Mexico's On Sale - Part 2: Banco del Bajio Is A Buy After The Sell-Off

seekingalpha06-30

Banco del Bajio's revenue has doubled in the past four years, and its earnings have tripled.It has a historic charge-off ratio of 0.20%, and its deposit-to-loan ratio was 103% at the end of Q1 2023....

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De C.V.","BK4099":"汽车制造商","BK4207":"综合性银行","TTM":"塔塔汽车"},"translate_title":"墨西哥出售-第2部分：Banco del Bajio在抛售后值得买入","themeId":null,"isJumpTheme":false,"ttsUrl":null,"symbols_score_info":{"EWW":1,"GBOOY":1,"TTM":1},"content_text":"Banco del Bajio's revenue has doubled in the past four years, and its earnings have tripled.It has a historic charge-off ratio of 0.20%, and its deposit-to-loan ratio was 103% at the end of Q1 2023.Banco del Bajio is well positioned to take advantage of nearshoring, due to its concentration in Bajio, and its focus on lending to corporations and SMEs.The recent sell-off in Mexican equities has resulted in a valuation that is lower than peers with lower ROEs and rates of growth.BanBajio's current P/E Ratio of 5.23 is approximately half of the valuation it had in 2020 during the pandemic.   mirsad sarajlic I recently wrote an article that did a deep dive into the Mexican Economy, before making the case that OTCPK:BOMXF, which owns the main Mexican Stock Market, is a Buy. I refer readers interested in more detail about Mexico’s fundamentals to it, but in brief;  During the years 2014 to 2020, Mexico’s economy shrank 2.95% in real terms, in large part due to the Shale Revolution in the US. The contribution of the Oil and Gas sector to Mexico’s GDP went from approximately 6% during the early part of the decade, to 1.3% in 2023. However, Mexico has managed this transition, and in the three years 2021 - 2023, the economy grew a total of 12.9%, or by an average of 4.3% per year. A driver of recent growth has been Foreign Direct Investment, of which over half has been Greenfield Investments, with approximately 40% of investments being made in the manufacturing sector, and a further 10% in transportation. This trend is expected to continue as US Manufacturers nearshore, by moving factories from China and South East Asia in order to avoid tariffs, and to take advantage of Mexico’s membership in the USMCA trade agreement.  Mexico’s fiscal position is solid. Deficits have been in line with those of the US as a percentage of GDP, and its total Government Debt is 50% of GDP, versus 150% in America. The Mexican economy is in reasonable shape. The Unemployment Rate is 2.6% and inflation is 4.7%. The peso has been one of the strongest currencies in the world since 2016 due to these solid fundamentals, and because of the Banco de Mexico's hawkish stance on inflation. Short-term interest rates are just under 11%, and real rates are approximately 6%. As a result, the peso has been the beneficiary of the “carry trade,” where currency speculators borrow money in JPY or CHF, at rates under 1%, convert those currencies in pesos, which are then put on deposit at a rate of 10% or more. On June 2, 2024, in an historic event, Mexico elected its first female president, and its first Jewish president – Claudia Sheinbaum. It was no surprise, both Sheinbaum and her party, Moreno, had been ahead in the polls for months. The peso sold off 10% almost immediately, and over the next few days, the stock market sold off 20%, in part due to what appears to be speculative short selling that will eventually have to be reversed. The reaction of the bond market was, by contrast, more muted.  The iShares MSCI Mexico ETF (EWW), has $1.8 Billion AUM, and it seeks to track the broader Mexican stock market. Investors considering investing in Mexican equities on a portfolio basis should refer to this recent article, as well as this one, as both analyzed EWW soon after the election. Those looking for a lower risk, countercyclical equity, can consider BOMXF, as it has virtually no debt and trading volumes on the MEXBOL are up approximately 35% since the election. This article, however, outlines the case for a higher risk growth stock, Banco del Bajio S.A., Instituciones de Banca Múltiple (OTC:BBAJF) which I rate as a BUY. Overview of Banco del Bajio 1) The Mexican Banking System: Mexico has 33 domestic banks, 21 foreign banks, 1 public bank and 6 development banks. Three of Mexico's