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The Latin American banking system has weathered the series of financial crises that began in 2008 and shook the U.S and European banking and finance sector to the core, remarkably well. This can be attributed to the conservative regulatory systems in which Latin American banks operate and their conservative approaches to credit risk and lending. As a result, many of Latin America's banks have been aggressively growing their market share, expanding their lending, leasing and credit portfolios, as well as growing their deposit bases. This has seen their revenue streams, net income and value grow. In my opinion this has created exceptional investment opportunities for risk tolerant investors seeking banking industry investment exposure, but who have been disappointed over the last four years with the performance of U.S and European banks. Three standout performers that I believe are among the best banks in the Latin American banking industry are Credicorp (BAP), Itau Unibanco (ITUB) and Bancolombia (CIB). In this article I will explain why they are standout performers and how any one of them is a desirable investment for investors seeking banking exposure in their stock portfolio.

The first stop is to get a feel for the financial performance of these three Latin American banking stars. Credicorp is a Peruvian full service bank providing the full range of banking and financial products in Peru, Bolivia, and Panama. For the fourth quarter 2011 it reported a 7% rise in revenue 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 11% to $5.6 billion, although long-term debt rose by 0.8% to $4.9 billion. Credicorp also reported a 24% increase in its 2011 full year profit to $1.8 billion.

Itau Unibanco is a Brazilian bank that provides the full suite of banking and financial products in Brazil and internationally. Itau Unibanco reported a disappointing financial result for the fourth quarter 2011, because despite reporting a 50% rise in earnings to $10 billion it reported a 24% drop in net income to $1.6 billion. However, it reported a stronger balance sheet for this period with cash and cash equivalents rising by 17% to $16 billion, although long-term debt also rose by 6% to $101 billion. Itau Unibanco reported an 18% increase in full year 2011 profit to $7.6 billion.

Bancolombia is a Colombian bank that provides the full range of banking and financial products in Colombia, Panama, El Salvador, Puerto Rico, the Cayman Islands, Peru, Brazil, the United States, and Spain. Bancolombia delivered some very impressive financial results for both the fourth quarter 2011 and the full year 2011. For the fourth quarter 2011, Bancolombia reported a 6% rise in revenue to $848 million and a 19% increase in net income to $259 million. For the same period Bancolombia's balance sheet remained steady, with total assets rising by 6% to $44 billion and total liabilities growing by 6% to $39 billion. It also reported a solid full year 2011 result with net income rising by 16% to $857 million.

Overall each of the three banks reported full year 2011 solid double digit increases in full year net income. Credicorp reported the highest with a credible 24% increase and Bancolombia the lowest, which was still a double digit increase of 16%.

Each of the three banks has solid valuation and performance indicators as the table below illustrates.



Profit Margin


Debt to Equity Ratio

Dividend Yield







Itau Unibanco












As the table shows, each of the three banks has a profit margin in excess of 20% coupled with a return on equity of 20% or greater, which augurs well for continued strong future growth. In addition, Credicorp and Itau Unibanco both have PEG ratios of less than one which indicates they are undervalued given their growth expectations. However, Bancolombia with a PEG of marginally greater than one is fairly valued and is not as comparatively cheap as the other two banks.

Each has a debt to equity ratio of greater than one, with Itau Unibanco having the highest at 3.4. This indicates that all three and in particular Itau Unibanco are reliant upon using wholesale debt to fund their lending operations. This is generally more costly for a bank than funding lending through their deposit base due to the interest costs. It means they are particularly exposed to movements in short-term interest rates that can have a direct impact their bottom line. It is probably the only weakness that I have identified at this time, but it must be remembered that all three have debt to equity ratios that are comparable to major U.S banks such as JPMorgan Chase (JPM) with a debt to equity ratio of 3 and Citigroup (C) with 3.2.

Furthermore, as the table below shows each of the banks is expected to deliver a substantial increase in net income for 2012, with strong growth in earnings per share.



2011 EPS


Forecast 2012 EPS

Forward PE 2012

Forecast 1 Yr EPS Growth








Itau Unibanco














I believe that each of these three banks based upon their trading price at writing and their forecast consensus 2012 earnings per share appear to be moderately cheap with forward price to earnings ratios of 9 to 14.

However, it does make Credicorp and Bancolombia appear expensive in comparison to JPMorgan which has a forward 2012 price to earnings ratio of 10 and Citigroup which has a 2012 forward price to earnings ratio of 9. However, Itau Unibanco with a forward 2012 price to earnings ratio of 9 is the cheapest of the three and comparable to JPMorgan and Citigroup.

