As Banco Santander (SAN) prepares to conduct an initial public offering of its Mexican bank, an overview of the bank is in order.
Grupo Financiero Santander Mexico (Santander Mexico) is the second largest financial services holding company in Mexico based on net income and the fourth largest financial services holding company in Mexico based on total assets, loans and deposits as of June 30, 2012. Through the bank and other subsidiaries, they provide a wide range of financial and related services, principally in Mexico, including retail and commercial banking, securities underwriting and brokerage and custody services, and asset management.
The principal subsidiaries are:
- Banco Santander Mexico, the commercial bank subsidiary (which as of June 30, 2012 accounted for 99.8% of total assets and 101.1% of shareholders' equity, and for the six months ended June 30, 2012 accounted for 98.0% of net income),
- Casa de Bolsa Santander, the brokerage subsidiary, and
- Gestión Santander, the asset management subsidiary.
As of June 30, 2012, Banco Santander Mexico had total loans net of allowance outstanding of Ps.338.0 billion ($25.2 billion), total deposits of Ps.489.1 billion ($36.5 billion) and 1,097 branches located throughout Mexico.
A Brief Financial Snapshot:
From the above table, we can see that non-performing loans have been heading down and are at very reasonable levels given the growth in the loan portfolio (in comparison, Banamex (C), Mexico's second largest bank, has NPLs at 1.6%, the lowest in Mexico). As well, the bank is run lean, which is why the efficiency ratio is so low and the ROE is near 20%.
As the above table shows, Tier 1 and total capital are above 14%, but lower than year-end levels. Tier 1 capital of Banamex is 16.8%.
The thesis behind investment in Santander Mexico (or any of the larger Mexican banks) comes down to one word: growth.
From Santander Mexico's prospectus:
- Expansion of the middle class - According to the Mexican Group of Economists and Associates (Grupo de Economistas y Asociados, or GEA), from 1992 to 2006 the share of the population that has monthly income greater than five times the minimum salary tripled, which in turn increased the number of potential clients of financial institutions in Mexico. In addition, according to CONAPO, the dependency ratio of the Mexican population is expected to reach its lowest levels in the period from 2012 to 2028, which in turn would increase the number of working individuals that require financial services.
- Low credit penetration - The country remains underbanked in comparison with more mature markets and even other countries in Latin America as demonstrated by relatively low ratios of total loans and total deposits as a percentage of nominal GDP, according to the International Monetary Fund's Financial Access Survey. Also, the level of banking penetration in Mexico (as measured by the loans to GDP ratio) currently remains below the peak banking penetration levels reached before the 1994 crisis.
The proof, however, is in the pudding:
- Santander Mexico's total income grew 20.25% YOY in Q2 2012.
- Operating profit grew 34.9% YOY in Q2 2012.
- C&I loans grew 15.3% YOY, Mortgage loans grew 42% YOY and consumer installment loans grew 29.1% YOY.
We see the following from Banamex's Q2 2012 earnings:
- Grupo Financiero Banamex net profits during the 2Q2012 were $9,538 million pesos, 35.7% higher than in 2Q2011.
- Grupo Financiero Banamex net profits in the 2Q12 were $4,886 million pesos, 8.9% higher than the one observed in the 2Q11 and 5.0% higher than in 1Q12.
- Banamex Direct Credit portfolio increased $409 billion pesos, with an 18% year - on - year growth.
- In credit Cards it recorded an 18% annual growth.
- In Mortgages, Banamex showed a 15% growth versus the same period of 2011.
Growth is nothing without a safety net, which in a banking system is capital. Again from Santander Mexico's prospectus:
Stable and well-regulated financial system - The Mexican financial sector is regulated by several government agencies. Banking regulation in Mexico has undergone extensive reform and has improved over the past decade and we believe the Mexican banking system is among the most well-regulated financial systems in the world, based on the Financial System Stability Assessment published by the International Monetary Fund in December 2011. The Mexican government has stated that the country will be an early adopter of the Basel III international rules. According to the CNBV, as of May 2012, the banking system in Mexico had a 15.3% total capital ratio, above the 10.5% threshold that will be required by the Basel III international rules.
According to a Reuters report:
Santander, whose rivals in Mexico are also mostly foreign-owned, hopes to raise $3 billion to $4 billion for a 25 percent stake in its Mexican unit, which has a healthy capital base, an expanding loan book and is No. 2 in Mexico's mortgage market.
A price tag of up to $4 billion for a stake of 25 to 30 percent would imply a price-to-book ratio - that is, the ratio of Santander's implied share price to the value of its assets - of between 1.9 and 2.3, according to a Nomura report published earlier this month, before the size of the offer was fixed.
That range values Santander Mexico on par with or at a discount to its closest listed rival, Banorte, Mexico's fourth-largest bank by assets. Its shares are currently trading at about 2.3 times its book value after soaring 60 percent in the last year, although they slipped slightly this month.
Bottom Line: This is meant to be an introduction to Santander Mexico and the investment rationale behind digging into the coming IPO, not a complete analysis. Santander Mexico is well positioned to participate in the growth of both the banking system and the Mexican middle class. As well, the IPO of some of Santander Mexico will add to the liquidity of Santander Group as a healthy amount of the proceeds will most likely find their way to Spain after the issuance. Santander Mexico could be a decent way for US investors to invest in the growth of Mexico and its banking system, as the first largest Mexican bank is part of the BBVA Group (BBVA) complex and does not trade separately and Banamex is part of the Citigroup complex and does not trade separately.
Disclosure: I am long SAN.
Additional disclosure: This article is for informational purposes only, it is not a recommendation to buy or sell any security and is strictly the opinion of Rubicon Associates LLC. Every investor is strongly encouraged to do their own research prior to investing.