BBVA Banco Frances: A South American Bank You Don't Know

by: Violent Capitalist

... because if you did, you'd know they have a market cap of about 5.6 bil and almost 6.4 bil in short term cash and cash due from banks, against only 230 mil in debt. Essentially cash that is not really being loaned out in higher yielding investments, much akin to my investment thesis on Bladex (NYSE:BLX). Except, here you have a chance to invest in several macroeconomic factors that can potentially provide you with larger returns than BLX, since they are a retail bank and can earn larger interest margin spreads.

Going back to BBVA Banco Frances (NYSE:BFR), they are actually the Argentinian subsidiary of Banco Bilbao Vizcaya Argentaria (NYSE:BBVA) and have no exposure to France from what I can tell. BBVA is based in Spain, and operates mostly in Spain and Europe despite Argentina being in its title...weird. Anyways, analysts usually give more attention to BBVA and other larger institutions on the South American continent like Bancolombia (NYSE:CIB), Credicorp (NYSE:BAP), Banco de Chile (NYSE:BCH), Banco Bradesco (NYSE:BBD), Itau Unibanco (ITU), and Banco Santander Brazil (NYSE:BSBR) just in case you want to check out my investment thesis across the industry in South America. This is because BFR for one is a tiny bank in comparison to many of these $10billion-plus market cap banks. Secondly, and I say this extremely lightly, Argentina has been one screwed up place for very very a long time (fiscally, politically, and economically as a result of the first two).

Honestly, if you had told me 'Bank + Argentine = A good investment' about 5 years ago, I would have laughed in your face and probably never talked to you again. But I had the privilege of working for a manager who invested in Argentine sovereign debt, so the story has been something that I'd occasionally follow. I can tell you now, that Argentina may have turned a corner for the better and possibly a return to capitalism and steady growth as long as they can avoid some politics and keep out socialist tendencies which tend to destroy their currency and their ability to access credit on the national level (follow French politics? THAT's the problem). This is a result of the fact that Argentina had finally settled with all of their sovereign bondholders, which gave them access to new sources of credit (on the international stage of sovereign debt, you can't issue new debt when you haven't settled on previously defaulted debt).

So while inflation has been a problem recently, things may be on the track of sensibility. Capitalism is creeping back, the region has experienced tremendous growth in Peru, Chile, Brazil, Colombia, Uruguay, and a steadying of macro factors in Argentina, should allow them to enjoy some steady growth as long as they can stay fiscally responsible... I just cannot say this enough.

Now back to BFR... I obviously like the direction Argentina has taken over the past 2-3 years. The defeat of pro-tax government on Agricultural exports was also an important step (it was a step back to socialist-type solutions). But essentially what this all means is that financing of capital will be slowly pushed back to the retail bank level instead of the national level. This will probably slowly open the loan books for banks like BFR that have access to capital and have knowledge about local operations (their history goes back to the late 1800's).

BFR at about $8/share is trading at 2x book, not exactly dirt cheap, but as I said before they have a lot of short-term capital on their books waiting to be loaned out at higher rates. Even still they are able to generate about 500mil in income. That against a 5.6 bil market cap is an 11x P/E multiple. In theory, they can expand their loan portfolio by at least 25% without any new capital (deposits or otherwise). In fact, one of the reasons they have so low debt, is because they can't really borrow capital like many larger banks do which have access to capital from the gov't and the public markets, something that was impossible without a resolution to an end to their credit crisis. BFR also offers a dividend yield of about 8%.

I think that BFR can put more capital into use to the tune of 600 mil in income in 5 years, resulting in a share price of about 15. A sweet double, but with the dividend yields, total returns can be about 150%. If you want a historical basis, I think they can get back to their operating income and valuations in the late 1990's.

Want to see something else amazing? Argentina was virtually unscathed by the 2008 financial crisis! Ahh, the benefits of being fiscally irresponsible prior to the early 2000's....

Current Price: $8
Target Price: $15
Strategy: No options here, so buy the stock at about $8 and hold for the long term

Disclosure: I am long BFR