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Mark Yu
Mark Yu
Articles (396)  | Author's Website |

A Quick Take on a Latin America Bank

The bank operates profitably albeit on a lower level in recent quarters

February 24, 2017 | About:

Mexico has not failed to appear on any major news outlet newsfeed recently – because of its currency, its president’s decision and the wall among other things.

The Mexico ETF – iShares MSCI Mexico Capped ETF (ARCA:EWW) – underperformed the broader Standard & Poor's 500 index in the past year with -10.1% total return vs. 27.6%.

Using Morningstar data, several companies in the ETF's holdings demonstrated below peer average multiple, one of which was Gentera SAB de CV (CMPRF). Gentera SAB de CV is an over-the-counter stock traded on a private exchange that does not have any 10-K annual or 10-Q quarterly reports.

Valuation

Gentera, formerly Compartamos SAB de CV, traded at a lower earnings multiple compared to its industry.

According to Reuters data, the $2.32 billion Mexico-based financial institution had a price-earnings (P/E) ratio of 12.6 times (industry value of 40.8), price-book (P/B) ratio of 3.1 times (industry value of 3) and price-sales (P/S) ratio of 2.3 times (industry value of 6.1).

Gentera also had a trailing dividend yield of 2.4% with a payout ratio of 33.7%.

Total return

In comparison to the broader S&P 500 index, Gentera has underperformed the former in both short and medium term. Gentera had -10.2% and -2.97% total returns in one- and three-year returns compared to the S&P 500’s 27.6% and 10.7% (1).

Earnings performance

On Oct. 24, Gentera reported its third-quarter and nine months fiscal 2016. Nine months into fiscal 2016, the largest microfinance bank in Latin America grew its interest income by 16.3% to 14.7 billion Mexican pesos ($740.8 million) while delivering a 25.3% profit growth to 2.87 billion pesos.

“Gentera concluded another solid quarter of continued growth. As every year happens the third quarter tends to be a time of the year with solid dynamics, and this year was not the exception. At the end of September, the consolidated Total Loan Portfolio reached 31.866 billion pesos, a 15.9% increase compared with third-quarter 2015, with a 12.2% growth at Banco Compartamos, a 30.1% increase at Compartamos Financiera in Peru and a 35.3% growth in Compartamos S.A. in Guatemala.

At the end of the third quarter Gentera’s financial subsidiaries served 3.35 million clients, throughout a network of 692 service offices and 107 branches, and a staff of more than 21,000 employees, which are committed to provide financial solutions to our clients.

With regards to its subsidiaries, Aterna, Intermex and Yastas, all of them delivered once again the results expected for the quarter. Aterna concluded the quarter with more than 5.5 million active life insurance policies; Intermex paid 1.1 million remittances, which represented more 5.5 billion pesos; Yastas finalized the quarter executing more than 1.6 million financial transactions; and finally, Fiinlab, our newest initiative aims to develop new business models to achieve greater financial inclusion.” – Carlos Labarthe, Gentera’s president and CEO

Gentera trades thinly and lost 2.4% post earnings announcement from Oct. 14 to Nov. 4, 2016.

Gentera

In 2015, Gentera celebrated its 25th year in existence providing financial assistance and serving Mexico, Peru and Guatemala.

According to its filings, Gentera is a Mexican corporation which purpose is to promote, organize and manage all types of civil or commercial entities, including but not limited to, multiple banking entities with the purpose of providing banking and credit services pursuant to the Law of Credit Institutions as well as other financial entities, both domestic and foreign.

(Corporate Structure, Gentera)

Gentera has several subsidiaries: Compartamos, Yastas, Aterna, Intermex and Fundacion Gentera.

Compartamos

Compartamos offers credit, insurance, savings and means of payment to its clients in Mexico, Peru and Guatemala. Several subsidiaries under Compartamos are as follows: Compartamos Banco (with operations in Mexico), Compartamos Financiera (Peru) and Compartamos SA (Guatemala).

In third quarter 2016, Compartamos Banco’s loan portfolio grew by 12.2% to 24.6 billion pesos compared to the year earlier period. Compartamos Financiera’s loan portfolio, meanwhile, grew by 30.1% to 6.8 billion pesos year on year and Compartamos SA demonstrated 35.3% growth to 475 million pesos.

Yastas

Yastas is a banking correspondent administrator that provides convenient access to financial operations, service payments and cell phones airtime.

In third quarter 2016, it executed close to 1.6 million financial transactions or 2.5 times more than the year-earlier quarter.

Aterna

Aterna is an insurance agency that specializes in prevention services and operates products and services through its partners in Mexico and the rest of Latin America. Aterna’s main products include life, health and liability insurances.

