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Banco Bilbao Vizcaya Argentaria SA (ADR) (BBVA), Banco Santander (Brasil) SA(ADR) (BSBR): Buy Offshore Banks for Faster Growth and Bigger Gains

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With the U.S. economy projected to grow only an anemic 1.9% this year, many developing countries are becoming more dependent on their own quickly growing middle classes to drive economic growth and demand for domestic goods and services.The banking industry almost always benefits greatly from growing economies like these, and investors seeking current income and exceptional growth potential need look no further than our neighbors to the south. Here’s why you should buy the best banks doing business in South America’s expanding economies.

Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA)

Where to look and what we want to see

When looking at banks in developing countries, investors should first seek stocks traded on one of the U.S. exchanges. Even though this does not guarantee anything in particular, it does tend to provide some degree of liquidity, and at least a bit of regulatory oversight and reporting requirements.

Stocks with a current P/E multiple less than the 5-year projected growth plus the dividend yield tend to deserve extra attention, since this metric tends to indicate they’re undervalued. The cumulative effect of this criteria provides a solid base from which to  begin a detailed due diligence process.

A quick screen set for international banks traded on U.S. exchanges produced a list of initial candidates, which was easily reduced to those with a South American focus.

A multinational with broad exposure

Banco Bilbao Vizcaya Argentaria SA (ADR) (NYSE:BBVA) is based in Spain and offers banking, pension and insurance products in Spain, Portugal, Mexico, and South America, while also offering standard banking services in the U.S. and Puerto Rico. The 6.07% dividend yield is a real eye-opener and the current market valuation of only 0.82 times book value causes this stock to warrant a closer look.

Unfortunately, over the past five years, the net income has fallen at an annual pace of 23.93% as a result of the debt crisis that has engulfed the weaker members of the European Union and its exposure to the weak economies of Spain and Portugal. After consideration is given to the 80% payout ratio required to cover the current dividend, the negatives begin to outweigh the positives in the evaluation of this stock as an investment opportunity.

A smaller, more focused opportunity

My initial screening also produced a smaller bank operating in a developing country with a projected growth rate of 4.5% for this year — fully 137% higher than the United States’s pace. The fast-growing country is Colombia, and the bank that will benefit from the growth is Bancolombia S.A. (ADR)(NYSE:CIB).

While many people think of drugs when the topic of Colombia arises, they are actually large exporters of coffee, plantains, almost the entire U.S. supply of roses, and most of the world’s emeralds. Nickel and copper are its fastest growing exports. Quite simply, there are many more opportunities in Colombia than most people realize, and the country’s profitable banking investment (along with the emeralds) is one of its undiscovered gems.

Bancolombia S.A. (ADR)(NYSE:CIB) has a current dividend yield of 2.82% that requires a payout ratio of only 37% to support. This current ratio allows ample room for increases even if profits remain flat; an unlikely scenario given the projected economic growth rates for the country. Over the past five years, this bank has increased its dividend at an annual pace of 8.06%, firmly establishing management’s commitment to rewarding shareholders.

With a projected earnings growth rate of 9.3% per year for the next five years, this bank should reward investors with a total annual return of around 12% per year between dividends, and a share price that rises along with the earnings growth.

Ultra-fast future growth at a bargain price

With primary exports consisting of transport equipment, soybeans, coffee, iron ore, and footwear, Brazil helps feed the world and provides base materials for steel manufacturing. At 2.9% growth, the economy of Brazil is projected to expand a full 50% faster than that of the U.S. this year. But you would never know it from the market valuation assessed to Banco Santander (Brasil) SA(ADR) (NYSE:BSBR).

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