Tremendous Prospects for BBVA

One of my key PowerTrends is what I call The Rise and Fall of the Middle Class. For this strategy, I look to capitalize on the those companies positioned to benefit from rising disposable incomes in the emerging markets, and from flattening incomes in the more mature markets. If we carry it one step further, we can extrapolate that other companies will benefit from the rising economic activity in those regions. What would make the opportunity even sweeter would be a company benefitting from a regional-to-national strategy in the U.S., much in the way Starbucks (SBUX) is going from a regional presence to a more national one in China. Starbucks recently opened its 1,000th store in China during the June quarter, and it aims to have 1,500 locations throughout China by 2015. Jim Cramer has made similar comments about Dunkin Brands' (DNKN) potential to expand westward in the U.S. Now, you may think I'm describing a small-to-midsize company, but I'm not. I'm talking about some of the growth drivers behind Banco Bilbao Vizcaya Argentaria (BBVA), the 35th-largest bank globally, with assets north of $800 billion according to Accuity. Headquartered in Spain, BBVA has a presence in more than 30 countries. It's not surprising that many haven't heard of this bank in the U.S., though it was only a few years ago when the company made a concerted effort to bulk up stateside when it bought Compass Bancshares for $9.1 billion. At the time, Compass' position in Texas, Alabama, Arizona, Colorado, Florida and New Mexico -- 415 branches in total -- was triple the size of BBVA's U.S. presence. Flash-forward to today, and BBVA Compass is the 22nd-largest bank in the U.S., based on deposit market share, according to data just released by the Federal Deposit Insurance Corporation. The U.S. accounts for 10% of the company's gross income. Based on conversations I have had with management, the firm's long-term goal is to grow BBVA into a top-10 U.S. bank. It's a similar strategy to that of Toronto Dominion Bank (TD), and it has served its shareholders rather well. Francisco Gonzalez, Chairman and CEO of BBVA Group, is on record stating that he expects U.S. operations will eventually become the largest segment of BBVA's overseas revenue generation through retail and commercial banking, wealth management and loan production. There are other reasons to be bullish on BBVA's business and its shares. First, we are seeing a rebound in the eurozone economy. The composite purchasing managers index (PMI) for that region rose to 52.2 in September, up from 51.5 in August, with the eurozone services PMI reaching 52.2 in September from 50.7 in August. That marks the strongest quarter of expansion in just over two years. Germany led the charge, France returned to expansion, Spain stabilized and Ireland and Italy are shoring up as well. Currently, BBVA derives just under one-third of its gross income from the Eurozone, and its business should improve as the rebound there continues. Second, BBVA derives 58% of its gross income from the emerging markets. It has a particularly strong presence in South America -- where it is either No. 1 or No. 2 in most countries, with the exception of Brazil -- and Mexico, where BBVA is the leading bank. Following a modest economic contraction in Mexico during the second quarter of this year, the outlook remains favorable in the back half of 2013 and into 2014. Driving that outlook is greater trade with a more solid U.S. economy, as well as greater public spending. As for South America, the region is expected to grow more quickly than the U.S. will, with gross domestic product anticipated to average at 3.2% growth annually from 2011 to 2015. Granted, that is slower than the 5.1% growth the region delivered in the 2004-to-2008 period, but it's also on par with or faster than U.S. growth forecasts. Third, BBVA is coming off a major infrastructure upgrade that has made BBVA Compass one of the few commercial banks in the U.S. to process transactions in real time, rather than in end-of-day batch cycles. While this may seem like a small thing, it has shortened the turnaround time for account openings from 45 minutes to five minutes, it has improved the speed at which new products are brought to market by 75% and it has cut overall costs by 13%. According to Accenture, BBVA has managed to reduce its cost-to-income ratios by 20 percentage points in most of the markets in which the bank performed such an upgrade. With that cost and effort behind it, BBVA and its shareholders are poised to reap the benefits. Fourth is valuation. Even though BBVA shares have performed strongly thus far in 2013, I see far more upside to come as BBVA continues to execute on growing its U.S. presence, rides the eurozone rebound and benefits from continued growth in Latin America. Despite that move, BBVA shares are trading at a steep discount to those of its peers on the basis of dividend yield and price-to-book value. With only one Wall Street analyst following the shares, I suspect the earnings expectations are also understated. If BBVA simply traded in line with the peer average for dividend yield and price-to-book, the shares would be worth at least $18. That offers investors more than 50% upside from the current share price -- and that doesn't factor in the 4.5% dividend yield. For those wondering, I see BBVA's peer group to be a mix of Bancolombia (CIB), Banco Santander (SAN), Bank of America (BAC), Toronto Dominion, U.S. Bancorp (USB), Bank of Nova Scotia (BNS) and others.

Tremendous Prospects for BBVA

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