Latin America’s Top Fund Bullish on Itau Amid Higher Lending

Aug 22, 2014 4:30 pm ET

(Updates with today’s trading in seventh paragraph.)

Aug. 22 (Bloomberg) -- The best-performing mutual fund focused on Latin America is betting on shares of Brazilian lenders Itau Unibanco Holding SA and Banco Bradesco SA amid prospects higher lending will bolster earnings.

BBVA’s Chile-based Fondo Mutuo BBVA Latam raised its holdings on Itau in June while buying shares of Bradesco a month later, according to the latest monthly filing to Chile’s securities regulator. That has helped boost its return to 27 percent this year, the best performance among 326 Latin America- focused funds tracked by Bloomberg after the Direxion Daily Latin America 3x Bull exchange-traded fund. The search excluded Argentina’s funds.

Brazil took steps this week to boost lending by as much as 150 billion reais ($66 billion) as it strives to lift growth without stoking inflation before presidential elections in October. Eight out of 10 financial companies in the equity benchmark Ibovespa reported second-quarter earnings that beat analysts’ estimates, according to data compiled by Bloomberg.

“The Brazilian government has been looking to strengthen the middle class, and that can result in higher lending,” Alvaro Ramirez, investment manager at BBVA Asset Management Administradora General de Fondos SA in Santiago, said in a phone interview.

Brazilian policy makers reduced capital requirements for banks on Aug. 20, a move that could generate as much as 140 billion reais in loans, according to central bank official Caio Ferreira. They also created incentives for banks to channel as much as 10 billion reais from reserves requirements into lending.

Lending Margin

Itau, Latin America’s largest bank by market value, said Aug. 5 that second-quarter profit rose 37 percent, beating analysts’ estimates as profit margins on lending widened. Bradesco’s earnings increased 28 percent in the period. Their shares have each surged more than 29 percent this year, compared with a gain of 13 percent for the Ibovespa.

Brazil’s benchmark stock index dropped 1 percent to 58,407.32 today in Sao Paulo.

While President Dilma Rousseff’s administration is facing the worst economic performance of any government since 1992, the unemployment rate in Brazil dropped to 4.9 percent in April from 13 percent in 2004, according to the most-recent data from Brazil’s national statistics bureau. The average real income rose 50 percent to 1,863.6 reais in May of this year from January 2009, the data showed.

Insurance, Education

Should that improve the outlook for middle-class consumption in Brazil, insurers and education companies should also benefit, Ramirez said. His fund had holdings of Banco do Brasil SA’s insurance unit BB Seguridade Participacoes SA and Kroton Educacional SA in July, according to regulatory data. He declined to disclose which stocks he bought in August.

For the rest of Latin America, Ramirez says the fund sees potential rallies in banks and companies linked to government infrastructure projects.

At the end of July, the fund had shares of Peru’s Credicorp Ltd., Argentina’s Banco Macro SA and Mexico’s Cemex SA, the largest cement maker in the Americas.