BBVA Banco Frances S.A. (NYSE:BFR) was founded in 1886 in Buenes Aires and is the oldest private bank and the 3rd largest bank in Argentina. Through a network of over 280 branch offices, the company is one of the main providers of financial and non-financial services to businesses and consumers in Argentina. It is currently owned and controlled by Banco Bilbao Vizcaya Argentaira SA (NYSE:BBVA) which is a multinational Spanish banking group and the 7th largest financial institution in the Western world.
BFR is very conservatively run with unusually high levels of liquidity and solvency for a bank. It has cash of over $1B and no net debt.
BFR & the Argentine Economy
From its inception in 1886, BFR has ridden through all the highs and lows of the Argentine economy and come out the other side in one piece – and with a superb balance sheet. It has developed into a strong, stable and conservative financial institution.
The graph below shows the ups and downs of the Argentine economy. Few other countries have had such a volatile economic history.
click to enlarge
Source: SSPE Ministry of Economy
In the late 19th century when BFR was starting out, Argentina’s economy was booming, with GDP averaging 8.5% from 1880 to 1905. From 1905 to the great depression, Argentina’s GDP growth slowed considerably, and during the great depression, Argentina’s GDP fell. The Second World War benefited the country immensely as both the demand and price of Argentina’s exports rose both in agricultural exports as well as manufacturing. For much of the first half of the 20th century, Argentina was a wealthy country with the country’s per capita income similar to that of France, Germany and Canada.
Argentina’s economy continued to grow until 1974 but inflation was a problem, averaging 26% from 1944 to 1974. During the military dictatorship from 1976 to 1983, the economy declined due to a series of disorganized, corrupt economic policies that halted industrial development and resulted in the bankruptcy of over 400,000 companies.
Argentina experienced severe stagnation from 1975 to 1990 which means inflation was high, economic growth was low, and unemployment was high. The country had an external debt of $65B USD by 1989. To build confidence and improve its balance sheet, the government from the mid to late 80s began a privatization program, which included banks. Many of the banks immediately after privatization became the poster child of mismanagement and recorded huge losses. It was during this period that BFR expanded from 15 branches to 62 through acquisition of recently privatized, distressed banks. This is another example of the strong getting stronger during difficult times. By buying out its struggling, weaker competition when the opportunity arose, BFR became bigger and stronger (less competition), holding it in good stead for the next economic upswing.
The privatization and other measures put in place were reaping rewards for Argentina by the early 90ss. Inflation reduced to single digits by 1993, and GDP grew at 5.5% pa between 1990 and 1998, even with a hiccup in 1995 due to the flow on effect to Argentina of the Mexican Crisis (known as the tequila effect). In 1996 BFR became part of the Spanish giant BBVA which now owns 76% of BFR.
By 1998, amidst the Asian, Russian and Brazilian crises, Argentina’s growth stunted and by 1999, Argentina, not to be outdone, had its own crisis lasting until 2002 called the Argentine Economic Crisis. Argentina entered a recession, and public debt (almost all in bonds) skyrocketed. In December 2001 Argentina defaulted on over $100B of its securitized bonds and as a result the 2002 GDP took an 11% dive. The default has had extreme and lingering consequences for Argentina. Since its default it has not been able to enter the global credit markets, and in general has struggled to attract foreign investment.
Just as the Argentine economy was looking strong again after things turned around post crisis, along came the GFC (Great Financial Crisis) which put more pressure on the country’s economy. But it surprisingly withstood the challenges of the GFC relatively well, and since the 2002 crisis, through its strong agriculture exports, the country has revived itself again to the point where the economic news coming out of Argentina is now generally positive.
The Argentine economy grew around 9% in 2010, and the 1st and 2nd quarters of 2011 were similarly impressive. But Moody’s has a negative outlook on Argentina’s banking sector citing unsustainable government policies and general political risk as the source of the strain on the sector. And according to Reuters, many private economists suggest inflation is running at over 20% whereas the government’s official number is around 10%. It seems the Argentina’s turbulent high growth high inflation story is set to continue.
The biggest risk to the Argentine economy remains the high inflation rate. Exports will lose their competitiveness with higher prices, and private consumption will gradually decrease as the price of goods and services becomes too expensive. The flow on effects could result in lower economic activity throughout the country which in turn will have negative flow on effects to Argentine banks such as BFR. With its impeccable balance sheet, and over 125 years operating in Argentina, BFR is certainly well positioned to ride out challenging economic periods.
BFR is a wonderful generator of cash. For the last 10 years, BFR has reported total net earnings of $690M while free cash flow has totalled $1.8B over the same time. Since 2003 BFR has enjoyed zero net debt, and today enjoys a sublime balance sheet with over $1B in cash. We like to see this sort of net cash position for a number of reasons. It allows the company to ride through any challenging times that might lay ahead, and it allows the company to take advantage of any opportunities to acquire distressed competitors to further strengthen their position. It also allows the company to buy back shares and pay dividends.
2010 was a great year for BFR, increasing net income from $188M to $301M and achieving a 35% NROE. $121M of the net income was distributed to shareholders providing shareholders with an attractive yield. Based on the current shareprice of around $6.30, the dividend yield for 2011 currently sits at over 17%, but investors should not rely on the dividend too much. The payout ratio over the last 10 years has been 100%, 0%, 0%, 0%, 0%, 8%, 28%, 43%, 4%, and 39% so a shareholder certainly cannot rely on the dividend. The payout ratio for 2011 is not far off 100%, so though the yield looks attractive at the moment, it almost certainly won’t last – at least not above 17%.
The Quality Rating of BFR is not too bad at 65. The company had a terrible year in 2002 posting a loss of $367M which is especially bad considering they posted an impressive gain of $301M last year. The terrible year in 2002 dragged some of the quality rating scores down considerably. The performance of BFR from 2007 to 2010 in particular has been good though.
The Intrinsic Value is going sideways for the next few years, but the IV is way above the share price. Indeed, the shareprice is only about 15% above the reported book value.
For most of the last 10 years, the shareprice has been well above the IV, but that trend reversed in 2008. The shareprice went as low as $2.2 in late 2008/early 2009. The shareprice started to take a pounding in 2007 during the start of the credit crunch where all financial stocks fell out of favor. During the 2009/2010 market recovery the shareprice headed up again towards the IV line before dropping significantly in 2011 due once again to the general downward pressure on all financial stocks. The dramatic drop in shareprice in 2011 has created the potential opportunity we see today.
Investment Grade Table Position
BFR takes position number 33 this week on the our weekly Investment Grade Table. The investment grade table multiplies the quality rating and margin of safety together before dividing by 100 to get the Investment Grade Score. This allows only those companies with a good quality rating and margin of safety combination to make the table.
The Argentine economy has endured extreme highs and lows, and for over 125 years BFR has not only endured those extremes, but has actually thrived on them. During periods of economic slumps BFR has grabbed the opportunity to take over its distressed competitors, while during periods of economic prosperity BFR has built up its balance sheet ready for another acquisition.
BFR has over $1B in the bank (compare this to its market cap which is also slightly over $1B), zero debt, has proven itself over 125 years, is currently paying an above 17% dividend yield (though that won’t last), and is trading only slightly above book value. The upside potential vs downside risk for BFR is attractive, and many investors will see good value at current prices
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.