sentiment following the announcement that former ECB President Mario Draghi was asked to form Italy’s next government. Investors may wish to consider what additional catalyst could drive spreads tighter. UniCredit is expected to report earnings on Thursday, 11 February.In Asia, Nanyang Commercial Bank led AT1 bond performance by tightening another 54bps on the week. Relative to Bank of East Asia's (23 HK) 5 5/8% coupon 2022 callable note, the Nanyang outperformance is beginning to look overdone. Please see Bank Credit Compass: Credit Tourist May Vacate if Real Fundamentals Do Not Catch-Up for more details.State Bank of India's (SBIIN) prediction of double-digit returns following results that were better than expectations, drove its shares to a 40% gain during the week. SBIIN’s credit was already there, in our view, but other India-headquartered bank credits may benefit.Meanwhile, in the broader Emerging Market (EM) Senior Unsecured HY area, Turkish bank bonds continued to catch-up with their higher rated EM peers with several notes tightening by +60bps over the week. Given the positive developments in Turkey over the last few weeks and the global risk-on environment, several of these banks continue to trade wide relative to most other EM banks.Market Outlook: Investors remain susceptible to management’s prophecies. Asset quality indicators may greatly underestimate the level of troubled debt due to continued forbearance, restructuring efforts and early-stage aging. This is driving provisioning costs lower than would be expected in a more normal operating environment. The value of these reports is significantly diminished for credit investors. Financial repression creates a market, which in its nature, is always a one-sided bet with the Fed / ECB/ BOJ. There is limited price discovery.  As such, credit value should remain driven by larger market forces.

Bank Credit Weekly: AT1 Outperformance in Risk-On Environment

<ul>
<li>
<a href="https://www.smartkarma.com/entities/unicredit-spa" target="_blank" data-smartkarma-citation="entities:21234:1" rel="noopener">UniCredit SpA (UCG IM)</a>  is to appoint Andrea Orcel as its next CEO, according to reports in the financial press</li>
<li>Orcel will need to walk the tightrope of defending Unicredit’s shareholder value and the political hot potato of the potential Banca Monte dei Paschi absorption</li>
<li>We believe that Orcel as CEO will act as an effective check to Unicredit chairman-designate Padoan, the most influential and vocal proponent of the BMPS deal</li>
<li>In the event of a Unicredit-BMPS union, we would expect Orcel to drive for a capital neutral deal, with a relatively clean BMPS balance sheet</li>
<li>Despite Unicredit shares having rallied by over 6% in the last two days on the Orcel announcement, we still see Unicredit as a very attractive value play among Italian and European banks</li>
<li>Risks to our view include a Unicredit-BMPS union that implies the absorption of a high level of BMPS NPLs and a less than neutral impact on Unicredit’s capital position</li>
</ul>



UniCredit SpA (UCG IM)  is to appoint Andrea Orcel as its next CEO, according to reports in the financial press
Orcel will need to walk the tightrope of defending Unicredit’s shareholder value and the political hot potato of the potential Banca Monte dei Paschi absorption
We believe that Orcel as CEO will act as an effective check to Unicredit chairman-designate Padoan, the most influential and vocal proponent of the BMPS deal
In the event of a Unicredit-BMPS union, we would expect Orcel to drive for a capital neutral deal, with a relatively clean BMPS balance sheet
Despite Unicredit shares having rallied by over 6% in the last two days on the Orcel announcement, we still see Unicredit as a very attractive value play among Italian and European banks
Risks to our view include a Unicredit-BMPS union that implies the absorption of a high level of BMPS NPLs and a less than neutral impact on Unicredit’s capital position


Unicredit (UCG IM) – Orcel’s Balancing Act

Thematic (Sector/Industry)

