Santander Mexico Grows As Mexican Economy Flourishes

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Mexico is the new darling of Latin American investing.

AndSantander Mexico ( BSMX ) 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 Mexico."


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.

Export Driven

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 less."

In addition, the demographic growth of the middle class and rising wages bode well for the country and its banking sector.

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 maturity schedule."

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 quality management.

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 Pina.

"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 bank."

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 banking system.

Majority Holding

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 past.

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."



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Investing Ideas

Referenced Stocks: BSMX

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