Banco ABC: This small cap is from Arabia!
B3: ABCB4
Today we are going to talk about a small Brazilian Bank.
I'll give you some tips:
Half of the employees are called Mohammed (or some variant)…
…and he has a respectable beard:
Happy hours usually take place at this establishment, with Buza Arabic ice cream topped with pistachios:
This is Banco ABC Brasil (B3: ABCB4).
But what bank is this that I've never seen agencies on the street?
You, the average investor, will not know this bank, because it is a bank focused on credit for companies. You don't need agencies for this.
Who will I be a partner with?
The company has preferred shares (PN) (ABCB4 listed on B3.
Shareholder composition of Banco ABC Brasil:
Arab Banking Corporation (known as Bank ABC): 99.9% of ON shares and 24.1% of PN shares)
Management: 12.4% of PN shares
Free Float on B3: remaining PN shares
Who is this Bank ABC?
Based in the Kingdom of Bahrain, in the Persian Gulf, Bank ABC is a bank focused on credit for companies.
It was created in 1980, shortly after the 1979 oil shock, by the Emir of Bahrain, to invest globally the excess resources generated from the exploration of this commodity. It is listed on the Bahrain Stock Exchange (BHSE: ABC) and is present in 18 countries (Middle East, North Africa, Europe, Asia and the Americas).
His net worth is USD 3.7 billion and he has USD 36.6 billion in assets.
Who are the owners of this Bank ABC?
Central Bank of Libya: 59.37%
Kuwait Sovereign Fund: 29.69%
Free Float on the Bahrain Stock Exchange: 10.94%
A little about the history of Banco ABC Brasil:
You might not even imagine, but it all started with Roberto Marinho, from Rede Globo TV.
In 1983, he created Banco Roma de Investimentos, an allusion to his initials.
In 1989, Bank ABC bought 50% of Roberto Marinho's shares and the name became Banco ABC Roma.
At that time, foreigners couldn't own banks in Brazil, so teaming up with Roberto Marinho was the solution.
The idea was to strengthen business between Brazilian and Arab companies. They worked in corporate credit, treasury and trade finance.
In 1997, Bank ABC acquired the other half of the shares that belonged to Roberto Marinho and the name was changed to Banco ABC Brasil.
Subsequently, a relevant portion of the capital was acquired by a holding company formed by its own executives in Brazil, aligning their interests with those of the controller.
In 2007, Banco ABC Brasil made a public offering of shares (IPO) on B3.
What does Banco ABC Brasil do?
The heart of this bank is the corporate credit area.
Until 2017, they focused mainly on credit for Large Corporate (rev. R$4+ billion).
From then on, they began to lend a lot to Corporate (between R$300 million and R$4 billion).
In 2019, for the Middle Market (rev. between R$30 million and R$300 million).
Today, the credit portfolio is:
33% Large Corporate
58% Corporate
9% Middle Market
In parallel with corporate credit, the Bank has grown with Investment Banking and Insurance Brokerage activities, two areas with better profit margins.
Some more information about the bank:
ROE: 16% (good)
Low default
Basel: 15% (healthy)
Immobilization index: almost zero
Efficiency index: in line with the best banks
Growth in profits, dividends and net worth of ~12% p.a.
Banco ABC Brasil represents 25% of Bank ABC's assets and 60% of profits
In short, the bench is well operated.
My Point of View:
Despite being a small bank, it has rich parents (Kuwait Sovereign Fund and Libyan Central Bank). If you need liquidity, your pocket is deep.
It is not a very relevant bank for the National Financial System. If you have a problem, the FGC (a private institution maintained by the big banks) can even save you. But I believe that the Central Bank of Brazil would not make an effort to see it survive. To illustrate: Safra, BV and Banrisul are more relevant institutions than Banco ABC Brasil.
The fact that the board has 12.4% of the PN shares pleases me a lot, as it creates an alignment of interests. This slice is worth R$247 million today. Colleagues in the market have already told me that the bank is in the hands of the board, with little influence from the controller.
The shares traded on the stock exchange are different from those of the controlling shareholder (ABCB3), but they are the same as those held by the board of directors (ABCB4).
Excellent execution in Large Corporate and Corporate credit. The Middle Market portfolio is growing, but default rates are much higher. It's a point of attention.
If they can achieve a controlled default in the Middle Market, the ROE could rise to ~18%, increasing the stock's fair P/PV.
Low risk of disruption: unlike big banks, it does not have a large amount of income from individual client fees, the segment most attacked by fintechs.
It is one of the few companies listed on the stock exchange that pays increasing dividends, having gone through the years of Dilma's government very well.
Despite being small, it is a great company. Now it depends on the share price…
Is it cheap?
After all, is it to buy this stock or not?
What is the price to buy and sell ABCB4 after all?
I'll show you all the rationale, in detail.
Let's go.