Some Thoughts About South American Banks

As a result of the question:

******************
I want to take this chance to ask you a quick question regarding South American banking stocks. Basically, I am putting together a short list of strong banks I want to invest in during the next trough of bear market. So far I have some Canadian, Singaporean and Chinese banks in the list. I do not know at all the Latin America region and could use some help, if you have some time.

Which banks would you pick as the top three strongest from the following list:

1. Banco Santander-Chile (ADR)
2. Banco de Chile (ADR)
3. Credicorp Ltd. (USA)
4. Bancolombia S.A. (ADR)
5. Banco Bradesco SA (ADR)
6. Itau Unibanco Holding SA (ADR)
7. Banco Latinoamericano Comerc Exterior SA
8. Banco Santander (Brasil) SA(ADR)
9. Banco Macro SA (ADR)

Thanks for your help J! Basically, the list follows the highest price-to-book-value to lowest.

Any hidden dangers in the banks down in your region? I understand they do not participate in the black hole of derivatives market plaguing the U.S. and Europeans. LOL

Thanks again
********************

I answered:

Hi C ! My knowledge on the banking region is limited but I hope that my experience living here can be of some help.

I have an account at the Banco de Chile and it works great. I use it to take deposits in Chilean Pesos for a 5.5% yearly rate and they have negative inflation so it’s an excellent return in, without doubt, the best country in South America, in economical, political, and stability terms. As I see it they have what looks like free market system, at least much closer to it than what other countries under a false illusion claim they have. Government is still small and doesn’t interfere so much, a bit like S. Korea. The country has not been spoiled by politicians yet like has happened elsewhere. I know the bank since the 80′s, it’s a very good bank. I worked for Citibank Chile in the 90′s. I made credit scoring models for them. Banco de Chile was a tough competitor. Actually Citibank, due to their risky culture in the region had to drastically reduce their operations. While I was there a massive reduction of employees occurred and the local CEO and several managers were fired along with 40% of employees.

I have been in Colombia several times in the 90′s. I do not know how it is now but I absolutely do not trust politics there or anything by the way. Politicians were at the time very connected to drug traffic. The Ndrangheta mafia in Calabria, Italy, imports cocaine from there into Europe. Kidnapping is an industry. Too much craziness. It is a pitty because the country is super beautiful and the people I met were friendlier than in any other south american country. But you also have very mean people. So I might be biased but I do not trust the country and trust is something I need to invest. Banco Santander Spain sold part of its Colombian operations at a nice profit. I do not mind at all, if anything had to be sold in South America, Colombia and Venezuela would be my first choices too.

It is worth considering that the banks in the region have a strong influence from the Government. They are either owned fully or partially by it. I do not live in Chile since the year 2000 but I think that Banco de Chile was at least partially owned by the government. I know that in Brasil several of the banks are state owned. I cannot not tell you for example if banco Bradesco is or not but that’s one of the first things I would check. I do not trust much governments directly interfering with Banking, but who knows maybe here they benefit shareholders, maybe not. In either case banks in the USA or Europe are in practical terms also controlled by governments as I see it.

The banking business in Brasil is very profitable, I see it because I live there and checked the local Banks and their financial statements. I have and HSBC account here, great to take fixed deposits. But for my day to day operations I prefer to open an account at Banco do Brasil, for practical terms, because it is everywhere and it’s the only bank present in the small town I live. I did not like HSBC as and investment last time I checked, and besides, it has not a pure player in Brazil.

Banking penetration in Brazil is very low still. Few people take mortgages, so only that has a big potential. Fees are high and the few that take loans pay high rates. Bank interest rate spreads are high, they make money. Default rates are also high but are more than covered by benefits. The politic situation has been stable since Lula (2003). Before him it Brazil had a bad political history and run away inflation at times, specially with Fernando Color de Mello. In the 90s, during his regime all saving deposits above a very small limit were confiscated !! That made me lose trust in Brazil. Ok that was many years ago. But still I do not forget it and am afraid of having a bad politician back that screws the country again. Also the trade taxes here are ridiculous. Basically anything that comes from outside is extremely expensive. Brazilians go to New York more than anybody else to buy things. Those things make me dislike investing in the country in general. But I still do like it due to their good growth. Investing here, as anywhere, is a calculated risk you have to balance wisely and take a good decision based on information. If you calculate the odds good you’ll do OK. I have been looking for a long time in Brazil, I still do not find anything, only Santander Brazil is Ok but since I have the parent which has a big part Brazil I stayed out. If you do buy Santander Brazil, at the right price, maybe now, you could do very well. If I invest there I take a big margin of safety, and it looks like they have it. During the crisis I bought Vale (Iron Ore company), for peanuts, but sold it quite profitably once it recovered, once the margin disappeared.

