Overall, Latin American economies weathered the 2008-09 financial crisis well, and their recovery has been faster than in other regions of the world including OECD economies. With developed countries lurching from one economic crisis to the next, emerging markets are increasingly becoming the economic powerhouses of the global economy. The growing wealthy and middle class populations of Latin America are driving greater demand for consumer goods and banking, financial and investment services.
In this article, I will analyze five Latin American Banking stocks that are listed on the NYSE, which I believe are worthwhile investments.
BanColombia S.A. (CIB)
BanColombia provides the full range of banking and financial products and services to individual, business and corporate customers in Colombia, Panama, El Salvador, Puerto Rico, the Cayman Islands, Peru, Brazil, the United States, and Spain. It is the largest bank in Colombia and is only one of two Colombian companies listed on the NYSE, the other being Ecopetrol (EC). It currently has a market cap of $51 billion and is trading at around $65 with a nosebleed trailing PE of 57. It has a 52-week trading range of $53.64 to $69.87.
Despite the massive trailing PE, I believe that at its current trading price, BanColombia represents a solid investment opportunity. I expect the company should see a major improvement in its stock price during 2012, and I will explain why below.
Based on the numbers, BanColombia's outlook is quite solid. For the third quarter of 2011, it saw a 29% rise in earnings to $2.7 billion and a massive 142% increase in net income to $933 million. However, for the same period, its balance sheet weakened despite cash and cash equivalents rising by 4% to $5.3 billion as long-term debt grew by 13% to $9.7 billion.
These are solid revenue and income numbers, and when we review and compare the company's key performance indicators to its competitors, its growth potential during 2012 become even more apparent, as the table below highlights.
Debt to Equity Ratio
Banco Bilbao Vizcaya Argentaria (BBVA)
BanColombia has a low PEG ratio that indicates it has solid growth prospects over the next five years, and these are certainly better than either Citigroup's or BBVA's. Furthermore, despite all three banks delivering solid double-digit profit margins, BanColombia stands out with its profit margin of 28%, and when combined with a very solid return on equity of 20%, this can only bode well for future earnings and income growth.
Like most banks, BanColombia has a heavily leveraged balance sheet with a debt-to-equity ratio of 2.73, which indicates that it is reliant upon using wholesale debt markets to source funds for lending rather than relying predominantly upon its deposit base. This does increase the degree of risk associated with the stock, but when you consider the debt-to-equity ratios of the major U.S banks such as that Citigroup it is not to dissimilar.
Overall, the outlook for the global banking industry remains poor due to ongoing fallout from the European sovereign debt crisis continues coupled with a slow U.S. economic recovery and fears of a Chinese economic slowdown. However, many analysts have taken the view that the performance of Latin America's banks is striking in contrast to European and U.S. banks. This can be attributed to the conservative lending and investment policies of South American banks, which means that most avoided large exposures to the bad loans and toxic investments that affected U.S. and European banks. In addition, the outlook for BanColombia is extremely positive, as it is Colombia's largest bank, and Colombia is South America's second most populated country. This means it is well positioned to take advantage of the growing demand for credit and savings products from Colombia's growing middle class population.
In addition, I believe that most investors do not understand the true degree of sovereign risk associated with investing in Colombia. It is a lot lower than many investors perceive. Colombia's security situation is improving and it has seen rapid economic development and foreign investment over the last 5 years. With surging foreign investment, Colombia's economy expanded at its fastest pace since 2006, during the third quarter of 2011, when it experienced GDP growth of 7.7%. This was also 1.7% higher than the second quarter of 2011. Colombia has also recently established a new free trade agreement with the U.S. that will provide support for non-traditional export growth. Therefore, I believe that the economic prospects in Colombia are particularly bright and the degree of sovereign risk is lower than would normally be expected. All of this bodes well for the performance of Colombian financial institutions such as BanColombia.
Furthermore, BanColombia has performed quite strongly since listing on the NYSE in July 1995. Its current trading price of around $65 represents an 838% growth in its stock price, which equates to an average annual return since 1995 of around 52%. The company also pays a dividend with a yield of 2.2%, which should provide investors with a regular return on their investment and with a payout ratio of 27%; this yield should remain quite sustainable.
Finally at current trading prices BanColombia appears to be unfairly discounted by the market. It has an earnings yield of 7%, which is more than triple the current risk free rate of ten year treasuries, which represents a solid risk premium over the risk free rate of return. Accordingly, I believe BanColombia will continue to grow and deliver solid investor returns throughout 2012.
