As U.S. and Brazilian banks stumble, lenders in Colombia, Chile and Peru have a growing book of business and few inflation fears. Time to deposit money in their shares?
Few investment horizons are as dispiriting these days as that of the U.S. financial sector. Industry giant Bank of America's stock has tanked, nearly 13% of residential mortgages are delinquent, and revolving loans—including credit-card debt—shrank at a 5.2% annual rate in July. Little wonder the Dow Jones U.S. Financials Index is off 16% this year, making it the worst-performing U.S. stock group.
Little wonder, too, that some money managers have begun to eyeball banks in Latin America, where booming commodities-driven growth, sharply rising loan demand, an emerging middle class and relatively low credit penetration make for a much more encouraging panorama.
Ed Kuczma, an investment manager and Latin American analyst at Van Eck Global in New York, likes banks west of the Andes, in Colombia, Chile and Peru, where the economies are growing 5% or more and where inflation—bankers' bête noire—runs at a manageable 3.5% or less. His picks: Bancolombia (ticker: CIB), Banco Santander Chile (SAN) and Credicorp (BAP) of Peru, all of which trade as ADRs on the NYSE and have dominant market positions back home.
"These bank stocks are proxies for the macro environments in each particular country," Kuczma says.
No Brazilian banks on his list? After a borrowing rush that stoked the country's expansion in the past decade, loan quality there is deteriorating and the government is "suppressing" lending activity. Worse, inflation is running at a 7.3% annual rate and has been rising. Brazilian banks have fared even worse than their U.S. cousins, off 20.3% this year.
Bancolombia gets a lot of Kuczma's attention. The 945-branch, $42 billion-in-assets bank has a leading 21% share of Colombia's loan market, and its stock, at 65, is up nearly 5% so far this year. It also sports a 2.2% dividend yield.
The shares have benefited from improving investor attitudes toward Colombia. In March, Standard & Poor's restored the investment-grade rating of Colombia's sovereign debt, removed in 1999 as the country descended into chaos caused by leftist guerrillas. A decade and $7 billion later—mostly in military aid from the U.S.—the government's stronger hand and the global commodities boom have given the economy new life. Bancolombia's Medellin home might still conjure images of drug-dealing mayhem stirred by the notorious Pablo Escobar, but he died 18 years ago. Although violence hasn't disappeared, murders and kidnappings are down 90% from their peak a decade ago.
For years a pariah, Colombia now attracts a flood of international tourists and foreign direct investment, which at $7 billion through June, was up almost 80% on the year. Oil production is expected to reach one million barrels per day by year end, putting Colombia in the major leagues of global crude producers. The country is also enjoying a windfall from record coffee prices. Less known is that Colombia has become the world's fourth-largest coal exporter.
Bancolombia's CEO, Carlos Raul Yepes, tells Barron's the biggest opportunities could be in mortgages, which constitute only 8% of the portfolio, a percentage that could double in coming years. "We're making up for a lot of lost time, with demand that has been building for 15 years and only now is being released," says Yepes. "The stars are in line."
Trading at 16 times 2011 earnings, Bancolombia stock is pricey. Still, Deutsche Bank, which rates the stock Hold, has a 2012 price target of 70. One concern: Lower local rates could hurt margins on variable-rate loans. The consensus view is for strong growth. Bancolombia earned $3.87 per ADR in 2010, and analysts expect $4.35 this year and $5.08 in 2012.
CREDICORP, PARENT OF BANCO DE CREDITOdel Peru, also appeals to Kuczma with its near-40% share of local loans and deposits. ADRs of the $29.7 billion-in-assets bank are trading at around 100, or a cheaper 11.9 times 2011 earnings, because of perceived risk from newly elected leftist president Ollanta Humala. But Peru's economy should expand by 7% this year, a surge Credicorp could ride. The Lima bank earned $7.16 in 2010, and could earn $8.40 this year and $9.60 in 2012.
With the economy expected to expand by 6.2% this year, Chile is growing a bit more slowly, but not much. Leveraging that growth is Santander Chile, a $52.7 billion-asset bank, which leads the industry with a 21.6% share of total loans and 19% of deposits. Its ADRs trade around 78, or 14 times this year's estimates. As with Bancolombia, loan quality has improved in the past year even as the loan portfolio has grown more than 19%. The Santiago-based affiliate of the big Spanish bank earned $5.39 per ADR last year and is expected to book $6.30 this year, $7.30 next.
U.S. investors will hear more about Colombian banks in coming months: Grupo Aval(AVAL.Colombia), the holding company for Banco de Bogota that is 92% owned by Colombian billionaire Luis Carlos Sarmiento, and mortgage lender Banco Davivienda(PFDAVVND.Colombia), have said they plan to list ADRs. Foreign banks have already heard about Colombia. There is a growing possibility of mergers if a U.S.-Colombia free-trade agreement is approved this year. "More players are arriving and many are looking for acquisitions," Bancolombia chief Yepes says. "But we're not for sale."
CHRIS KRAUL, a Bogota-based freelance writer, covers Latin America for the Los Angeles Times and other publications.