The next and final ratios that have been examined are key financial ratios that measure the banks operational efficiency, the quality if their assets and loan books, and their degree of solvency. Each of these measures is set out below.


Efficiency Ratio

Past Due Loans (PDL)

BIS Ratio

Credit Rating






Itau Unibanco










The first ratio is the efficiency ratio, which measures how efficiently a bank utilizes its resources to generate revenue and is essentially a reflection of how many cents are required to generate one additional dollar of revenue. Therefore, if a bank has an efficiency ratio of 41.6% like Credicorp, then it translates into 41.6 cents of expenses for every dollar generated. The efficiency ratio is an important tool for measuring a bank's performance as it takes into account the bank's net interest income, net overheads, and capital efficiency.

The accepted industry standard is an efficiency ratio of 60% to 70% indicating a well run bank. Obviously the lower the efficiency ratio the better the bank is performing and in the case of the three banks analyzed here each has an efficiency ratio of lower than 50%. With the most efficiently operating bank being Credicorp with an efficiency ratio of 41.6%, followed by Bancolombia with 45% and Itau Unibanco with 47.7%. All of which indicates that each bank is exceptionally well managed and operates very cost effectively.

In comparison, for 2011 the U.S banking industry had an aggregate efficiency ratio of 68%, which is higher and therefore less efficient than all three banks. Furthermore, major U.S banks such as JPMorgan's with an efficiency ratio of 65%, Bank of America (BAC) with 90%, Citigroup with 66% and Wells Fargo (WFC) with 59%, are not operating or generating revenue as efficiently as Credicorp, Itau Unibanco or Bancolombia.

The past due loans (PDL) ratio measures the number of loans that are over 90 days due as a proportion of the bank's entire loan book. This is an accepted standard for determining which loans have become substandard and are at risk of defaulting. Generally a ratio of around 2% is accepted as a good measure. Both Credicorp and Bancolombia have low PDL ratios of around 2% while Itau Unibanco's is somewhat poorer at 4.9%. Essentially this indicates that the quality of its loan book is lower and there is a higher degree of credit risk and bad debt, which will impact the banks bottom line. However, it is still quite manageable and in line with industry standards. As a point of comparison in by December 2009 Citigroup had a PDL of 25% and Bank of America a PDL of 32%.

The BIS ratio gives an indication of the solvency of a bank, as it is a measure of how much capital is used to support the bank's risk assets, by giving the ratio between the risk-bearing capital and the risk-weighted assets. The minimum standard as set by the Bank for International Settlements ('BIS') is 8% (comprised of 4% each of Tier 1 and Tier 2 capital). However, some countries may apply a higher requirement as part of their banking regulatory framework. It is also generally accepted that a minimum ratio of 10% is optimal. As the table indicates all three banks have a BIS ratio that is appreciably higher than the 8% minimum as well as the optimal ratio of 10%. This indicates that all three banks are adequately capitalized with strong risk management frameworks.

Furthermore, each of the banks has a credit rating which is equal to or higher than the minimum investment grade of BBB-. Bancolombia's is the lowest at BBB-, while Credicorp and Itau Unibanco are one notch above at BBB. Overall these credit ratings are lower than those for major U.S banks such as JP Morgan rated as A+, Citigroup rated as A- and Wells Fargo rated as A-. A factor in each of the three banks having lower credit ratings than their U.S counterparts is that it reflects the additional degree of risk associated with investing in a Latin American bank.

Their credit ratings are representative of the credit rating for the countries in which they are based, with Peru and Brazil both having credit ratings of BBB and Colombia BBB-. This is an important reminder that any investment in an emerging market does have a greater degree of risk than investing in a developed market such as the U.S.

The overall economic outlook for Peru, Brazil and Colombia in 2012 is quite positive with all three countries having 2012 GDP growth rate forecasts in excess of 3%, Peru at 5.6%, Colombia at 4.5% and Brazil at 3.6%. In addition, it is predicted that as these countries grow their middle class will grow leading to greater domestic consumption of consumer goods and greater demand for credit and investment products. It is also estimated that the penetration of banking products and services in those countries is around 50%. All of this bodes well for growing market share and revenue.

It is my opinion that Credicorp, Itau Unibanco and Bancolombia are well managed and profitable institutions as they have returns on equity in excess of 20%, profit margin of 20% or more and efficiency ratios of less than 50%. Furthermore, they provide outstanding investment opportunities with more than satisfactory EPS growth and are priced at reasonable forward multiples.

Source: Latin American Banks: 3 Of The Best For Investors In 2012