Banorte Stock: Growth From Everywhere (OTCMKTS:GBOOY)

Good measures to assess a bank’s growth are growth in book value, ROE, and NIM. In this case, Banorte is doing fantastic. Over the last three years, the bank has expanded its ROE by 48%, and book value (equity) by 38%. At the same time, the net interest margin has expanded. In Q2 2021 the NIM of the whole holding was around 5% and three years later stands at 6.5%, representing a 30% expansion. Also, as you can see in the image below, the NIM of the core bank has barely decreased 10 bps from its highest point, representing signs of strength despite the higher funding costs. With the Mexican Central Bank now cutting its interest rates, this NIM in the core bank would most likely get better as funding cost falls and demand for loans rises.

Rappi Joint-Venture and Bineo

With ongoing competition from fintechs such as Uala, Nu, and Stori, which directly compete with the core bank, Banorte has a joint venture with RappiPay that is now in the profitability stage of the pipeline. Rappi is a super app in Latam, mainly known for its food delivery business. Through RappiPay, they offer Visa credit cards with no management fees that allow customers to gain from cashback in purchases within Rappi and outside of Rappi. Nonetheless, the company has been reducing expenses by trimming these benefits, and also announcing the discontinuation of the debit card, which used to reward customers with high interest.

Also, the company recently launched a digital bank named Bineo. Which could be seen as the Mexican version of Cash App or Venmo. They offer non-interest-bearing accounts but also provide extra features such as personal loans, and bill payments. In the pipeline, the company plans to add extra features in the second half of the year by adding functions such as credit cards, mortgage remittances, loyalty programs, and payroll loans.

In the company presentation, Bineo seems like a bet that they are emphasizing. However, the company’s ambitions in adoption are quite low. They expected between 2 and 3 million clients in the next 5 years, which seems low compared to the reach of Banorte. For comparison, Nu in a greenfield entrance in Mexico, acquired 5.5 million clients after five years. In my opinion, the fact that Bineo doesn’t reward clients with high interest will bring headwinds in terms of massive adoption. Especially when the competition is doing it.

Even though Banorte is a diversified business, and the Bineo investment of USD 170 million is quite low compared to the enterprise value of the company, I think there is a risk of this not playing out. If fintechs such as Nu and Uala continue with high momentum in increasing demand deposits, and in the future, start cross-selling core products such as insurance, mortgages, and personal loans, that would start to take away market share to major banks besides credit cards, especially within the young population that is more inclined to use fully digital options.

Mexican Economy Tailwinds

From a macro-perspective, the Mexican economy has been experiencing some tailwinds as a foreign destination for US and Chinese companies to settle manufacturing operations. Foreign direct investment has been rising substantially, and the government is spending big on infrastructure. One mega project is the Tren Maya, which was inaugurated in December 2023 and plans to connect five states, including tourist cities such as Cancun and Tulum through a 1,554-kilometre intercity railway. Also, companies such as Tesla and BYD have announced investments to construct mega factories in Mexico due to their lower manufacturing labor cost than China, free-trade agreement, and proximity to the United States. In addition, the country has centered some focus on rehabilitating the Tehuantepec Corridor, which was first inaugurated in 1907 and operated for seven years after the Panama Canal took all the demand. The new Interoceanic Corridor Istmo of Tehuantepec consists of 303 kilometers of railway, and the government has provided massive fiscal incentives to incentivize companies to settle logistic operations there.

These positive outlooks coupled with interest rates, have led the peso to appreciate against the dollar by 18% over the last three years, in a period of dollar strength where the DXY has gained 15% against major currencies. Also, the Mexican stock market has appreciated by 58% in the last three years based on the iShares MSCI Mexico ETF (EWW).

GBOOY Valuation

The stock price correction since February has made the stock go back to fair-value territory in terms of book value per share. Based on its three-year history the stock situates at 1.876x P/B with the average falling close at 1.750x. If I were to analyze this stock by the start of February, the stock would’ve been running high at 2.249x book value. However, some correction in the stock price and growing equity reported in Q1, made the P/B multiple go back to 1.876x.

At the same time, the ROE in Q1 situated at its best level over the past three years, and it has tended to do so in almost every quarter. Even though this sounds fantastic, it might also be seen as a sign of concern, and I agree if it’s believed that return on equity is mean-reverting. But the conclusion to be made is that Banorte is looking good within book value growth, NIM and ROE expansion, and price-to-book valuation to its history.

Mexican Elections

Mexico will face its presidential and congress elections on the 2nd of June of this same year. Elections are events that bring uncertainty in markets. But based on the polls, the continuation of a left-wing government is more likely to materialize —more so when there is no runoff in Mexico.

Candidate Claudia Sheinbaum, former chief of government of the current administration, is leading the polls with 59%, despite the rise in crime to historical levels and accusations of the AMLO 2006 campaign being financed by drug trafficking. Even with that, the actual president remains popular with 53% favorability, which allows her to keep those votes. On the other hand, businesswoman Xóchitl Gálvez stands far away from the first place with 36% of the vote intention.

Despite the AMLO administration providing asylums to persecuted politicians such as Jorge Glas in Ecuador and Evo Morales in Bolivia and alleged of being soft against countries with questioned democracies such as Venezuela, Cuba, and Nicaragua, AMLO didn’t try to change the constitution to get reelected as many initially feared.

Conclusions

With the financials, valuation, and macro-outlook all looking good, it’s easy to decide on a buy rating. The risk of political uncertainty in elections seems not to be a big drive of volatility due to the advantage that the first candidate has over the second one in the polls. The only reason I go with a buy and not a strong buy rating is because of potential mean reversion in ROE, the stock price, and dollar peso currency pair that are all extended.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.