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Bear of the Day: Banco De Chile

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Earnings season is off to a positive start in the banking sector with JP Morgan (JPM - Free Report) , Citigroup (C - Free Report) , Goldman Sachs (GS - Free Report) and Morgan Stanley (MS - Free Report) all beating consensus estimates and fueling a broad market rally.

Unfortunately, the banking situation in South America is not quite as good.

After a protracted six-year economic slowdown, South America is in the midst of what the World Bank recently described as a “fragile recovery.” Notable challenges include a stronger U.S. dollar and rising U.S. interest rates which have contributed to a “drastic fall in net capital inflows” to the region.

That October 5th World Bank report also notes that the region remains vulnerable to natural disasters such as earthquakes, floods and hurricanes. Due to high population density in vulnerable areas and lacking risk management practices, South America is at risk of serious economic shocks from natural events.

Banco de Chile (BCH - Free Report) - though fairy healthy as far as South American Banks go - has still suffered through 2018 with the shares off more than 11% amid slowing financial results and reduced earnings estimates.

Despite the recent price decline, BCH remains fairly expensive relative to the foreign bank sub-industry, trading at 16.6X forward earnings and 25X free cash flow, versus industry averages of 9.9X and 9.3X, respectively.

The real problem is reduced operating income with the Q2 cash flow statement showing operating losses of $101M during the first half of the year versus $418M in positive operating income during the same period a year earlier.

Five recent negative earnings revision have taken the consensus for full year 2018 from $6.22/share just 90 days ago to $5.37/share currently.

BCH is a Zacks Rank #5 (Strong Sell).

While the U.S. banking industry is looking as strong as ever and stands to build on earnings momentum as interest rates drift higher, investors would be wise to avoid the shares of banks in regions where significant economic and political factors uncertainty remain.

Outside the U.S. European banks are in much better shape. Two French financial institutions, BNP Paribas (BNPQY - Free Report) and Societe Generale Group (SCGLY - Free Report) are both Zacks Rank #1 (Strong Buy) and operate in an economic environment that’s currently much closer to the U.S.

Sometimes the “Bear of the Day” is a company at which conditions are so poor that aggressive investors might even want to consider initiating a short position. Banco De Chile is not one of those stocks. There’s nothing specifically wrong with it, there’s just not much working in their favor either and there are much better places in the banking industry to invest.

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