In third-quarter 2016, Aterna had more than 5.5 million active life insurance policies compared to 4.19 million the year-earlier period.

Intermex

Intermex is a payer of family remittances in Mexico. According to Gentera, Intermex’s operation is linked to remittance companies in the U.S.

In third quarter, Intermex was able to execute more than 1.1 million transactions valued at 5.5 billion pesos compared to over 1 million transactions or 4.4 billion pesos year on year.

Fundacion Gentera

Fundacion Gentera, meanwhile, is a nonprofit organization that guides the social responsibility efforts of Gentera and its companies.

Interest income and loan portfolio

(Annual and Sustainable Report and Press Release, Gentera)

As observed, Gentera derives most of its business from loan portfolio interest. In previous annual report, the financial firm derived 99.4% or 17.2 billion pesos of its interest income from loan portfolio interest (2).

In review, almost all of this interest income, or 99%, was derived from consumer loans and 63% or 18 billion pesos of the total loan portfolio were rated an A-1 risk – safest.

Gentera had 78% or 22.35 billion pesos of its total loan portfolio – including current and past due and accrued interests – in Mexico followed by 18% in Peru and 1% in Guatemala.

Nine months into fiscal 2016, Gentera’s total loan portfolio grew by 15.9% to 31.9 billion pesos compared to the year-earlier period.

Other metrics

Net interest margin

Net interest margin is a ratio that measures how successful a firm is at investing its funds in comparison to the expenses on the same investments (Investopedia). Figures above provided by Gentera demonstrated stability in recent third quarter comparisons.

Efficiency ratio

The bank efficiency ratio is a quick and easy measure of a bank's ability to turn resources into revenue. The lower the ratio the better (50% is generally regarded as the maximum optimal ratio). An increase in the efficiency ratio indicates either increasing costs or decreasing revenues (Investing Answers).

Figures above provided by Gentera demonstrated increasing cost rather than declining overall revenue in recent quarterly comparisons.

Nonperforming loan ratio

A nonperforming loan is the sum of borrowed money upon which the debtor has not made his scheduled payments for at least 90 days. A nonperforming loan is either in default or close to being in default (Investopedia).

As it turned out, Gentera reportedly has increased its nonperforming loans in recent years.

Return on equity

Gentera’s return on shareholder equity also exhibited a decline.

On average, Gentera had three-year sales and profit growth and profit margin averages of 20.3%, 126.4% and 23%.

Cash, debt and book value

As of September, Gentera had 4.35 billion pesos in cash and other investments. The financial firm also had 10.7 billion pesos in debt or a 0.7 debt equity ratio compared to 0.71 times in December 2015 (1).

Gentera also had 2.3% of its 39.93 billion pesos assets in goodwill while having a book value of 15.3 billion pesos compared to 12.75 billion pesos the same period a year earlier.

Cash flow

Nine months into 2016, Gentera grew its cash flow from operations to 1.97 billion pesos from an actual loss of 955 million pesos the year earlier. Significant cash inflow or 2.45 billion pesos came from Gentera’s other assets and liabilities, according to Morningstar data.

Gentera also allocated 98 million in property and equipment leaving the firm with 1.9 billion in free cash flow compared to an actual cash flow loss of 1.3 billion pesos the prior year.

Gentera allocated 2.5% or $47 million in share repurchases while providing no dividends in the period.

Conclusion

Gentera demonstrated a highly profitable financial firm located in Latin America. Looking a little closer, however, revealed that Gentera’s operations may be encountering a bit lower profitability in its several businesses compared to recent years.

Aside from having a markedly lower earnings multiple compared to its peers, Gentera trades three times more than its book value in its current share price. Together with absent dividends and minimal share repurchases compared to free cash flow figures, Gentera ADR shares would be a pass.

Notes

  1. Morningstar data.
  2. Me: Interest income can also be understood as sales.

Disclosure: I do not have shares in any companies mentioned.

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About the author:

Mark Yu
A doctor in physical therapy (DPT) with a passion for finance. Not a registered financial analyst. Value seeker. Long only. Global investing. Long-term investing.

Attempts to dissect company filings per day. Dislikes goodwill and intangible assets.

For quicker reading--jump ahead to an article's conclusion.

One company (review) a day keeps the speculation (hopefully) away.

Would typically invest $500 to $3000 of own money per buy recommendation.

"The only source of knowledge is experience"

"I have no special talent. I am only passionately curious." Albert Einstein

"To strive, to seek, to find, and not to yield." Alfred, Lord Tennyson

"We find one a year, that's terrific. You do not need a hundred or a thousand great investment ideas to do well. You need a couple. And, the discipline is the most important thing." Warren Buffett

Visit Mark Yu's Website


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