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 (
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 ETF (
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
.
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-- Tom Hutchinson
Tom has a 15-year history as a financial advisor with UBS
constructing investment portfolios. Tom's background includes a
NASD Series 7 and 63 certifications... Read more...
Disclosure: Neither Tom Hutchinson nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
StreetAuthority