BBVXF - BBVA: My Preferred Way To Bank On Latin America

2023-07-26 11:00:58 ET

Summary

• Although Banco Bilbao Vizcaya Argentaria, S.A. is a Spanish bank, I mostly buy it for its significant exposure to Latin America and Turkey.
• The bank's greatest risk may be a decline in the Mexican Peso, just as a strong Peso has likely been one of its best recent tailwinds.
• Despite the recent run-up in its price, BBVA stock still trades below book value with an indicated dividend yield of almost 6%.
• Among the bank stocks in my portfolio, this one ranks high as one that pays well for exposure to markets I want exposure to.

Spanish bank Banco Bilbao Vizcaya Argentaria, S.A. ( BBVA ) has been popping up on my screens a lot lately. This is because it has a banking business diversified across several markets that interest me, and it does so while having all five of its Seeking Alpha Quant Ratings "in the green."

Although it is an extremely gross oversimplification, I have sometimes said that I consider BBVA to be to the former Spanish empire what the Hongkong and Shanghai Banking Corporation ( HSBC ) is to the former British Empire. When I first wrote about HSBC back in 2017, the London-based bank had just reported a year where over 100% of its profits were made in Hong Kong, as HSBC had reported losses in the UK, the U.S., and other markets that year. BBVA's recent years, on the other hand, have reported healthy profits in each of the major markets in Europe and Latin America it operates in. In this article, I run through the main factors I look at when deciding to add to my BBVA position, namely its geographic breakdown, and the numbers feeding its high quant ratings.

BBVA's Geographic Breakdown

BBVA is headquartered in Bilbao, Spain, and is a component of European and Spanish stock indexes and exchange-traded funds, or ETFs, including the Vanguard FTSE Europe ETF ( VGK ), SPDR EURO STOXX 50 ETF ( FEZ ) and the iShares MSCI Spain ETF ( EWP ). BBVA's primary listing is on the Bolsa de Madrid stock exchange, and investors may see the dividends from their BBVA shares subject to Spanish withholding taxes . That said, it should be noted that only about one quarter of BBVA's profits actually come from Spain, or even from Western Europe, with the rest of its business coming mostly from Mexico, followed by the rest of Latin America, and then by Turkey. The below table is a clip from BBVA's 2022 annual report showing the geographic breakdown of different levels of BBVA's income among these regions.

In 2022, BBVA's Mexico business was over twice the size of its business in Spain, which has me thinking that the recent strength of the Mexican Peso ( USD:MXN ) has probably been a tailwind to the profits and sentiment behind BBVA shares. This next chart shows how much the peso has appreciated against the U.S. dollar and the euro over the past three years, with the 39% appreciation against the euro being the more significant number for BBVA, whose base currency is euros.

A few factors could be used to explain the Mexican peso's recent strength, but I'd point to both tight monetary policy by Mexico's central bank and flows from a strong U.S. economy north of the border. This means reversal of this strength in the peso is of course a risk factor, but for now, I'm quite happy to have some peso risk in this portion of my portfolio.

As far as a comparable for BBVA's Mexico business, the iShares MSCI Mexico ETF ( EWW ) has over half of its financials exposure coming from just one bank: Grupo Financiero Banorte ( GBOOY ). It would be worthwhile task for me to read through Banorte's annual reports, but for starters, I find it easier to invest in Mexican banking in a more diversified bank based in a developed market whose stock I can trade on an exchange rather than over the counter.

BBVA's Quant Ratings

After looking at BBVA's diversified sources of profits, I wanted to quickly run through the five factors in its Seeking Alpha quant rating to check how they would factor into my decision that this stock still looks like a good buy at these levels.

BBVA is a value stock

The three main ratios I use to value a bank stock are dividend yield, price / forward earnings, and price / book. BBVA looks cheap on all three of these metrics, so I agree with the A- rating for value .

BBVA is growing, especially outside Spain

As a quant rating, BBVA currently scores a B- for growth , which I think is fair and conservative. Where I would go a bit further is by looking at BBVA's businesses in markets outside of Spain as all being relatively healthy growth markets, with the following clip from a few pages later in the annual report showing how consistent BBVA's profit growth has been in its Mexico business. Note that these numbers are based on a constant exchange rate, so are not due to the strengthening peso, but rather from actual business growth in Mexico. A scroll down to the charts of BBVA's Turkey and South America businesses shows similar growth patterns - only in Spain do profits not seem to be growing consistently.

BBVA is profitable

BBVA's profitability quant rating is "A+," though I would probably adjust this down to an "A-" or even "B+." My preferred profitability ratio for a bank is the un-levered return on assets ratio, which I prefer to see consistently above 1%. BBVA's has been below that for the past decade, and only now seems to be slowly climbing back up to 1%, so while it has been a consistently profitable bank, I hope it does better this next decade.

BBVA has positive momentum

I have long been skeptical of momentum , but over time, I've come to appreciate how simply looking at trends can improve my chances of avoiding value traps. As mentioned in the summary bullet points of this article, BBVA has been steadily trending upwards over the past months and years, which explains its "A+" momentum quant rating . Since BBVA ranks high on both value and momentum, I will keep it in mind when I go back and read the 2013 Journal of Finance paper " Value And Momentum Everywhere ."

BBVA is seeing positive earnings estimate revisions

Finally, one factor I've become increasingly strict on is that I like to buy stocks that are seeing upward revisions in earnings estimates by analysts who follow the company much more closely than I can. Since BBVA's primary listing is in Spain, and is covered by many more analysts there (21, versus only 2 for the US ADR ), below is the chart of these earnings revisions, in Euros, for the Madrid-listed shares, which closed today at €7.12/share. The recent momentum in share price seems clearly justified by a significant increase in expected earnings, which is the kind of momentum I'm happy buying into.

BBVA's dividend

BBVA's dividend policy is in Euros, so I think it's important to look at the dividend amount in Euros rather than to see a lower dividend on the ADR as a dividend cut because the Euro declined against the dollar in a given year. For this most recent year, I noted the April 2023 dividend is €0.251, up from €0.186 the previous April, and the October 2022 dividend was €0.097, up from €0.065 in October 2021. Though I wish their dividend page were much better, this at least ticks the box for a stock with a recent dividend hike that seems sustainable and results in an attractive yield.

My Conclusion on BBVA

While I wish I bought more back when BBVA shares were significantly cheaper, running through these quant score factors, and reviewing the geographic balance of its business, makes me comfortable buying more BBVA shares for my global bank stock portfolio. If I wanted a bit of a buffer, I might consider writing an out of the money put option to acquire more shares at a discount, or write a covered call on some of my existing shares, but that's easier to do on the European shares than on the U.S. ADRs . Even as an outright purchase, I think BBVA shares offer attractive compensation for risks quite different than U.S. large-cap technology.

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