<ul>
<li>The investor rotation into value focusing in on EM and DM banks; our key picks are <a href="https://www.smartkarma.com/entities/credicorp-ltd" target="_blank" data-smartkarma-citation="entities:25963:1" rel="noopener">Credicorp Ltd (BAP US)</a>, <a href="https://www.smartkarma.com/entities/turkiye-garanti-bankasi-as" target="_blank" data-smartkarma-citation="entities:25026:1" rel="noopener">Turkiye Garanti Bankasi As (GARAN TI)</a>, <a href="https://www.smartkarma.com/entities/commercial-international-bank" target="_blank" data-smartkarma-citation="entities:27625:1" rel="noopener">Commercial International Bank (COMI EY)</a> in EM banks, and <a href="https://www.smartkarma.com/entities/unicredit-spa" target="_blank" data-smartkarma-citation="entities:21234:1" rel="noopener">UniCredit SpA (UCG IM)</a>, <a href="https://www.smartkarma.com/entities/caixabank-sa" target="_blank" data-smartkarma-citation="entities:21255:1" rel="noopener">CaixaBank SA (CABK SM)</a>, and <a href="https://www.smartkarma.com/entities/bper-banca-s-p-a" target="_blank" data-smartkarma-citation="entities:21165:1" rel="noopener">BPER Banca S.p.A (BPE IM)</a> in Southern Europe banks</li>
<li>Exchanges and Big Data, the convergence; <a href="https://www.smartkarma.com/entities/intercontinental-exchange-inc" target="_blank" data-smartkarma-citation="entities:10221:1" rel="noopener">Intercontinental Exchange (ICE US)</a> is strong on recurring revenues, and both ICE and <a href="https://www.smartkarma.com/entities/s-p-global-inc" target="_blank" data-smartkarma-citation="entities:9735:1" rel="noopener">S&amp;P Global Inc. (SPGI US)</a> should deliver shareholder value creation from transformative M&amp;A</li>
<li>Potential for premium growth and returns in digital payments; we like <a href="https://www.smartkarma.com/entities/nexi-spa" target="_blank" data-smartkarma-citation="entities:28921:1" rel="noopener">Nexi SpA (NEXI IM)</a>, where we see clear benefits from its M&amp;A, and we see <a href="https://www.smartkarma.com/entities/paypal-holdings-inc" target="_blank" data-smartkarma-citation="entities:4747:1" rel="noopener">Paypal Holdings (PYPL US)</a> as a core holding</li>
<li>Digital wealth managers focus on the mass affluent; <a href="https://www.smartkarma.com/entities/finecobank-banca-fineco-spa" target="_blank" data-smartkarma-citation="entities:21188:1" rel="noopener">Finecobank Banca Fineco (FBK IM)</a> stands out in Europe, <a href="https://www.smartkarma.com/entities/xp-inc" target="_blank" data-smartkarma-citation="entities:28619:1" rel="noopener">XP Inc (XP US)</a> is the leader in Brazil but looks over-valued and exposed to increased competition, in our view</li>
<li>Risks to our positive views on our themes includes slower than expected growth in digital payments, transactions and increased regulation on big data; a slower than expected global GDP recovery also could adversely impact bank fundamentals</li>
</ul>


The investor rotation into value focusing in on EM and DM banks; our key picks are Credicorp Ltd (BAP US), Turkiye Garanti Bankasi As (GARAN TI), Commercial International Bank (COMI EY) in EM banks, and UniCredit SpA (UCG IM), CaixaBank SA (CABK SM), and BPER Banca S.p.A (BPE IM) in Southern Europe banks
Exchanges and Big Data, the convergence; Intercontinental Exchange (ICE US) is strong on recurring revenues, and both ICE and S&amp;P Global Inc. (SPGI US) should deliver shareholder value creation from transformative M&amp;A
Potential for premium growth and returns in digital payments; we like Nexi SpA (NEXI IM), where we see clear benefits from its M&amp;A, and we see Paypal Holdings (PYPL US) as a core holding
Digital wealth managers focus on the mass affluent; Finecobank Banca Fineco (FBK IM) stands out in Europe, XP Inc (XP US) is the leader in Brazil but looks over-valued and exposed to increased competition, in our view
Risks to our positive views on our themes includes slower than expected growth in digital payments, transactions and increased regulation on big data; a slower than expected global GDP recovery also could adversely impact bank fundamentals


FinTech & Financial Investment Themes 2021

Italy

UniCredit S.p.A. attracts deposits and offers commercial banking services. The Bank offers consumer credit, mortgages, life insurance, business loan, investment banking, asset management, and other services. UniCredit operates worldwide.

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

UniCredit SpA (UCG IM)

European Bank Screens 4Q20 – Our Picks in the Rotation to Value

The rotation to value benefits European banks, and there is further to go. 4Q20 results show resilient balance sheets; we focus on HSBC, Unicredit,...

Victor Galliano

Société Générale’s AT1: Better Fundamental and Relative Value than BNP

SocGen’s AT1 curve offer better value than BNP’s. SocGen reports a materially higher capital buffer and other fundamental differences are less than...

Hank Calenti, CFA

Bank Credit Weekly: AT1 Outperformance in Risk-On Environment

European bank AT1 significantly outperformed Asia as each EU Basel III AT1 note tightened. Concurrently, increased risk appetite drove performance...

Hank Calenti, CFA

Unicredit (UCG IM) – Orcel’s Balancing Act

Andrea Orcel's soon-to-be-confirmed CEO appointment affords UCG shareholders some protection in the BMPS acquisition scenario; we expect a focus on...

Victor Galliano

FinTech & Financial Investment Themes 2021

Our key 2021 investment themes and ideas in EM and S Europe banks, exchanges and data providers, digital payments companies and digital wealth...

Victor Galliano

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)