Itau Corpbanca: Why I Bought This Chilean Bank (NYSE:ITCB)


Chile Economic Overview

Chilean equities are currently in a bottoming out phase due to the economic and political risks during 2019, coupled with new risks created from the coronavirus this year. Chile has a very stable macroeconomic profile and is arguably one of the best destinations for investing among all Latin American and Central American countries.

Some of the economic highlights that I covered in my previous article on Chile, include the following: 1) Relatively stable growth, which can rebound amid rising copper prices, 2) Lower levels of public debt (circa 30% of GDP), 3) Favorable Ease of Doing Business Ranking (59 out of 190), 4) Low inflation and reasonable cost of capital, 5) A relatively stable political environment, except for tensions in 2019, 6) Reasonably low twin deficits and 7) High level of foreign exchange reserves. Most importantly, Chile also has a strong banking sector, and US investors can easily invest in some of these banks.

Like every emerging market, Chile will experience a setback in economic growth this year as global growth likely contracts:

  • Chile’s economy is expected to contract by 4.5% this year, and to later exceed 5% in the following year. Chile has the potential to benefit from a recovery in the price of copper, driven by an under-supply in copper in the future.
  • Chile’s benchmark interest rate is 0.5%, compared to 3% during the beginning of 2019. Inflation has remained in the single-digit levels.
  • Chile’s fiscal deficit rose to 2.7% last year due to the economic slowdown experienced during 2019.

Why Banks In Chile Are Appealing

The iShares MSCI Chile Capped ETF (BATS:ECH) has declined in line with the Global X Copper Miners ETF (NYSEARCA:COPX). One key factor to note is that Chilean banks, such as Banco de Chile (NYSE:BCH), have been strong outperformers due to the favorable nature of Chile’s banking sector.

ChartData by YCharts

NPLs in Chile’s banking sector still remain reasonable, even during the setback in economic growth experienced this quarter. Banks will definitely face slower loan growth this year and potentially in 2021, but there is less risk associated with investing in banks in this shaky macro environment due to the existing solid foundation. Chile’s NPL ratio was 2.1% in April, and it peaked at 3.3% in June 2010.

ROE of Chilean Banks

Chile’s banking sector enjoyed a very favorable ROE during previous years when economic growth was stronger and the current average ROE of the Chilean banking sector is still attractive. A copper bull market would bode well for Chilean banks and the economy in general, allowing banks to perform better as they did last decade.

Chile’s banking sector is also very developed relative to other frontier and emerging markets. Chile has higher levels of banking penetration (loans/GDP=93%), and other products not commonly available in other emerging economies.

Why Itau Corpbanca Is Worth A Look

In my last article that covered some of the opportunities in frontier and emerging markets that will benefit from the recovery of commodity prices, I mentioned Banco de Chile as a reliable way to gain exposure to Chile’s economic rebound. Another solid bank to look at, which has experienced an even stronger sell-off this year, is Itau Corpbanca (NYSE:ITCB), which provides investors with exposure to Chile and Colombia. Itau Corpbanca is the 5th largest bank in Chile, and it trades at a notable discount to some of its peers, such as Banco de Chile and Banco Santander (NYSE:SAN).

ChartData by YCharts

I do believe that this premium is justifiable, but it’s clear to see that Itau Corpbanca is undervalued on a historical basis, and could easily trade at book value under better economic conditions. It’s also harder to convince myself to continue accumulating an emerging market bank at 2x book during current market conditions. Much of this premium is attributable to Banco de Chile’s higher growth rates, and the fact that Itau Corpbanca has been underperforming the general market in terms of growth.

Growth Spearheaded By The Retail Segment

Itau Corpbanca has had a stable market share in Chile’s banking industry, and has been focusing on increasing its market share in the consumer segment. It was able to grow its retail loan portfolio as a % of total loans by 375 basis points between Q1 2017 and Q1 2020, and its consumer loan growth outpaced the general market by 2x last quarter.

Segment

Market Share

Change

Consumer

7.2%

+16 bps

Mortgage

8.1%

+16 bps

Commercial

11.8%

-36 bps

Total

10.1%

-6 bps

Source: Itau Corpbanca Q1 Presentation

Itau Corpbanca has also been able to keep its NPL ratios low, in line with the rates seen within Chile’s banking industry.

Segment

NPL ratio

Commercial

2.3%

Mortgage

1.6%

Consumer

2.5%

Source: ITCB as of March 2020

According to the company’s guidance for 2020, the company’s overall loan growth will only be 4-6% this year, and it will continue to focus on growing its retail segment. This makes the bank an attractive value stock that trades at nearly a third of book and could see multiple expansion if there is a bull market in copper this decade.

ChartData by YCharts

One key factor to note is that Banco de Chile and the iShares MSCI Chile Capped ETF (ECH) are both much safer bets that have outperformed Itau Corpbanca. It’s a much better idea to continue to monitor the stock’s performance this year and to accumulate shares during market pullbacks. Furthermore, I think it could be a better idea to invest in a basket of banks in Chile, rather than the ETF, as these companies have the potential to outperform the ETF and the Chilean stock market.

Disclosure: I am/we are long ITCB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.





Source link

Leave a Reply

Your email address will not be published. Required fields are marked *