Chillin' in Chile

08/04/2010 11:38 am EST


Carla Pasternak

Editor, The Income Investor

Corpbanca’s share price is as healthy as the Santiago-based bank’s dividend and bottom line, writes Carla Pasternak in High-Yield International.

Santiago-based Corpbanca SA (NYSE: BCA, Santiago: CORPBANCA) is one of Chile's largest banks, offering commercial and retail banking through 111 branch offices. The bank also offers mutual-fund management, insurance, and securities brokerages through a network of subsidiaries. Shares trade as GDRs (Global Depository Receipts) on the New York Stock Exchange, but the primary listing is on the Santiago Stock Exchange.

The performance of this stock has been outstanding. BCA returned 120% in 2009 and posted a remarkable average annual three-year total return of 26%, compared with -9% for the Standard & Poor’s 500 [index]. The stock has also returned 37% so far this year and is trading near its 52-week high. What's going on?

Corpbanca is a solid bank in a growing emerging market economy. Chile exports copper and other products to other growing economies, such as China and Brazil, and its economy had been growing at about 5% to 7% annually in the years before the financial crisis. Increasing wealth and a rising middle class has created a steadily improving demand for banking and financial services.

The economy has rebounded strongly from last year's recession. In fact, the Economist forecasts that Chile's economy will grow at 4.7% this year and 6% next year. Meanwhile, inflation is forecast to be just 2.1% in 2010. Looking forward, Chile recently elected a president who is expected to aggressively pursue pro-business and pro-growth policies.

[So,] in the second quarter, when the S&P 500 suffered its worst quarter since 2008, the iShares MSCI Chile ETF (NYSE: ECH) was one of precious few country funds [to show] a positive return. The fund has returned over 10% so far this year and is also near its 52-week high. (Chile has also been a big component of “frontier” markets’ outperformance this year.

Net income at Corpbanca has more than doubled over the past three years, from $73 million in 2006 to $152 million in 2009. Average annual earnings per share growth over the past three years is 27%, compared with the industry average of 1.6%, according to Morningstar. For the full year 2010, Bloomberg estimates that Corpabanca earnings will grow 27%.

Dividends have rocketed as well, from $1.09 per GDR in 2006 to $3.62 this year, [which] translates to a solid 6.6% yield. In 2007, the company adopted a dividend policy of paying out at least 50% of net income in dividends. However, for the past three years, the bank has paid out 100% of net income.

Dividends are paid in Chilean pesos and converted to US dollars for GDR holders, so there is currency risk. But the peso has maintained virtually the same valuation versus the dollar so far this year, while the dollar has gained on most other currencies.

The bank also has a sound balance sheet with a reasonable debt/equity ratio of 1.5 and an overall investment grade credit rating of "BBB+" by Standard and Poor’s, with a stable outlook.

Corpbanca is a solid, well-run bank operating in one of the world's sweet spots for growth over the next decade. The 6.6% yield makes BCA an excellent income stock, but given that the shares are trading at record-high levels, I will wait for a possible pullback.

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