Credicorp Limited (BAP)
Credicorp provides the full range of banking and financial products and services in Peru, Bolivia, and Panama. The company has a market cap of $9.8 billion and is trading at around $123 with a trailing PE of 9. It has a 52 week trading range of $80.79 to $124.39. At its current price I believe that Credicorp represents a solid investment opportunity for 2012 and now I will explain why.
Credicorp's numbers are particularly strong, for fourth-quarter 2011 the company reported a 7% rise in earnings to $500 million and an 11% rise in net income to $189 million. It also reported a stronger balance sheet in this period with cash and cash equivalents rising by a solid 11% to $5.6 billion, although long-term debt rose by 0.8% to $4.9 billion. Credicorp also saw its 2011 full year profit rise by 24% to $1.8 billion. The company's management calls these numbers "particularly significant," given the degree of uncertainty in the international market and uncertainty in the local political and investment scenes.
I also feel that Credicorp's performance ratios indicate that the company has solid growth prospects, even more so when compared to its competitors as the table below highlights.
Debt to Equity Ratio
Banco Santander (STD)
The Bank of Nova Scotia (BNS)
Credicorp has a moderately favorable PEG ratio of slightly less than 1, which indicates moderate future growth prospects. When this is combined with a solid profit margin and return on equity, which are both over 20% it is clear Credicorp has the ability to grow net income and deliver strong investor returns through 2012.
Furthermore, it has a debt-to-equity ratio of 1.23, which while still showing the company is reliant upon using debt rather than equity to fund its operations; is relatively conservative for a bank. This in my view bodes well for income stability and reduces the amount of risk associated with investing in Credicorp.
Credicorp's management team also has a firm understanding of the markets in which it operates. An example of this is the significant income stratification in Peru, which requires a very conservative operating framework for financial institutions, particularly with regard to lending operations. Credicorp's management understands this, as indicated by Credicorp's solid balance sheet and income statements. Another highly appealing aspect is that in late 2011 Fitch upgraded Credicorp's rating to A from A-, which shows improved confidence in the quality of the company's operations.
I believe that, at current price levels, Credicorp is undervalued by the market as it has an earnings yield of 6.6%, which is more than triple the risk free rate of ten year Treasuries. Despite trading at close to its 52 week high, now is a great time to jump on board with Credicorp as its business continues to grow momentum, which will see it hit new stock price highs and deliver solid investor value.
Banco Bilbao Vizcaya Argentaria
BBVA engages in the retail banking, asset management, private banking, and wholesale banking businesses in Spain and throughout Latin America. It has a market cap of $44 billion, a 52-week trading range of $7.02 to $13.01 and is currently trading at around $9 with a trailing PE of 11.
For fourth-quarter 2011 BBVA delivered solid financial results with a 631% increase in earnings to $24 billion, but a disappointing drop of 117% in net income, which was -$139 million. This saw the company report a 2011 net profit of $25 billion, which was still a 14% increase on its 2010 net profit.
BBVA's key performance ratios do not compare overly favorably with its competitors as the table below indicates.
Debt to Equity Ratio
Banco Macro (BMA)
However, despite BBVA's PEG ratio not being that impressive and lower than its competitors it is delivering a solid profit margin and a moderate return on equity. This bodes well for further net income growth and stronger investor returns through 2012. Also it does have a high debt to equity ratio of 2.49, which is similar to the degree of leverage found with most U.S. banks such as Citigroup.
The added sweetener with BBVA is that it pays a solid dividend yield of around 4% and it has a dividend payout ratio of 51%, which as a quick and dirty measure of dividend sustainability, indicates that it should be able to maintain its dividend.
In my opinion, BBVA is undervalued by the market as indicated by its earnings yield of 13.82%. This earnings yield is substantially greater than the risk free yield of ten year Treasuries and indicates that its stock price should continue to increase in value.
Overall, BBVA has delivered a solid financial performance in 2011, in what can only be described as difficult operating circumstances. I also believe that BBVA's performance metrics indicate that based on its current earning yields it is undervalued. My only concern is that Spanish banks as a result of the European debt crisis have received a bad rap and the stability of the Spanish economy is of considerable concern, which obviously brings a high degree of sovereign risk for the investor when investing in BBVA, although the bank does derive a significant portion of its earnings from its South American operations.
Banco De Chile (BCH)
Banco De Chile provides the full range of banking services to individuals and corporations in Chile and internationally. It has a market cap of $14 billion and a 52 week trading range of $64.57 to $96.11 and is now trading at around $95, with a trailing PE of 16.
Banco De Chile reported a 14% drop in fourth-quarter 2011 earnings to $790 million and a 22% drop in net income to $149 million. For the same period Banco De Chile's balance sheet weakened with cash and cash equivalents dropping 9% to $3.2 billion, although long-term debt dropped by 3% $7.8 billion. However, Banco De Chile's 2011 profit surged upwards by 13% from its 2010 profit to $859 million.
