Financials

Report by Galliano's Financials Research

Mexican banks, along with other Mexican assets, have benefitted from the nearshoring theme and more recently, the investor sentiment change in favour of EM assets which also supported bank shares. Yet bank sector headwinds are emerging in the data, with rising funding costs eroding credit spreads and worsening credit quality trends implying a worsening in the credit cycle. Victor Galliano believes that Banorte’s 2Q23 results vindicate his caution on the shares, with evidence of spread pressure and rising credit costs; he prefers to gain Mexican bank exposure through BBVA (BBVA Mexico consistently extracts premium returns on equity well in excess of 20% p.a., with its healthy core capital levels not acting as a major hurdle to its high ROE).

Financials

Report by Galliano's Financials Research

Digital strategy is being successfully rolled out to all its geographies - current valuation does not reflect BBVA's competitive attributes and strengths. Forecast dividend yield is over 7%. BBVA's premium returns engine is Mexico, where it is well positioned to counter the threat from FinTechs, as well as exploit the Citibanamex sale process to selectively poach disillusioned clients. This is supported by improving returns in Spain where BBVA remains a digital transformation leader. In addition, Turkey offers exciting growth potential and with the latest offer BBVA should be buying out the Garanti minorities at an attractive price.

Financials

Report by Galliano's Financials Research

1. A shift into value in EM banks; cautious on digital banks - top picks are Sberbank, Banco do Brasil and HDFC Bank. Nubank likely to be one of the EM FinTech big negative surprises of 2022.
2. Southern Europe banks, position for the prospect of higher interest rates - highlights BBVA and Banco BPM.
3. Exchanges, competitive pressures are real, but are they priced in - B3 and Singapore Exchange standout.
4. Growth and value in digital payments - highlights Mastercard and, for its deep value, PagSeguro.
5. Digital wealth managers, picking a potential winner - BTG Pactual.

Financials

Report by Galliano's Financials Research

Garanti acquisition a shrewd move despite negative market reaction - BBVA’s offer to buy out the Garanti minorities values the Turkish bank at a PTBV ratio of 0.7x and prospective PE of 3.6x and is expected to be earnings accretive. The Spanish lender has plenty of experience in delivering premium returns from its operations in challenging neighbourhoods and by taking greater control will be able to further implement the group’s digital strategy and consolidate its risk management. BBVA shares are also supported by the prospect of share buybacks equivalent to ~10% of its market value.