2 High Dividend Foreign Banks With The Footprint To Grow Profits And Dividends

| About: Banco Latinoamericano (BLX)
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On July 17, 2013 I wrote an article on 2 foreign banks that are in a great position to grow with expansion of the Panama Canal. The 2 banks are The Bank of Nova Scotia (NYSE:BNS), now called Scotiabank, and Banco Latinoamericano de Comercio Exterior, S.A. (BLX), often referred to as Bladex. Since the first article was written over 6 months ago, it is time to update the information on these 2 banks.

BNS Scotiabank

Anish Chopra, head of TD Asset Management, likes BNS:

"…because it will benefit from growth in emerging markets, specifically Latin America. It is also important to remember that the people from those countries are generally under-banked, and as that problem rectifies itself, Scotiabank stands to benefit."

"Scotiabank also has a strong Canadian banking business that should be resilient to issues surrounding Canadian housing, and its 9.1% Tier 1 Capital ratio is strong enough to support future dividend increases"

BNS continued to extend its footprint in 2013 with the purchase of ING DIRECT, Canada's 8th largest bank with $30 billion in deposits and 1.8 million customers, and Credito Familiar in Mexico, a 243 branch operation focused on consumer finance.

Below one can see year by year graphs of change: (Graphs taken from 2013 annual report of BNS)


One can see that EPS and ROE have declined somewhat in 2013. On the other hand, dividend growth has been study and still represents less than 50% of earnings. The reduction in EPS was due to an increase of expenses in 2013 of $1,296 million, an 11% increase due to acquisition costs and the negative impact of foreign currency translation. The Bank's income tax rate also increased 1% over the prior year from 19.6% to 20.8% due to the differences in tax treatment of the company's profits. Last year's EPS also benefited from a $0.61 per share real estate gain. Actual earnings per share from core businesses increased from 2012 to 2013 if this real estate gain is eliminated.

Dividends were increased 2 times in 2013. It was raised from $0.57 to $0.60 in the second quarter. It was raised another $0.02 at the end of the 4th quarter. This dividend offers a 4% yield if the stock is purchased at the current selling price of $58.00 per share. The dividend is paid in Canadian dollars so one must consider conversion rates between currencies.

Three of the four banking entities increased profits from 2012. The various changes can be seen below:(Graphs taken from 2013 annual report of BNS)


The Global Banking entity had lower earnings of about 1%. The other entities had better than 10% improvements over the prior year. It also shows that over 85% of International Banking business came from Latin American and Caribbean countries; the very countries most likely to be impacted by the widening of the Panama Canal. BNS has continued to strengthen its presence in the region and was recognized again in 2013 as the best overall trade bank in Central America and the Caribbean by Trade Finance magazine.

BLX Bladex

BLX seemed to be talking out of 2 sides of its mouth when it reported results for 2013. It said that it made more money in 2013 over 2012 in its core businesses, but ended with a decrease in net profits from 2012 to 2013. It reported;

"Full-Year 2013 Net Income totaled $84.8 million, or $2.21 per share, compared to $93.0 million, or $2.46 per share in 2012, a decrease of 9%, mainly due to losses from non-core investments in 2013."

The company illustrated it this way: (Graphs taken from 4th Quarter report of BLX)


To understand what the non-core items are, the following comments by the CFO are recorded below:

"By non-core, we refer {to} what is not our international intermediation business. And so in the past, Bladex used to have an asset management unit, which set up a investment fund that was marketed through third parties in order to attract these third-party monies. We realized our -- after a number of years that our strategic goals of achieving inflows into this fund were not materializing. And so at the end of last year, the decision was made to divest this unit. We concluded that divestiture on April 1 of last year, 2013, and that exit was a structured exit. We reduced our exposure to the funds because the fund, in previous times, really only had our money, Bladex's money, and very little third-party monies in the fund. And so it was 98% or more our money. So we reduced our exposure as -- and then at the same time, found another anchor investor who invested in that fund. And so the idea is to continually reduce our investment in the fund, maintaining a commitment to stay invested for up to 3 years and we're marching towards that goal in making our final redemption in early 2016."

Bladex's investment in this fund is just over 50% currently. It plans to continually reduce its investment in this fund until it is completely out on or before early 2016. The speed at which this occurs depends upon the influx of moneys from other investors into the fund.

Other areas of the bank's activities showed positive results. Net interest income for 2013 was $123.1 million compared to $105.0 million in 2012, a 17% increase year to year. Net interest margin increased 5 bps to 1.75% from 1.70% in 2012. Fees and commissions increased from $10 million in 2012 to $13.7 million in 2013, an increase of 36%. Credit quality has improved slightly from 2012 to 2013. Illustrations from the company are below:(Graphs taken from 4th Quarter Presentation of BLX)


Finally, the company is confident of its future. It just raised the dividend from $0.30 per quarter to $0.35 on December 10, 2013, a 17% increase. The current dividend represents a 5.4% yield on the $26.00 stock price.


Both of these foreign banks stand to prosper from growth in Latin America. The expansion of the Panama Canal, which is scheduled to be completed at the end of the next year, should help the region grow as a consequence of an expanded and faster trade route in the region. Both banks are prospering in the region without this expansion. The expansion of the canal, when it is completed, should help both banks grow activity and profits. Bladex is best positioned to profit from this increased activity since it finances area trade. Scotiabank, with its huge and growing footprint in the region will also profit from this growth in trade and activity.

Both banks are currently growing and paying good dividends. They are accomplishing this without the added impetus of an enlarged Panama Canal. They offer growth in profits and dividends in the normal course of their pursuit of business. This makes both of these banks good investments even without the impact of an enlarged Canal. This is especially important since the construction of the canal is now at a standstill because of a financial dispute between the construction company and the Panama Canal Authority.

At some time in the future the Canal will be completed. It will stimulate the economies in the region. Both banks are profitable now and will continue to be profitable without the added stimulus of the enlarged canal. However at some time in the future, when the Canal is completed, these banks will grow and prosper even more unless some cataclysmic event interferes.

Both companies are reasonably good buys at their current prices. They are growing profits and dividends currently and stand in good position to grow faster over the next decade.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I manage several accounts that have these companies in the portfolio.