I also believe that Banco De Chile's key performance ratios indicate that the company has some growth prospects and overall it is performing on par with its competitors as the table below highlights.
Debt to Equity Ratio
Banco De Chile
Banco Santander Chile (SAN)
Despite Banco De Chile's high PEG, which doesn't indicate that the company has solid growth prospects, it has a solid profit margin and return on equity, both of which bode well for future growth prospects. These performance indicators are also greater than both of its main competitors in Chile, Corp Banca and Banco Santander Chile. It also has a lower debt to equity ratio than both and despite it being 2.60 this is offset by its solid return on equity.
A benefit of investing in Banco De Chile is its solid dividend yield of 3%, which is higher than the yield of ten year Treasuries and the U.S. inflation rate for January 2012 of 2.93%. It is also likely that Banco De Chile can sustain this yield with a conservative payout ratio of 49%.
In addition, on a year-on-year basis Banco De Chile has grown its total loans by 21%, which is well above the growth posted by other banks in Chile. Another aspect of its operations that I find appealing is that it has dropped its provisions for loan losses in 2011 by 40%, from 2010 provisions. This indicates that the level of risk in the bank's loan portfolio is dropping and its quality is increasing, which bodes well for future earnings. Another standout characteristic is the 2011 performance of its retail banking segment which saw a 43% year-on-year rise in EBIT for 2011 from 2010.
Finally, at its current trading price, I believe the stock is undervalued as it has an earnings yield of 6%, which is more than double the risk free rate. This represents a healthy risk premium for a company operating in the banking sector.
In addition, the sovereign risk associated with investing in Chile is particularly low for a Latin American country and in fact is less than many of the European countries caught up in the current sovereign debt crisis. In my opinion an investment in Banco De Chile can only deliver solid investor returns as the bank is well positioned to take advantage of the ongoing growth of the Chilean economy, with the Chilean government predicting GDP to rise to 4% in 2012.
Banco De Chile is the second largest Chilean bank by loans under management and is the largest in terms of current accounts, which give it a dominant market share. Overall Banco De Chile has some extremely positive characteristics, which on top if its solid fundamentals make it in my opinion a compelling investment.
Banco Santander Brasil SA (BSBR)
Banco Santander Brasil operates as a full-service bank in Brazil offering the full range of banking, finance, insurance and investment products. It has a market cap of $40 billion and a 52 week trading range of $6.73 to $12.60. It is currently trading at around $11, with a trailing PE of 20.
For fourth-quarter 2011 BSBR reported an 11% fall in earnings to $13.6 billion and a 13.5% fall in net income to $1.8 billion. For the same period its balance sheet weakened with cash dropping by 4% to $614 million and long-term debt increasing by 13% to $49 billion.
BSBR's key performance indicators do not indicate a company that has solid growth prospects and in fat show that it is being out-performed by its competitors as the table below shows.
Debt to Equity Ratio
Banco Santander Brasil
Banco Bradesco (BBD)
Itau Unibanco Holding (ITUB)
Overall the company is being outperformed by its competitors on profit margin and return on equity although it does have a significantly lower debt to equity ratio than its competitors. This helps to explain the lower return on equity. Overall, these performance indicators do not bode well for BSBR's future performance other than its debt to equity ratio, which bodes well for net income and dividend stability as any rise in interest rates won't see additional cash flow being allocated to managing debt.
Another important aspect worthy of consideration is that Banco Santander Brasil is a financially separate and independent entity from its deeply troubled parent, Spain's Banco Santander . In fact Banco Santander Brasil has reiterated that it is not funding its Spanish parent and that it has a model of complete independence regarding liquidity and capital.
I also believe that Banco Santander Brasil is unfairly valued by the market as it has an earnings yield of 70%, which makes it appear to be heavily undervalued by the market when compared with the risk free yield of ten year Treasuries. On this basis its stock price can only rise in value.
Overall, Brazil presents a strong economy that has not suffered on the same scale from the global financial crisis or the European sovereign debt crisis as the European or U.S. economy. However, the Brazilian government is undertaking measures to ensure that an economic recovery is well under way, which saw the official interest rate in January 2012, reduced by half a percentage point to 10.5%.
In addition, I do not believe the country risk associated with investing in Brazil is as high as many other Latin American countries and is certainly not as risky as Argentina, with the country having learned from its near debt default in 1999. Overall, for all of these reasons, I do believe that an investment is Banco Santander Brasil will give solid investor returns over the short to medium term.