A Little-Known Foreign Bank Poised to Soar
U.S. banks had a great run. From December 1994 to December 2006, the KBW Bank Sector Index (an index of leading banks) soared nearly +400%. But the financial crisis ended that party. Now the index is at 1996 levels again.
While the bull market is over for U.S. banks, it may be just beginning in another part of the world.
Banks in Latin America didn’t experience the problems banks in the developed world did during the financial crisis — and they have emerged in much stronger shape. And, unlike the developed world, some Latin American economies are experiencing robust economic growth and appear poised to continue that growth into the future.
A particular standout is Chile.
Chile is the world’s number one exporter of copper. Selling Copper and other exports to growing economies such as China and Brazil has led to GDP growth of about +5% to +7% in the years before the financial crisis and the country has recovered strongly from the global recession.
Rising commodity prices and reconstruction efforts after Chile’s 8.8 magnitude earthquake early this year are turbo-charging the economy. GDP grew +6.2% in the second quarter and the International Monetary Fund forecasts that Chile will be the fastest growing Latin American economy in 2011 with GDP growth of +6%. Meanwhile, GDP growth in the United States has been sputtering in barely positive territory.
Increasing wealth and a rising middle class has created a steadily growing demand for banking and financial services.
Corpbanca SA (NYSE: BCA) is the fourth largest bank in Chile, offering commercial and retail banking through 111 branch offices as well as mutual fund management, insurance and securities brokerage through a network of subsidiaries. The bank has a sound balance sheet with a reasonable debt/equity ratio of 1.5 and an overall investment grade credit rating of “BBB+” by Standard and Poor’s with a stable outlook.
How has a firm offering banking and financial services in the fast-growing Chilean economy fared?
Corpbanca’s net income has grown from $73 million in 2006 to $170 million in 2009. The bank’s average annual earnings per share (EPS) growth during the past three years was +27%, compared to the industry average of +1.6%. Dividends have rocketed as well, from $1.09 per ADR in 2006 to $3.62 this year.
Corpbanca shares gained +120% in 2009 and posted a remarkable average annual three year total return of +31%, compared to -7% for the S&P 500 and -9% for Morningstar’s foreign regional bank category. The stock is up a whopping +50% so far this year.
Part of Corpbanca’s appeal has been the Chilean market. The iShares Chile (NYSE: ECH) is the top performing country-focused exchange-traded fund (ETF) in the past three months, with a +29% return in that period. The fund has been one of the top performing county ETFs in the past year as well. But Corpbanca has outshined even those returns.
The party might just be getting started. While the IMF forecasts +6% GDP growth in Chile for 2010, some analysts are calling for growth as high as +7% in both 2011 as well as the second half of 2010. Currently, Bloomberg estimates that Corpabanca will earn $4.90 per share in 2010, a +27% increase from last year and consistent with earnings growth during the last several years.
In 2007, the company adopted a dividend policy of paying out at least 50% of net income in dividends. However, the bank has paid out 100% of net income for the past three years. The dividend is paid once a year in March, and 2010’s payment of $3.62 per ADR translates to a solid yield near 6% at current prices. There is a 35% withholding tax on the dividends, which can be offset when filing taxes at the end of the year. [Read: How to Avoid Taxes on Dividends From Abroad]
Dividends are paid in Chilean Pesos and converted to U.S. dollars for ADR holders, so there is currency risk. But a rising Peso versus the dollar translates to higher dividends in dollar terms — and stronger economic growth in Chile bodes very well for the peso. [Read: A Primer on American Depository
Receipts: The Benefits]
Action to Take –> Corpbanca is a solid, well-run bank operating in one of the world’s sweet spots for growth in the next decade. The 6% yield makes Corpbanca an excellent stock for income investors seeking foreign exposure. The stock has run-up +48% since June, so conservative investors might want to wait for a pullback below $55 before jumping in, although it should be noted that the stock trades on fairly thin volume, so it may be difficult to secure an exact entry and exit point.
For more on finding high yields overseas click here.