Invest in These Beaten Down Brazilian Banks

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

As riots erupted in Brazil over the last few weeks, the stocks trading on US exchanges have collapsed. In fact, the Brazil iShares Index (NYSEMKT: EWZ) fell from around $54 to $40 over a few weeks during June. Even worse, the index peaked out around $75 back in early 2011. Over two years later and the index still remains in a downtrend as domestic stocks soar.

Another major reason for the downtrend in stocks has been the recent decision by the Brazilian Central bank to raise the Selic rate to 8.0% on May 30. The decision to hike the rates more then the expected 0.25% caught the markets off guard and has led to fears that the central bank will stall already meager economic growth.

Some interesting banks include Banco Bradesco (NYSE: BBD), Itau Unibanco Holdings (NYSE: ITUB), and Banco Santander Brazil (NYSE: BSBR) as stocks beaten down in the last few years even as growth potential remains intact. See chart below for the one-month returns:

<img alt="" src="" />

BBD Total Return Price data by YCharts

The long-term potential in Brazil has not changed. The country still plans to host the World Cup in 2014 and the Summer Olympics in 2016. Investors now get the opportunity to buy the country's banks at much lower prices. All three stocks have plunged in the last month on top of a weak few years.

Slowing credit

The rapid credit expansion in the previous decade has left some concerned about government credit in a bubble state. Amazingly the country is seeing a slowdown in credit yet government bank lending rose 11.1% in the 12 months ending in April for the lowest growth in three years.

Another important stat is that default rates dropped to 7.5%, their lowest level since October 2011.

For the non-government banks, an encouraging long-term stat is that these banks only account for 35% of the lending market. The government banks account for nearly 50%. This number could allow for market share expansion in the years ahead. In fact, the Chief of the Central Bank expects credit to expand 14% this year led by private lenders.

Leading public banks

Itau Unibanco operates a network of 4,121 branches, 906 customer branch sites and 27,960 ATMs.

Probably surprising to most Americans, Itau Unibanco and other Brazilian banks offer relatively massive scale. This bank has a revenue base of $33 billion even after the revenue has declined over last year. The stock is worth over $60 billion, making it actually larger than the regional banks in the US or investment banker Morgan Stanley.

Even with the largest market cap of the public banks, the stock only trades at a forward earnings multiple of 7. As an example, the multiple for domestic banks Bank of America and Wells Fargo is around 10 times forward earnings.

Banco Bradesco operates a network of 4,686 branches, 34,859 ATMs, 12,975 shared ATMs, and 5,237 special points of banking services located on the premises of corporate customers.

The stock trades at a forward earnings multiple of only 7.5 with analysts expecting relatively flat earnings during this period of economic weakness in the country.

Banco Santander Brazil has a network of 2,407 branches, 1,381 on-site service units located at its corporate customer premises, and 17,793 ATMs.

The bank is the smallest of the group with a market cap of $23 billion and revenue of $20 billion. As with the other stocks, it trades at an extremely low forward earnings multiple of only 6.9.

Bottom line

While most Brazilian and even emerging market stocks in general have been crushed, Banco Bradesco, Itau Unibanco, and Banco Santander Brazil face tough credit situations in Brazil. As investors flee the sector, now is the time to consider these large-cap, emerging market banking stocks that should see decades of growth in the banking sector.

Many investors are terrified about investing in big banking stocks after the crash, but the sector has one notable stand-out. In a sea of mismanaged and dangerous peers, it rises above as "The Only Big Bank Built to Last." You can uncover the top pick that Warren Buffett loves in The Motley Fool's new report. It's free, so click here to access it now.

Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus