After these past couple of years, you could be excused for thinking that banking executives are the only ones making money off banks. After a quick rebound in the spring of 2009 following the avoidance of financial Armageddon, bank stocks have left much to be desired, especially for longtime shareholders.
Where's my money?
Over the past year, even as banks have returned to profitability from the brink of extinction, bank stocks haven't really done much. Of the five largest banks in the U.S., only US Bancorp has provided positive returns. The SPDR KBW Bank ETF, based on an index of 24 major banks, has only had a slightly better result:
|SPDR KBW Bank ETF||2.9%|
|JP Morgan Chase||(10.7%)|
|Bank of America||(21%)|
Source: Capital IQ, Yahoo! Finance.
This has to do mainly with uncertainty -- uncertainty about the quality of loans and future growth, which is caused by uncertainty about the housing market, unemployment, and regulatory policy changes. There are few things the market hates more than uncertainty.
Donde esta mi dinero?
Expanding our scope globally provides a bit of a mixed picture.
|China Construction Bank||11.1%|
|Industrial and Commercial Bank of China||(0.7%)|
Source: Yahoo! Finance.
European banks have been struggling with concerns about both consumer and government debt defaults. And while it helped to be invested in banks in emerging markets, that wasn't enough cover for HSBC Holdings and Banco Santander, which have significant operations in Asia and Latin America, respectively. Additionally, Chinese banks have been waging their own battles with real estate bubble concerns in recent months.
A different class
It should be no surprise that the few successful banks from the past year are riding strong fundamental growth in consumer credit. In their markets, incomes are rising, and a new middle class is emerging. These regions include Brazil and India, both of which have remarkably strong domestic demand (as opposed to China, which has built its economy on low wage-paying export industries).
The three banks below are right in the middle of the emerging middle-class trend, and each provided strong returns over the last year.
HDFC Bank, the second-largest private bank in India, provided shareholders with a 57% return over the past 12 months. This bank offers conservative management, combined with access to the rapidly growing Indian banking market. In the past five years, net income has grown an average of 35% per year. In the last fiscal year, the loan portfolio grew 27%, while gross non-performing loans remained at an impressive 1.43% of total loans. That's just the type of performance investors dream of, and with India's 1.2 billion citizens relatively unbanked, double-digit growth will likely continue for the next several years.
Banco Compartamos (OTC BB: BMOSF.PK)
Mexican micro-lender Banco Compartamos also had a good year. This is a rather unconventional bank, making small, short-term working capital loans (the average loan is less than $600, generally with a term less than six months). These loans help groups of rural women get the money they need to build up their small food or craft stands into sustainable businesses.
Although most of its 1.6 million clients exist on the fringe of the formal economy and have little in the way of collateral, Compartamos has perfected its underwriting methods. It boasts a default rate on its most popular loan product below 1%. Despite fears surrounding the slowing Mexican economy and its dependence upon the U.S. consumer, Compartamos was able to grow its client base by 23% last year, which translated into loan growth of 27% and earnings growth of 46%. For investors, this meant a stock return of 103%.
Our third bank, another Latin American operator, put up more modest (but solid) returns last year, with a 12% return that slightly topped the S&P 500. Bladex is a merchant bank based in Panama, providing short-term trade financing for Latin American companies that do business with neighboring countries or on a global scale.
Although the bank's earnings suffered from the dramatic slowdown in global trade in late 2008 and early 2009, things have bounced back. Additionally, as many multinational banks (see tables above) try to get their houses in order, they have pulled back from foreign markets, which has improved Bladex's competitive position. Not only is Bladex ready to capitalize on Latin America's economic emergence, but it also pays us right now with a hefty 4% dividend -- a rarity in this industry these days.
But that was then
Unfortunately, the past has passed, and last year's great performers won't pay for your retirement (unless, of course, you already owned them). However, we can take a lesson from the recent success of these three bank stocks. Each of them has tapped into the powerful trend of the growing emerging-market middle class -- HDFC Bank and Compartamos directly, and Bladex indirectly via growing international trade.
This story has been taking place for years in places like China, Brazil and India. Companies like Coca-Cola