For months, investors have played a parlor game of speculating on the best way to play Mexico’s proposed energy reforms. With any political equation, there’s always a degree of skepticism among investors, as there should be.

Mexico’s various state legislatures this week are moving to approve the proposed constitutional change that would open the country’s energy sector. The reform package would allow private companies to explore for and produce oil and gas in the country. Now that the proposition is one step closer to reality, it warrants a more sober review of potential investment strategies.

Some have argued for investments in US offshore energy services companies, others for direct investments in the “Super Major” foreign oil companies that will lead new exploration and production initiatives in the region. But there is an inherent problem: These behemoths are too diverse globally to be pure plays on reform.

When one sees the amount of capital that’s necessary to expand the oil sector and the country’s own reliance on the natural resource, the answer becomes clear that the capitalists or the banks stand to benefit the most from this new trend. However, even with the banks, some are too global for investors to meaningfully participate in the country’s projected growth. What’s more, some of Mexico’s home-grown banks aren’t listed or available for foreign investors.

That’s why Grupo Financiero Santander Mexico (NYSE: BSMX), which was spun-off from its parent, Spanish banking giant Santander Group last year, is a standout opportunity to directly play Mexico’s energy reforms.

In 2012, the bank’s parent filed a $4 billion initial public offering (IPO), raising up to $4.3 billion. Although it retained a majority three-fourths stake in its subsidiary, the parent sold shares in two tranches, with 20 percent allocated to investors in Mexico and the remaining 80 percent outside the country.

At the top of its pricing range, the Mexican unit’s market capitalization of $17.23 billion would make it the 83rd largest bank by value in the world. The IPO was the third largest of that year, after Facebook (NASDAQ: FB) and Japan Airlines (Frankfurt: JAL).

By still maintaining a stake in its unit, the Spanish banking parent offers the best of both worlds: a global financing network to foreign investors, which JPMorgan projects will invest an additional $15 billion annually as a result of oil sector liberalization, and a local presence in the growing Mexican economy. The spun off unit will benefit from potential economic growth of as much as half a percentage point, according to financial reports.

Of course, the advantages of being local were not lost on Grupo Financiero Santander Mexico. In its IPO registration statement, the firm stated, “We believe that the current sustained growth of the Mexican economy, the young age of the Mexican population, the stable and well-regulated Mexican financial system and the low penetration rates of financial services in Mexico offer a significant opportunity for us to continue growing.”

Grupo Financiero Santander Mexico: A Pure Play That’s in Play



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Mexico has the second largest population in Latin America, according to the United Nations Development Program, and it is expected to grow by 9 percent from 2011 to 2025, according to estimates from the Mexican National Population Council (Consejo Nacional de Población, or CONAPO). Mexico’s economy also is the second largest in Latin America in terms of gross domestic product in 2011, according to the International Monetary Fund.

It’s the Economy, Amigo

Grupo Financiero Santander Mexico has been making strides in cementing its position in the local economy, which stands to benefit greatly from increased energy investment. This growth will filter through to every level of the economy, manifesting itself as demand for mortgages, credit cards, loans and other retail banking products.

In late November, along with the bank’s acquisition of Dutch banking giant ING’s (NYSE: ING) Mexican mortgage business, ING Hipotecaria, the deal solidified Santander Mexico’s position as the second largest banking mortgage provider in Mexico, with an estimated market share that increased from 15.8 percent to 17.8 percent with the acquisition, according to company materials.

Presently, Santander Mexico is the country’s third largest financial group by business volume, with market shares of 14.8 percent in deposits and 13 percent in loans. The firm is a universal bank providing banking and other financial products and services to a range of customer segments, including personal, private, corporate, and small-and-medium enterprise (SME) banking customers. The bank also offers personal banking products such as home loans, credit cards, personal loans, and pension fund services.

In its most recent quarterly filing in late October, the bank reported net income of 5,882 million pesos (USD453 million), representing year-over-year and quarter-over-quarter increases of 39.6 percent and 42 percent, respectively, before one-time charges. The quarter’s earnings were sequentially higher, due to lower administrative expenses.

One of the quarter’s highlights was loan portfolio growth with year-over-year increases of 28.6 percent in SMEs, 11.6 percent in credit cards, 7.2 percent in consumer loans and 12.5 percent in mortgages.

Marcos Martínez Gavica, the chief executive, commenting on the quarter, said: “While economic growth in 2013 has been slower than anticipated, macro and financial sector fundamentals in Mexico remain strong. We expect economic activity to pick-up next year, driven by an increase in public and private spending, the infrastructure program and by progress on the structural reform agenda the country requires.”

The Mexican bank over the last year (evaluating its New York Stock Exchange performance) has delivered a 17.64 percent return on equity, shown quarterly year-on-year revenue growth of 3.41 percent and offers a dividend yield of 1.53 percent.

Grupo Financiero Santander Mexico presents a rare opportunity for investors to tap directly into projected high growth in Mexico, with the flexibility and convenience of buying the shares in Mexico (for those seeking foreign exchange exposure on the belief that the peso will strengthen on reforms) or in the US on the NYSE. Grupo Financiero Santander Mexico is a buy up to 18.