EWW - Mexico's On Sale - Part 2: Banco del Bajio Is A Buy After The Sell-Off
2024-06-30 02:32:11 ET
Summary
- 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.
I recently wrote an article that did a deep dive into the Mexican Economy, before making the case that 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.