five biggest banks, Santander Mexico, BBVA Mexico, and Citibanamex are foreign owned. The largest domestic Mexican bank, and the second largest in the country, is Grupo Financiero Banorte SAB CV (OTCQX:GBOOY). Banco del Bajio, or BanBajio, is Mexico's third-largest domestic bank, and its eighth-largest overall. It is also the 21st largest company traded on the MEXBOL as measured by market cap, and aside from Banorte, the only domestic bank which has an ADR. 2) History, Geographic Scope, and Business Mix: Banco del Bajio was founded in 1994 in the city of Leon, and for much of its life, its majority shareholder was its founder and chairman. In 1998, the Spanish bank Banco Sabadell purchased a 20% stake in BanBajio, which it subsequently sold in 2012 to Temasek Holdings, the Sovereign Wealth Fund of Singapore. In June 2017, the company went public in an IPO that was oversubscribed four times, and today BanBajio is widely held, with approximately two-thirds of its shares owned by retail investors, and a further 20 percent owned by a variety of institutions, funds and ETFs. Investors in the IPO have done well when compared to Banorte, and to the overall Mexican Stock Market. However,, over the past month, BanBajio's shares are down 20% versus Banorte's decrease of 17.5%, and EWW's decline of 14.5% Graph 1: Historic Performance of BBAJF Data by YCharts Banco del Bajio has in excess of 300 branches in 29 of Mexico's 32 states. It has traditionally focused on lending to corporations, small and medium-sized enterprises (SMEs), and agribusinesses in the industrialized and high-growth western and central regions of Mexico. Its operations are concentrated in the Bajio region of Mexico, which includes parts of the states of Jalisco, Querétaro, Guanajuato, Aguascalientes, Zacatecas, San Luis Potosí, and Michoacán. According to Citibanamex, the average per capita nominal GDP for Mexico as a whole, at the end of 2022, was USD 10,950. This figure was skewed by the Mexico City region, which had a per capital GDP of USD 22,823. Table 1 shows figures for the states which comprise the region of Bajio. Table 1: Nominal Per Capita GDP Select Mexican States, December 31, 2022. Citibanamex BanBajio's home city and headquarters are in Leon, which is in the state of Guanajuato, one of Mexico's fastest growing states. It also has a strong presence in Mexico's second and third-largest cities, Monterey and Guadalajara, both with populations of circa 5.5 million. Guadalajara is in Jalisco, and it's per capital nominal GDP at the end of 2022 was US 12,256, whereas Monterey is in Nuevo Leon, and its per capital nominal GDP was USD 18,937. Banco del Bajio is one of the few Mexican Banks that has focused on the SME, or Small and Medium-Sized Enterprise market. Unlike other institutions that use their branch networks to take deposits from retail customers, and then re-cycle those deposits as loans to those same customers, BanBajio collects deposits which it then lends to companies, of which approximately 15% are agri-businesses. Its consumer loan portfolio is underdeveloped - at the end of Q1 2024, the total size of Banco del Bajio's loan book was 242 billion pesos, with consumer loans comprising a mere 6.1 billion pesos of this. The bank views consumer loans as a strategic priority, and this segment grew by 41.5% from Q1 2023 to Q1 2024, compared to loans to companies of all sizes, which saw growth of 11.2%. BanBajio's initial focus in the consumer loan sector is providing short-term liquidity through Credit Cards and payroll loans. Such loans traditionally have very high margins, but also high default rates. However, BanBajio obviously knows which of its corporate and SME customers are fiscally solvent, and therefore able to meet their payroll obligations in a timely fashion because the most recent quarter's NPL ratios for payroll loans were 1.8 percent, credit card NPLs were 2.5 percent, and personal loan NPLs were 1.3 percent. Broken down by sector, the composition of the loan book at the end of Q1 was;  All Companies: 84%, (corporations 55%, SMEs 29%) Governments: 6% Financial Institutions: 5% Consumers and others: 5%  3) Operational Overview Over the last four years, BanBajio's revenue has nearly doubled, from 13.655 billion pesos to 24.432 billion pesos. Its annual earnings have more than tripled, from 3.437 