South American Banks That Get The Gold Medal

By Todd Shriber | October 05, 2009 AAA

The recent announcement that Rio De Janeiro will host the 2016 Summer Olympics certainly put the spotlight on Brazil, but for investors, that light has been shining brightly for quite a while now. The iShares MSCI Brazil Index (NYSE:EWZ), the primary ETF tracking Brazilian equities, is up about 40% in the past three months while the S&P 500 is up "just" 19%. Brazil is the tenth largest economy in the world, home to some of the richest natural resources reserves, including significant crude oil holdings, and in addition to the 2016 Olympics, Brazil will also play host to 2014 FIFA World Cup.

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Brazil has helped lift the fortunes of other South American nations as well. The iShares MSCI Chile Investable Market Index ETF (NYSE:ECH) is up 60% year-to-date and that means there is more to investing in South American beyond Brazil.

Much of the investment thesis regarding stock-picking in this region involves the typical emerging market plays, namely commodities, infrastructure and cyclical stocks, but all those companies need financing and that makes looking at South American bank stocks especially compelling at this point. Let's take a look a few here.

Company Forward P/E Ratio Price/Book Ratio
Banco Santander (NYSE:STD) 10.7 1.4
Banco Bradesco (NYSE:BBD) 14.5 3
Banco Santander-Chile (NYSE:SAN) 14.7 3.7

A Giant Spin-Off
Banco Santander is actually Spain's largest bank, but the bank is spinning off its Brazilian unit this week in a $7.4 billion IPO - one of the biggest new offerings of 2009. Not surprisingly, the offering has been met with robust demand and Santander's Brazilian unit could wind up being valued at levels similar to established European banking giants such as Societe Generale and Deutsche Bank.

You don't need to buy the IPO to get a piece of Santander's Brazilian exposure. Santander is selling just over 16% of the Brazilian unit and it is counting on the business to deliver nearly $5 billion in profits by 2011. Santander will open 600 branches in Brazil by 2013, showing its commitment to the market. (For more, check out The Rise Of The Modern Investment Bank)

Already A Big Brazilian Player

Banco Bradesco is the second-largest bank in Brazil and the bank is expanding its reach into the world of private equity investing. The ADRs are up 50% in the past three months and the bank is looking to seize on demand for Brazilian equities by making its shares more obtainable for international investors.

It wouldn't be surprising to see Banco Bradesco go shopping, though it recently denied it was interested in acquiring a Brazilian insurance firm. The shares are marketable currency at this point, up 76% in the past 52 weeks. Good luck finding a similar performance with a U.S. bank. (For related reading, check out Go International With Foreign Index Funds)

Don't Sleep On Chile
Banco Santander-Chile (NYSE:SAN) is the publicly traded Chilean operation of Santander. The bank is Chile's largest lender and also has a 3.5% slice of the Chilean insurance market. For what it's worth, Santander-Chile's trading volume is light at around 198,000 shares for the last three months and Goldman Sachs recently said it favors Brazilian and Peruvian banks when it comes to Latin American financials.

Who are we to argue with Goldman, but it's hard to ignore that Chilean stocks are starting to gain investors' favor. Santander-Chile is up 60% year-to-date. The stock trades at 13.7 times forward earnings and yields 2.4%, which isn't great, but it is better than the current dividend yield on the S&P 500 and the payout is decent at $1.30 per ADR annually.

Bottom Line: Bank On South America
Banks all over the globe have been dealing with myriad problems for nearly two years and South American banks are no angels. Yes, there are bad loans and credit losses to be dealt with, but as we said earlier, the balance sheets of the trio mentioned here sparkle when compared with their European and U.S. counterparts. It's hard to go wrong with Santander's international exposure and it might be a better way to go than the Brazilian IPO, at least in the short term. Bradesco's sheer size should serve it well and Santander-Chile could make for an interesting "conservative/speculative" play.

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