Banco Santander: Banking on Brazil

Paul Goodwin Emerging Markets Specialist and Analyst, Cabot Heritage Corporation

Brazil has been a victim of economic and political turmoil for years, with a constant threat of inflation, corporate scandals morphing into political scandals and uncertainty about the health of the largest economy in South America, asserts Paul Goodwin, editor of Cabot Emerging Markets Investor.

But after years of up and down revenue (down 14% in 2013, up 30% in 2014, down 48% in 2015), Banco Santander (BSBR) looks to be well positioned to take advantage of a calmer, more predictable Brazilian economy and political life.

With a market cap of $42 billion, Santander isn’t the biggest bank in Brazil, but it has good scale. The bank has 34 million customers, a network of 3,421 branches and mini branches and almost 34,000 ATMs.

It’s also the only international bank in Brazil with substantial assets and the company has decades of growth both organic and via acquisitions.

Banco Santander has several special areas of growth. The company is an active micro-credit lender, with 3.8 billion Brazilian reals invested. (The current exchange rate is 3.06 reals to the U.S. dollar).

The company is also active in online banking and access via mobile devices, including its own banking app. Digital channels (internet and mobile) represented 75% of the banks transactions in Q4 2016.

Beside its international exposure and aggressive expansion in Brazil, there are a couple of features of Santander’s stock that appeal to us.

First, there’s the long, long decline in the stock’s price, sliding to below $3 in September 2015 and again in February. From that point, BSBR has blasted to near $12. So there’s no doubt that the stock has momentum.

The second feature that attracts us is that BSBR’s move is approaching the threshold at which it will become attractive to institutional investors. Just 3% of BSBR’s float is owned by institutional and mutual fund owners. So further price appreciation could open a powerful new source of demand.

Even after its big run, BSBR is still trading at a reasonable 19 times earnings. And it pays a dividend with a 2.2% annual yield.

There are a couple of risk factors that we are taking into account with BSBR. The first is the possibility that Brazilian inflation or political instability might recur. The second risk is the strength of the U.S dollar vs. the Brazilian real.

There’s not much we can do about either of those risks except keep a close eye on the stock. We think BSBR is buyable right here, although recent volatility suggests that a little patience might offer a chance to buy in at around $11.

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