billion pesos to 11.1 billion pesos. The most recent quarter was slightly disappointing, as although YoY revenue grew by 7.2% (from 6.1 to 6.58 billion pesos) earnings only grew by 3.3% (from 2.69 to 2.78 billion pesos) compared to Q1 2023. Some of the explanations for this were more conservative provisioning due to worries about the Mexican and US Federal Elections, a focus on increasing deposits (from 88.8% of loans to 103% of loans) in front of these elections, and a one-off change in how off balance sheet US dollar obligations are accounted for. Going forward in 2024, profits should be underpinned by asset re-pricing as loan terms are re-negotiated. Graph 2: Annual Revenue and Earnings Trading Economics Banco del Bajio is extremely well run. Unless otherwise noted, the figures below are from BanBanjio's Q1 2024 Earnings Call. At the end of Q1 2024; a. Banco del Bajio's Efficiency Ratio (also sometimes referred to as the Cost to Income Ratio) stood at 34 percent, slightly up from 32.5% for the Fiscal Year of 2023. Anything below 50% is considered to be a good ratio, and per this report from Moody's, the equivalent ratio for the Mexican Banking System as a whole was 53.6% for 2020-2022, and 47.1% as at March 2023. I note that the Q1 2024 Efficiency Ratios for $Citigroup Inc(C-N)$. (68.15%), Bank of America Corporation (63.20%), Wells Fargo & Company (62.95%), and JPMorgan Chase and Co. (49.15%), are much worse. b. Despite double-digit growth in loans, the bank's Loan Book is extremely clean. As at March 31, 2024, the percentage of Non-Performing loans was 1.36% of total loans, and provisions were 180 percent of NPLs. After adjusting for collateral and the presence of government guarantees, money at risk was under 1% of total loans outstanding. This is how Moody's assessed Banco del Bajio's loan book one year ago. BanBajío's NPL ratio, measured as stage 3 loans, remained low at 1.1% as of March 2023, stable from March 2022, and was well below the 2.1% average for the seven largest Mexican banks as of the same date. The bank's charge-offs remained low representing only 0.2% of gross loans as of March 2023. So, historic charge offs have been circa 0.2% but Banco del Bajio has taken provisions, which are an expense, of 2.45% of all loans (180% of 1.36% NPLs). Most management teams would not be so conservative. c. BanBajio had a Deposit to Loan ratio of 103 percent. This means that it isn’t reliant upon the capital markets for funding, and the recent election related turmoil should not impact it too severely. Moreover, its deposit base is growing and diversifying. In March 2023, BBAJF's Loan to Deposit Ratio was only 88.8%, and according to Moody's, due its \"Cuenta Conecta initiative the bank has been able to replace deposit concentrations with states and municipalities with individual depositors.\" Management expects that BanBajio's liquidity, which is already very good, will continue to improve. At the end of 2023, management reported that, \"For 2024 we expect to continue growing deposits at double-digit a little faster than the loan portfolio.\"  Graph 3 shows both BanBajio's historic quarterly growth rate for deposits versus Banorte's, and, that since the start of 2020, its total deposits have more than quadrupled, whereas Banorte's total deposits have actually fallen by 6.12%. Graph 3: Deposit Growth Data by YCharts d. ROE for the first quarter of 2024 was 25.9 percent, versus 28.2 percent for the entire year of 2023. This decrease is due to the higher costs associated with diversifying its deposit base, and in part, due to BanBajio's growth. BanBajio is investing heavily in technology, plans on opening 15 new branches in 2024, and it plans on hiring 100 Senior Bankers in the western part of the country, to take advantage of the nearshoring opportunity. e. As per the Moody's report referenced earlier, BanBajio's Net Interest Margin has historically been between 4% and 5%, which compares favourably to its peers, and to the NIMs of circa 300 to 350 basis points that banks in most other countries are able to achieve. However, BanBajio is currently enjoying an incredibly high NIM of 7.00%, and it has done so for approximately 18 months, due to the elevated short-term rates imposed by the Mexican Central Bank. When and if short-term rates decrease, BBAJF's NIM will also decrease, and