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Cabot’s “One Great Undiscovered Bank Stock”

Despite the fact that the “developing” world continues to grow much more quickly than the huge established economies of Europe, Japan and North America, investors are still largely reluctant to invest in emerging markets these days.

That’s understandable, for sure — when the media is telling you to be worried, and when the US dollar is surging and there seems to be regulatory risk, panics caused by falling commodity prices, and even genuine war and revolution brewing around the world, to say nothing of genuinely failed states like Venezuela, there’s a reasonable desire to be safe and keep your money at home. And since the US has led the world in terms of both currency performance and stock market performance for a while now, you also get rewarded for being a little bit afraid.

But still, eventually we have to expect that the emerging markets will bring some growth to the table to mitigate the risk they always have, and that exposure to those markets will be good for us in the long term.

There are precious few newsletters who focus on emerging markets anymore (there used to be dozens, with at least five or six big ones specifically focused on China), so I usually take notice when one of the “last men standing” in that sector teases a stock. That’s why I was intrigued by the latest hints dropped by Timothy Lutts over at Cabot about the new emerging markets pick found by Paul Goodwin.

Goodwin is the analyst for Cabot Emerging Markets Report, which I called the last “China” newsletter standing last year when it was still named Cabot China & Emerging Markets Report. The last China pick from Goodwin that I wrote about was NetEase (NTES), which has worked out pretty well over the past year… but this one, though still an “emerging market” pick, is far different…. and Lutts calls it “far less risky” than the other emerging market ideas in Mexico, Taiwan and elsewhere that Goodwin has been picking of late.

So what is this “less risky” emerging market idea? They call it a “Great Undiscovered Bank Stock,” and these are the clues we get from Lutts:

“… it’s a bank in a country… that’s usually overlooked by most investors.

“Hint: it’s from a country that borders Brazil.

“And business is great!

“Earnings at the bank are expected grow 7% this year and 15% next year.

“The stock’s P/E ratio is just 12.

“And it pays a 1.7% dividend.

“Altogether, I think it’s a great opportunity to benefit from Brazil’s troubles. As money flows out of Brazil, some of it is making its way to this country….

“Now, I could tell you the name of the stock, and you could run out and buy it now. But then you’d be on your own, and I think you deserve more. I think you deserve regular advice on investing in emerging markets from the man who originally discovered this stock, our own Paul Goodwin.”

Well, maybe you deserve more — but you probably won’t get it from me. I can just tell you what stock he’s teasing, and get you started on making a decision for yourself. The Thinkolator sez this is Credicorp (BAP)

Credicorp is technically a Bermuda-headquartered company, but that’s presumably just a tax dodge — it’s really a Peruvian financial services company (I’m sure they’d want me to say, the largest Peruvian financial services company). Their investor relations page is here, including links to presentations and explanations of the business. They do have a controlling family shareholder (the Romeros, a billionaire family with stakes in many Peruvian operations), and the stock has been a very strong long term performer (though also fell by 50% last year before recovering, and has had several 20% drops since the 2008 crisis… it’s risk averse compared to Chinese tech stocks, I suppose, but not necessarily stable).

And yes, per Yahoo Finance’s estimates the trailing PE is just 12, and it does pay a dividend near 1.7%. The current analyst average estimate (also from Yahoo Finance) is that they will have flat earnings in 2016, though the prediction of 15% growth next year does still match their forecasts.

I don’t know if money is flowing out of Brazil during the Brazilian collapse and into Peru on any large scale — trade-wise, it’s the opposite, with Peru being a pretty significant customer for Brazil’s goods. Presumably mostly agricultural good, but I don’t really know (the countries do have a recent trade agreement that befits their long shared border… as well as some links that no one really likes, like some recent corruption and bribery scandals involving Peru’s president and a Brazilian engineering firm).

Credicorp is mostly Banco Credito de Peru, which is a regular ol’ bank that does deposits and commercial and retail lending, including credit cards, but they do have meaningful subsidiaries engaged in insurance (which is growing and profitable), asset management/pension funds, and investment banking. None of them come close to matching the earnings power or asset base of the core bank, which is the biggest lender in Peru and has expanded aggressively to reach that status over the past decade, so it’s really the standard banking stuff that makes them go — good lending practices, cost of capital, etc.

They seem to be doing well, from what I can tell while browsing their recent presentations, but I’m not familiar with what “regular” banking metrics might look like in Peru — some of their downdrafts have come because of falling credit quality and overdue loans in past years, but they do seem to have some growth potential in retail banking as they bring more Peruvians, the majority of whom still don’t have bank accounts, into the formal economy. The stock is trading at a significantly higher valuation when it comes to book value than other major South American banks I skimmed through recently… but it has also performed much better than many of them, particularly those who have a Brazilian presence.

I haven’t dug into all of the operational metrics of the company (there are a lot of them in their recent quarterly presentation, none of which jumped out a shocking when I quickly scanned the report), but it is encouraging that their five-year growth in share price has more or less tracked right along with their five-year growth in book value per share (both are up close to 40%)… and their price/book valuation, which is what I usually look at first for financial firms, has been in a wide range over the past decade (as low as 1.5X book, as high as nearly 5X book), but is pretty close to “average” now for them at a bit more than 2.5X book value. And price to tangible book is similar, so they’re not carrying lots of goodwill or other squishy stuff on their books — though, like any bank, much of the reported value depends on their assessment of the continuing creditworthiness of their existing borrowers.

And much of the underlying growth in the company probably depends on the overall strength of the Peruvian economy… which is pretty good at the moment, Peru (like their neighbor Colombia) is holding up quite well and has been quietly generating decent GDP growth for close to 15 years, often stronger than their better-known neighbors.

There is a Presidential election in about two weeks, but the “scary leftist” who conjured up visions of Venezuela for some folks is in third place so apparently won’t be in the runoff election… the two leading candidates seem to be seen as “OK with business” (I don’t know anything else about them, other than that the leading candidate, Keiko Fujimori, is the daughter of former president Alberto Fujimori — credited by many with bringing peace and some prosperity to Peru as he fought the Shining Path, but at the cost of massive human rights violations, with a side order of corruption and bribery… he’s still in jail, I think).

The stock’s performance in US$ terms will obviously be influenced by the currency — the Peruvian Nuevo Sol has been weakening against the US$ for five years or so, though it bounced back slightly recently. Credicorp has done significantly better than the average Peruvian stock over the past decade, as represented by the iShares MSCI Peru ETF (EPU)… but over the past year I suspect macro and currency concerns have really led the way, because the two have been in lockstep. Peru is a commodity-focused country, with their biggest exports being copper, gold, zinc, oil and agricultural goods, including large fisheries, but that does not seem to have hurt the economy as much as I would have thought over the past year.

So… sound like the kind of “less risky” emerging market bet you’d like to make? Have any experience investing in Peru or with Credicorp or the Romero family’s other operations? Share what wisdom you’ve got, please, with a comment below…

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6 years ago

I’m just going to say I like what SAN has going for it in the long run, especially where it is selling for lately. Do your own research, please, friends, as always!

craig davis
craig davis
6 years ago


👍 15112
craig davis
craig davis
6 years ago

Largest retail bank.Return on equity, low valuation and business model ability to absorb flucuations in the economy.

6 years ago

I think the great undiscovered bank if BPOP which I like to call Banco Popular of Puerto Rico. I calculate its Fair Value by discounted cash flow to be about 90 +/- 10. I have been trying to buy it with cash secured puts but so far I am just collecting premiums. The bank seems well run. But it is located in Puerto Rico whose government might default on bond payments.

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