If I had to pick from the list you sent me, I would pick Banco Santander Chile/Brasil and Banco de Chile. Those are the 2 best countries (Chile still way better). Santander is owned by the Spanish parent but they are operated as independent units. Santander Brasil comes from a brazilian bank which changed the name after it was bought by Santander Spain, in a very wise operation for them, back in 2007. The Spanish parent takes risk by buying other banks, but they have proven to be able to buy very wisely and cheaply. I’m sure that once the Spanish crisis is over they will do very good but I only recommend it as an investment if you are very aware of what you’re getting in, I wrote about it last year. Fortis, Royal Bank of Scotland and Santander Spain bought together ABN Amro. Only Santander survived the crisis after buying it, Fortis and RBS practically went broke, or I should better say that several of their shareholders went broke losing everything. But Santander got all the South American assets from ABN Amro, along with Brazil. If it had not received Brazil maybe Santander Spain by now would be a penny stock. Their wise acquisition might have saved them.

Banco Bradesco and Itau are apparently OK but I do not trust or know them much, and I wonder up to what point they are linked to the government.

You are right in saying that the banks in the region are not plagued by derivatives. Not only that, I think that the region is more disciplined in general. They are very strict in lending. Taking a mortgage is difficult, they require a big deposit ratio in general. I would say that they are way more conservative than in Europe or USA in their lending. In that sense you do not have to worry, it’s vanilla banking here. They control risk better and at the same time they have a growing business due to the growth in the region. Demand is quite high and banking is under-penetrated. Some might think that South Americans are irresponsible with their debts but my experience is that they care about it more than in USA. Owning money and not paying it is a shame for the huge majority, no matter how poor they are, I would even think that the poorer or middle classes care more about paying back than the higher classes.

In conclusion as a very fast answer to your question, without knowing deeply about the Banks in your list, if I had to pick them by quality, profitability and by my limited knowledge I would pick to study deeper:

Santander in Chile and Brazil
and Banco de Chile

I would also consider to invest indirectly in the South American region via Banco Santander. Because more than 60% of their profits come from emerging markets like Mexico, Brasil, Chile, Poland etc… and they also have presence in UK and Germany, even in USA. Their Spanish/Portuguese exposure is limited, if you calculate the limits well you could do more than fine. The good thing now is that Spain is dragging them down so it might be an opportunity. I cannot tell you if that will stop or how deep it can go. If I had to bet I would bet on it. Specially at these price levels because I feel comfortable with management and with what I know about how much their total exposure to sovereign debt and housing is. Looks like a good risk reward.

Cheers!
jrv

About jrv

I was born in Spain and lived in Belgium, Chile, France, USA, Argentina among other places. Currently I am trying to settle down in a wild place. I am "retired", even though now I dedicate more hours "working" for my investments than I ever worked in the real labor market where I used to work in IT and Banking. I am a family man, I have a lovely wife, several sons and one step daughter. I have humble tastes, I like to stay home and read about companies and investments. I started investing at 25 before the internet bubble exploded. I did not know much about investing and liked technical analysis so my results were pretty bad. Fortunately I did not have much to lose. Some years later in 2006 bored of doing only real state investments and with quite a lot of money saved I opened an account in a cheap and excellent online broker and started again. This time I did not want to commit the same mistake, so I decided to follow a model. I heard that Warren Buffett was the best at making money via stocks so I started by reading a lot about him, all of his shareholders letters and several of the books that he recommended. I learned a lot, started applying his investing principles and reading a lot of 10K's. Digested news from lots of different sources. Basically I started buying very good and cheap companies and holding them for ever if possible and if nothing changed fundamentally. When the housing crisis started I was more than 75% cash. At that time I identified good companies at incredibly cheap prices so I invested most of my savings in stocks. In less than I year I doubled. By the second semester of 2009 I turned my software company into an investment vehicle and dedicated myself full time to it. My wife and I decided to change our lifestyle and moved from Belgium to the beach in a wild country. The goal was to keep fixed costs low in order to be able to live with a minimum 6-8% yearly return but specially to move away from the inhuman life of civilization and to have finally some peace and sunny weather to concentrate better on investing. Now I can think and study about companies 60 hours a week and I am doing great. I can finally do what I want full time and can proudly say that I have never been so happy, specially also with my just born 4th son, my other great kids and my sweet wife who supports me fully while I study most of the day and patiently wait for the opportunity to make a swing ! You can learn a bit more about my portfolio by viewing it at www.kuchita.com/view/sumo.php or you may learn more about me and my family by following the link "Author's site" from the menu above.
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2 Responses to Some Thoughts About South American Banks

  1. Anonymous says:

    JRV,

    Thanks a million times for this! Your writeup exceed my expectations and most of what you said is new to me. I am somewhat aware of the Chile story, but your colour commentary has really helped solidify a picture I am forming in my mind regarding South America.

    Thank you for your service to fellow investor.

    C.

  2. jrv says:

    glad i helped you :) !

Comments are closed.