indeed, management's 2024 guidance made in December 2023 assumed an average 2024 NIM of 6.5% to 6.7%. Despite this, management does not forecast any significant short-term deterioration in Banco del Bajio's profit margins or ROE due to;  The growth of its digital banking platform, which will lower operating costs. As reported on the Q1 2024 Earnings Call, \"Monthly Active Clients in the bank are growing by 5 percent, moreover, our digital clients are growing by 29 percent year-over-year. Our clients are growing total amounts transacted by 58 percent, with the mobile channel being the most dynamic, growing by 68 percent. As of now, 82 percent of transactions at BanBajio are done through self-service channels, improving from 69 percent in only 2 years.\" Diversification of its product mix and expansion into higher margin non-loan products. In 2023, overall Fee & trading income grew by 20 percent, with FX, Trust Services, Factoring, and Payroll Services all being high-growth areas. Year-over-year, electronic banking fees grew by 26 percent, interexchange fees grew by 27 percent, Point Of Sales fees grew by 14 percent and FX trading grew by 16 percent. Expansion into consumer loans, as discussed earlier.  Valuation and Dividends As reported by Seeking Alpha, BanBajio's P/E Ratio (TTM) is 5.23 versus Banorte's P/E Ratio (TTM) of 7.02. The Price/Book Value and Price/Sales ratios for BBAJF are 1.31 and 2.48, versus Banorte's ratios of 1.41 and 3.09. This is despite the fact that BanBajio is more profitable on a relative basis, has a higher ROE, and is growing much faster than Banorte is. Table 2: BanBajio versus Banorte*     Banco Del Bajio Banorte   Market Cap USD $3.59 billion $22.43 billion   Revenue Growth YoY 21.12% 12.10%   Revenue Growth FWD 11.78% -2.04%   Revenue 3-Yr CAGR 31.24% 14.47%   Net Income 3-Yr CAGR 52.63% 21.44%   Net Income Margin 46.73% 44.03%   ROE 26.63% 21.04%   Click to enlarge *Seeking Alpha As per Graph 4, Banco del Bajio's P/E Ratio was circa 10 in 2020, versus its current level of 5.23 Graph 4: Banco del Bajio - Valuation Ratios Over The Past 5 Years   Trading Economics BanBajio targets a Total Capital Ratio of 14% to 15%, and at the end of Q1 2024, this ratio was 16.87%. Graph 5: Banco del Bajio - Capital Ratios Over The Past 5 Years Trading Economics However, management does not believe in hoarding capital, and although its target payout ratio is 60% of Net Income, if management does not see opportunities to earn an acceptable ROE, it has no issue in declaring a special dividend, as was the case in 2021. Graph 6: Banco del Bajio - Dividend History Over The Past 5 Years Trading Economics In its most recent AGM, management approved two dividends for 2024, which comprised 60% of 2023's Net Income, and which had implied a dividend yield of 9%, based on the price of BBAJF at that time. The first dividend was 3.70 pesos per share, and it was paid on May 31, 2024. The second dividend that was declared was in the amount of 1.85 pesos per share, and it is due to be paid at the end of September. When it was pointed out that the bank's capital ratio is above the upper end of its target band, the response was, \"And anything in excess of that, if it somehow reduces our ROE, so we will consider in the second semester we will study the situation. It will depend on the loan growth and other factors that might impact us. We will consider an additional dividend payment.\" Risk Factors I would be remiss if I did not mention the following risks; 1) Concentration Risk: In business school, they tell you to focus. Develop core competencies and critical mass, play to your strengths, and do what you're good at. BanBajio has done this admirably, both geographically, and by focusing on SMEs, small corporations, and the agribusiness. But this goes against the advice of finance professors, which is to diversify, diversify, diversify. Spread your risk, don't put all your eggs in one basket. 