In this briefing:
1. Banco Guayaquil: Off Radar but Surging Higher
Banco Guayaquil SA (GYL ED) commands Ecuador’s most extensive network of 5,732 points of sale, incorporating branches, ATMs, neighbourhood units, as well as a virtual mobile bank, plus telephone and mobile banking. The bank commands 10.5% and 10.3% of the system credit and deposit markets.
Contrary to perception, Ecuador’s financial system appears relatively sound. It is well-capitalised, with solid credit quality, and high levels of liquidity. Private credit is still growing quite robustly. The supervision of the cooperatives should be strengthened though this is not a systemic risk. Removing barriers to financial intermediation, enhancing risk management, and improving oversight and contingency planning could help fortify the system further.
Ecuador’s economy though remains fragile and speculative. The administration of Lenin Moreno cannot be faulted for not grappling with some of the main issues confronting the country after years of chronic mismanagement by Correa. While growth still remains moderate, limited by structural bottlenecks, inflation and unemployment are under control though the fiscal deficit, debt burden, and paltry reserves represent huge challenges, not aided by recent oil sell-off. For this reason, CDS is sky-high – at similar levels to Argentina at 750bps.
But unlike Argentina, deep value can be found in Ecuador’s Banking Sector. At least investors are compensated, in great part, for country risk unlike elsewhere.
And, arguably, the time to buy oil-related proxies is when the commodity price is low, not high.
GYSE shares went on a tear in 2018, not even halted by oil volatility at Q3. But there could be more to come as they are moving off extremely depressed levels. Shares still trade at a 65% discount to Book Value and lie on a low Mkt Cap./Deposits rating of 5%, far below the global and EM median. GYSE commands a dividend-adjusted PEG of 9x. Earnings and Dividend Yields stand at 34% and 18%. A quintile 1 PH Score™ of 10 captures the valuation dynamic while metric change is impressive. Combining franchise valuation and PH Score™, GYSE stands in the top decile of opportunity globally though we are mindful of country risk and interrelated oil volatility.
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