The International Monetary Fund (IMF) released a report [pdf] in April of this year predicting economic growth for the global economy. While the U.S. and Canada are predicted to grow between 1 and 2% over the next 2 years, most Latin American and Caribbean countries are predicted to grow between 2 to 6% over the same period. The graph below, taken from that same report, shows these rates by country.
Two banks sit in a prime position to profit from this increasing growth in the region; Banco Latinoamericano de Comercio Exterior, S.A. (BLX) often called Bladex and Bank of Nova Scotia (BNS) which is often called Scotiabank.
Banco Latinoamericano de Comercio Exterior, S.A.
BLX is a commercial bank located in Panama. Bladex is the first Latin American bank to be listed on the NYSE, which occurred in 1992. It is a supranational bank established by central banks of Latin American and Caribbean countries to promote trade finance in the region. The Bank is principally engaged in providing trade financing to selected commercial banks, middle-market companies and corporations. The bank does not provide retail banking services to the general public.
Source: Banco Latinoamericano de Comercio Exterior Annual Report
The Panama Canal expansion should be completed next year allowing larger ships to pass through the isthmus. This should be an impetus to increase trade among countries in the Americas and hence boost the business of Bladex as well over the next 2 years.
Significant positive facts about Bladex: (Taken from TDameritrade)
- Price/Earnings ratio is a reasonable 11.50
- EPS growth over the past 5 years has been 4.5%
- Pays an annual dividend around 5%
- Payout ratio is around 50%
- Dividends have increased 3.5% over past 5 years
- Price of the stock is just a shade over book value of $22 per share
- Well-Capitalized bank with a Tier 1 ratio of 16.6%
- Entered into an agreement [pdf] to sell the asset management unit in April in order to concentrate on its financing business.
On the other hand several independent research firms have either negative or neutral opinions on Bladex. Ford Equity Research rates it hold, Jaywalk Consensus rates it a sell and The Street Ratings has a hold on it. These ratings are probably a consequence of first-quarter earnings. The first-quarter earnings of 2013 were $.43 per share as compared to $.86 per share in 2013. There is no reason for alarm over these comparisons because the company has great fluctuations in earnings from quarter to quarter as a matter of course. Last year the 3rd-quarter earnings were $.34 per share against the 1st quarter's $.86 per share. Many of these fluctuations are a consequence of currency valuation changes.
Bank of Nova Scotia
BNS or Scotiabank serves Canada, with banking services that include debit cards, deposit accounts, credit cards, loans and mortgages as well as commercial banking solutions for medium and large businesses. It has more than 18.5 million customers in more than 50 countries around the world. The reason to include BNS in this article is its strong presence in Latin America and the Caribbean.
The strength of the presence in Latin America and the Caribbean is summarized in these recognitions for excellence [pdf]:
- Recognized as The Global Bank of the Year 2012, by The Banker magazine, a Financial Times publication.
- Recognized as 2012 Bank of the Year in the Americas (regional category)
- Recognized as 2012 Bank of the Year in Antigua, Barbados, Belize, Turks and Caicos and British Virgin Islands
- Named Number One Foreign Exchange Provider in Canada, Jamaica and Peru by Global Finance magazine
- Awarded Best Bank in Costa Rica from Global Finance magazine for the sixth consecutive year
- Chosen Best International Trade Bank in Peru by Trade Finance magazine for the third straight year
- Named the 2012 Best Consumer Internet Bank by Global Finance magazine in 19 Caribbean countries
- Global Finance magazine recognized Scotiabank as the 2012 Best Corporate/Institutional Internet Bank in 15 Caribbean countries
- Scotiabank Jamaica awarded the Gold Medal and ranked No. 1 for the best mid-sized contact centre in the Americas by Contact Centre World
- Scotia Casa de Bolsa (Scotia Brokerage house) was recognized as the best brokerage house in Mexico by "El Inversionista" (The Investor) in 2013.
Furthermore the company recently strengthened its presence in Latin America:
- Completed the acquisition of the Bank's 51% investment in Colombia's Banco Colpatria, positioning the Bank as the 6th-largest financial group in the country
- Completed the integration of R-G Premier Bank in Puerto Rico, increasing its market share to approximately 9%
- Announced, subject to regulatory approval, the acquisition of Credito Familiar, a well-known brand in the Consumer and Micro Finance segment in Mexico
- Completed acquisition of 50% of BBVA's pension fund management business, AFP Horizonte, in Peru in 2013; third largest fund manager in Peru serving 1.4 million customers
BNS in its latest quarter showed a 15% growth in revenues from year to year in the region. See the graph below:
BNS is a strong bank, well-positioned to grow in the Americas. It has a strong balance sheet with a Tier 1 capital ratio of 10.7% and a total capital ratio of 13.6%. It reported $1.6 billion net income for the latest quarter, a 10% increase year over year.
Significant positive facts about BNS: (Taken from TDameritrade)
- Price/Earnings ratio is a reasonable 10.66
- EPS growth over the past 5 years has been 5.8%
- Pays an annual dividend of 4%
- Payout ratio is around 43%
- Dividends have increased 4.7% over past 5 years
Scotiabank has been increasing the amount of business it does in Latin America, Mexico and the Caribbean. The cross-border exposure to Latin America increased from $20 billion in 2011 to $25 billion in 2012. Its recent purchases and its excellent reputation in the region should nourish similar gains over the next 2 years. Since only 20% of the bank's business is located in this region, it is not positioned to profit from the region's growth as well as Bladex. However, this large footprint in the region should foster competitive advantages both in Canada and the rest of the world. It will help the bank grow and prosper over the next few years.
There are some caveats to consider with Scotiabank. There is a huge housing bubble taking place in Canada. Some analysts fear that this bubble may create a major problem for Canadian banks. If Canada's housing bubble bursts Scotiabank holds 16% of the current mortgage book. CEO Rick Waugh said that Canada's housing market is suffering a soft landing. "Our delinquency rates with our customers are showing slightly elevated, but not significant (increases)…and are well under control."
These low cash flow numbers are a product of the bank's expansion. It has been purchasing assets, especially in Latin America, at a great rate. At some point the management team will either have to slow this expansion or raise more capital. One way that Scotiabank could continue its ambitious expansion into Latin America and Asia is by issuing a new preferred stock without further dilution of the common stock. On the other hand it could also offer new common shares to serve the same purpose with the resulting dilution of the common.
The IMF predicts that Latin American and Caribbean nations compose the geographic region where economic expansion will be stronger than most of the rest of the world for the next few years. The expansion of the Panama Canal will encourage more trade between nations and further enhance expansion in the region. BLX and BNS are well-positioned banks to profit from this growth in trade and economic activity.
The dividends and profits of Bladex and Scotiabank should continue to grow. Bladex is probably in the best position to profit from increased trade in the region. There is no dilution of interests outside of the region. Most of its business and profits are derived from serving the Latin American and Caribbean nations. It is an excellent position to profit from the expansion of the Panama Canal.
Scotiabank on the other hand derives a much smaller portion of its profits from the region. However its expansion into the Southern hemisphere is paying off in a very big way and should increase its profitability over the next few years. If one is confident that the Canadian housing boom will have a soft landing, Scotiabank is a safe bet to continue growing profits and dividends.
Additional disclosure: While I don't hold these 2 companies now, If we get a dip in the market over the next few weeks, I plan to invest in the companies at that time.