Financial Services

The underbanked: an appealing banking opportunity in emerging nations, 6.26.13

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Turkey, Mexico, and the Philippines may be thousands of miles apart geographically, but they share certain characteristics financially. They have low debt-to-GDP ratios. Their citizens’ access to credit is below average. Their governments are undertaking reforms to improve the stability and efficiency of their financial systems. And perhaps most importantly, their demographics augur well for their long-term economic growth.

About the demographics: we think the economic prospects of Turkey, Mexico, and the Philippines are good in no small part because their populations are young and growing fast. Their youthful constituency is a key segment of the so-called "underbanked" – people who use few, if any, banking services. For instance, more than 2.5 billion people around the world, most of them in emerging nations, have no bank account, the World Bank estimates. As such, they represent a massive untapped market, a $45-billion market globally, according to the Center for Financial Services Innovation.

In our judgment, select well-run regional banks should be able to serve the underbanked especially well in Turkey, Mexico, and the Philippines. Our list of such regional banks includes Turkiye Garanti Bankasi, Credito Real, Grupo Financiero Banamex, Grupo Financiero Santander Mexico, and Metropolitan Bank & Trust.

Turkey making bread

As for the three nations’ economic prospects, let’s first address Turkey. In recent years Turkey’s economic growth has been bumpy but generally highly positive: an average of 6% GDP growth between 2002 and 2008, a 4.8% decline in 2009 due to the global financial crisis, then 9.2% growth in 2010, 8.5% growth in 2011, and an estimated 3% growth in 2012. This year, according to the International Monetary Fund, the Turkish economy should expand by 3.5%, a rate superior to that of other emerging economies like Poland and South Africa.

In demographic terms, more than half of Turkey’s population of 75 million is under the age of 30. They are an increasingly educated generation, with the number of Turkish college graduates soaring by 155% between 2000 and 2010, according to Business Insider.

These economic and demographic forces have in turn fueled a strong Turkish banking industry, whose revenue grew by 12.6% and profits by 19.2% in 2012 over the previous year. Of the 49 local banks in Turkey, 37 increased their profits in 2012, reports the Turkish Banking Regulation and Supervision Agency. And the value of loans made by Turkey’s banks grew by 16% in 2012, to a total of $453 billion, up from $381 billion in 2011, according to Reuters.

Garanti leads Turkish banks

In the industry, the second-biggest Turkish bank, Turkiye Garanti Bankasi (headquarters: Istanbul, market capitalization: about $36 billion), expects to generate growth of more than 18% in loans and 10% in assets this year. Garanti provides corporate, commercial, retail, and investment-banking services to 12 million customers, with branches in Cyprus, Luxembourg, and Malta, among other nations. In the first quarter Garanti held $72.4 billion in loans outstanding. Garanti is the first and only Turkish bank to have earned an A rating from the Global Reporting Initiative for integrating social and environmental factors in its business practices.

The second emerging nation on a fast economic track is Mexico, situated between the affluent United States and Canada to the north and the swiftly growing Latin American nations to the south. International trade accounts for 60% of Mexico’s economy, fueled partly by a strong, growing domestic manufacturing industry. For instance, Mexico leads the world in the production of flat-screen televisions. The nation’s entire manufacturing market totals $300 billion, which should be further enhanced by an influx of foreign automakers, who are investing $10 billion in new assembly plants there.

We believe Mexico’s strong manufacturing base should be a boon to its financial-services sector, which weathered the financial crisis better than most of its counterparts in other nations did. At a time when many banks elsewhere were being bailed out, Mexican banks remained solvent by keeping their balance sheets conservative, generally avoiding highly speculative loans and exotic derivatives, and charging relatively high fees and interest rates. For example, some credit cards issued by Mexican banks carry interest rates approaching 40%.

Mexico: woefully underbanked

That conservative approach to banking, however, has come at a price: woefully underbanked and credit-deprived consumers. Only 21% of Mexicans have their money in a bank, according to research firm Consulta Mitofsky. Bank loans equal about 20% of GDP in Mexico, compared with about 49% in Brazil and 80% in Chile, according to Global Finance magazine.