2) Political Risk: a. One need only look at the market reaction to the June 2nd election to see how much of a risk this can be. Part of the investment thesis is that the reaction was overblown, and therein lies the opportunity. However, I could be wrong. A populist agenda to increase taxes on the rich and on corporations, for example, would affect sentiment towards Mexico as a whole, thereby decreasing valuations. It would also likely affect BanBajio's customers more than those of other banks. b. Another source of politico risk is the United States. There is the small matter of a presidential election later this year. Although nearshoring is about taking jobs from China and moving them closer to the United States, the MAGA base might not see it that way. 3) Potential New Entrants: Fintechs are a threat to banks everywhere, and this issue was discussed in BanBajio's earnings call for the 2023 annual financial results. BanBajio is taking a number of initiatives to counter this potential threat. First, it is investing heavily into technology and digital banking. It is also developing new products and services, such as Factoring. On the other side of the Balance Sheet, BanBajio has started to offer its customers' money market funds, on the premise that it is better to lose deposits to its own funds, rather than those of a Fintech. 4) Currency Risk and Interest Rate Risk: Mexico's central bank lowered rates for the first time in three years on March 22, 2024. Given the recent sell-off in MXN, plans for further easing have likely been put on the back burner, but when and if this resumes, the currency could fall further. I note, however, that; a. A lot of speculative froth seems to have been blown away, and, b. The Banco de Mexico first started raising rates in 2021, from circa 4%, to a peak of 11.25%. The Currency had been appreciating for five before this due to Mexico's fundamentals, which are still solid, and before nearshoring had started to gain momentum. 5) Illiquidity: Yes, BBAJF is the eighth-largest bank in Mexico, and yes, it's Mexico's 21st largest company. But at the end of the day, it still is only a USD 3 billion company. There are two things to note about Table 3. a. The first is the elevated level of Short Interest in BBAJF. Eventually, this will have to be reversed, and look for this to occur, all other things being equal, before the next dividend which is due to be at the end of September, as short sellers are responsible for making this payment. b. Pertaining to illiquidity, liquidity is actually quite good at this time. Average daily volume was 36,000 shares in the first two weeks of June, and there is usually a reasonably narrow Bid/Offer spread. However, note how few shares traded earlier in the year. Those looking to take a relatively sizeable position may want to consider Banco del Bajio's common stock, which trades on the MEXBOL under the ticker BBAJIOO.MX. Table 3: Short Interest BBAJF OTCMarkets Conclusion Mexican risk assets sold off at the beginning of June due to profit taking by currency speculators, short selling pressure, and concerns regarding the potential behaviour of the outgoing government in the month of September, when the current president, AMLO, will still be in power, and the new legislature will be sworn in, giving him a one-month period with an increased majority. In the past week, markets have stabilized and started to rebound, albeit only modestly, and there is every chance that this may be a dead cat bounce. However, Mexico's fundamentals are solid, and it is anticipated that it will benefit from nearshoring. Banco del Bajio S.A., Instituciones de Banca Múltiple is well positioned to benefit from nearshoring, as;  It is one of only two Mexican Banks that have ADRs. Its business is concentrated in the industrialized and fast-growing Bajio region, which will likely benefit more from nearshoring than other regions of Mexico. It is somewhat unique in that it concentrates on providing services to corporations and SMEs, as opposed to the consumer market. Its exposure to the capital markets, both for funding, and as a source of revenue, is minimal. Continued market volatility will have a minimal effect upon its underlying profitability.  BanBajio is extremely well run, with an exceptionally low Efficiency Ratio, a Net Interest Margin of 7%, an ROE in the mid-twenties, and a high rate of historic and forecast growth. The recent 20% sell off in Mexican equities, and in BanBajio, have resulted in a valuation that is half of what it was four years ago during the Pandemic, and which is less than its most comparable peer, Banorte. I rate Banco del Bajio as a BUY.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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