Mexico is the new darling of Latin American investing.
AndSantander Mexico (
) has been enjoying the ride since spinning off from its Spanish
parent and going public last Sept. 26.
"The demand for bank stocks in Mexico is very large right
now," said Gerard Cassidy, an analyst at RBC Capital Markets.
"When you look at global asset managers and then look at Latin
America, Mexico is the new 'in-region' to be in. And within that,
the best way to play the country's economy, of course, is through
a bank. There aren't many banks that are publicly traded in
Santander Mexico is one of two publicly traded Mexican banks.
The bank has more than 1,000 branches throughout Mexico with
total assets of $58 billion. It is the fourth-largest bank in the
country. The Spanish parent still maintains a 75% stake in the
bank after its IPO Sept. 26.
Analysts expect the Mexican economy to grow 4% in 2013,
surpassing growth rates of Brazil and Chile, where Spain's Banco
Santander also has independently traded bank branches.
The Mexican economy is export driven, led by the manufacturing
sector with 80% of its exports going to the U.S. Its
manufacturing sector represents 18% of the economy vs. 13% in the
U.S. and 15% in Brazil.
"This is important," explains Cassidy. "Mexico has a
well-educated workforce when it comes to manufacturing jobs, and
so companies are very willing to commit capital into Mexico to
build out manufacturing plants.
"What's interesting to us is that we're seeing with the rising
labor cost in China, that the advantage of putting a plant in
China vs. Mexico has dropped significantly, especially if that
manufacturing plant is going to sell product into North America.
You don't have the shipping cost, and the time period is
In addition, the demographic growth of the middle class and
rising wages bode well for the country and its banking
One of the strongest contributors to Mexico's banking industry
growth is expected to be its underpenetrated credit sector. The
country's loan-to-GDP ratio is very low at around 20%. Compare
this to a loan-to-GDP ratio in Brazil at 50%, Chile at 100% and
the U.S. at 200%.
"There is still a ways to go," said Maclovio Pina, senior
analyst at Morningstar. "You have the broad economy that is
growing at a faster pace than a developed economy and then you
also have the fact that there is very low credit penetration and
that means that there are a lot of people that need a new banking
relationship, who are waiting to be your customers out there.
"The incremental growth you can get from that is much higher.
So, it's not like a big corporation that's constantly refinancing
a loan for the same thing or rolling its debt just to keep on its
Santander Mexico has had a track record of being, on average,
more profitable than its peers. It has achieved such strong
results thanks to its solid policy of cost control and credit
Pina explains that the bank has a more efficient branch system
with fewer employees per customer. Its IT system integrates
everything more efficiently.
And the company has also been keeping in check its direct
marketing and other costs.
"If you're OK being the fourth largest and you're not
constantly battling who will be the largest one, you don't have
to overspend in terms of getting the most aggressive marketing
campaign," he said.
In addition, Santander Mexico has done a good job of assessing
the clients' creditworthiness.
"They manage their risk-reward profile for the funds that they
disburse as loans slightly better (than other banks)," said
"When you have all this demand for loans coming at you, this
is exaggerated a little bit, but you can essentially cherry-pick
all of those creditors who in your view have the best credit
profile," he added. "So it's not a situation like in more
developed economies, like here in the U.S., where you're actively
fighting against other banks to bring new customers into your
While the economic outlook and demographics in Mexico look
good, functioning in a developing country always carries
political or country risk. Nevertheless, analysts view the
government positively, with little or no interference in the
The fact that the Spanish parent owns 75% of Santander Mexico
also poses a risk that if the parent decides to raise more
capital due to continued woes in Spain, even a small additional
float of shares could significantly dilute the existing ones. The
parent has already done so with some of its other banks in the
If this were to happen, analysts suggest it will not
necessarily be viewed negatively, but rather would be an
opportunity to own more of the stock.
While the majority stakeholder ultimately will have the
decision power in the Mexican bank, the bank's management is
viewed positively by analysts.
"We think that people at the helm are pretty capable bankers,"
said Pina. "If you're looking at management from the investor
perspective, what we like to point out is the fact that the
majority investor is someone else and that someone else holds
3/4ths of the voting power, so essentially they control it.
"We're not saying that that's necessarily bad, because even in
Spain and even with all its problems, Santander bank is still the
best of the big Spanish banks. It has a great track record of
integrating businesses, of capturing efficiencies, of investing
in profitable enterprises. So, we think that the other
stakeholder is also good at what they do."