But Mexican banks are increasingly and effectively addressing the needs of the underbanked and the business establishment. For example, loans to Mexico’s private sector rose 11.5% last year and could rise between 12% and 15% this year, according to Bloomberg News. To promote even more lending at lower rates, Mexican President Enrique Peña Nieto introduced a series of reforms in May. We think three Mexican banks are best-positioned to benefit from an improving environment for lending in particular and financial services in general:

*  Credito Real (headquarters: Mexico City, market capitalization: about $8 billion) is a Mexican payroll lender and microfinance company that serves consumers in the low- and middle-income segments. Typically, the microfinance loans that Credito Real provides range from $2.50 to $2,500, averaging about $1,000. Those loans are often the first forms of credit that its customers have ever received. The net-interest margins on the loans are high, reflecting the premium interest rates charged as compensation for the degree of credit risk involved, since the borrowers have little or no credit history. In our analysis, Credito Real has consistently produced some of the highest net-interest margins of any Mexican bank in recent years. Since 2008 Credito Real’s revenue has grown at double-digit rates annually, and its assets have risen by as much as 65% annually.

*  Grupo Financiero Banamex, commonly known as Banamex, is a subsidiary of Citigroup (headquarters: New York, market capitalization: $150 billion). Banamex, bought in 2001 for $12.5 billion in the biggest U.S.-Mexican acquisition ever, is the country’s second-largest bank. Last year Banamex recorded profits that were 21% higher than in 2011, issued 1.8 million new credit cards, and granted more credit to Mexican families than any other institution. For instance, the bank made one of every four mortgage loans in Mexico. Banamex was named Mexico’s best bank by Global Finance magazine this year.

Santander aids parent

*  The Santander Group’s Mexican subsidiary, Grupo Financiero Santander Mexico (headquarters: Mexico City, market capitalization: about $19 billion), offers retail and commercial banking, brokerage, and financial-advisory services. It is one of Mexico’s biggest lenders, making more than 10% of all domestic loans and taking in more than 10% of all domestic deposits, according to The New York Times. When Santander Mexico went public last October, it was the largest-ever initial public offering in Mexico. Santander Mexico is helping to offset weak profits at the parent company, which has been hurt by real-estate loans in Spain. Emilio Botin, the chairman of the Santander Group, characterized Mexico as "a country with a very positive outlook for growth" that’s been invaluable in enhancing the geographic diversification of his organization. Last year Latin American operations, including Brazil, Chile, and Mexico, contributed about half of the group’s profits.

The third emerging nation that we think has attractive banking prospects is the Philippines, which is benefiting from low inflation (about 3%) and high GDP growth (about 6%). We think that pattern of low inflation and high GDP growth should remain in place for the next three years at least. Demographically, the country is sitting pretty. Roman Catholics number 75.5 million in the Philippines, and their large families have helped the nation to avoid the demographic fate of rapidly aging nations like Germany and Japan. In the Philippines the median age is 22.7, versus 43.7 years in Germany and 44.6 years in Japan. The Philippines’ population is expected to grow from 94 million currently to 142 million by 2040, with 61% of the people participating in the labor force.

Much of the population, especially those living in rural areas, is likely to need more banking services as time passes and the nation’s affluence grows. About 82% of rural Filipinos don’t have bank accounts, and only 6% of business growth in rural areas is funded by bank loans, says Bridge, a Filipino financial-services firm. Conversely, a bright spot in Filipino banking has been remittances, or payments by foreign workers. About 10% of Filipinos working abroad send payments home – $20 billion worth in 2011, up from $7.5 billion in 2003. As we see it, these remittances are and should continue to be a lucrative source of deposits for Philippine banks.

Indeed, remittances are helping to drive the growth of Metropolitan Bank & Trust (headquarters: Makati, Philippines; market capitalization: about $249 billion), the nation’s largest bank. Metrobank’s profit rose to $11.4 billion in the first quarter from $4.3 billion a year earlier – an astonishing 163% increase. The bank’s loan growth expanded by 15% in the first quarter from a year ago.

In sum, we think favorable demographics and a reservoir of untapped customers should result in sustained growth for banks serving emerging nations. We think that growth should be especially pronounced for five top-notch regional banks – Turkiye Garanti Bankasi, Credito Real, Grupo Financiero Banamex, Grupo Financiero Santander Mexico, and Metropolitan Bank & Trust – in Turkey, Mexico, and the Philippines, three countries that are geographically dispersed but are close in that they have similarly dynamic economies and blossoming financial-services sectors.




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Turner Investments, founded in 1990 and based in Berwyn, Pennsylvania, is an investment firm with more than $10 billion in assets under management in stocks, as of March 31, 2013. Turner manages growth, global/international, and alternative separately-managed accounts and mutual funds for institutions and individuals.

As of May 31, 2013, Turner held in client accounts 241,360 shares of Turkiye Garanti Bankasi , 2.5 million shares of Credito Real, 850,740 shares of Citigroup, 39,290 shares of Grupo Financiero Santander Mexico, and 10 million shares of Metropolitan Bank & Trust.

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