SAN FRANCISCO (MarketWatch) � Banking is back in Latin America. While most of the rest of the world is still recovering from the global financial crisis of 2008, Latin American banks have recovered.
Five factors have fueled that growth: a growing middle class, access to banks for the previously �unbanked� population, growth in deposits, a broader and expanding loan portfolio, and greater efficiency by Latin American banks.
Brazilian banks have led the surge, occupying the top five spots on The Banker�s list of the best Latin American banks. They�ve done this mainly by focusing on the growth of the middle class. The middle class in Latin America has grown to 51% of the population in the major economies in 2011, from just 41% in 2001. That growth in the middle class has pushed per capita income to $11,900 from $7,600 a decade ago.
It has also increased the demand for consumer loans: be they mortgages, car loans, or small business or industry loans.
Itau Unibanco Holdings SA ITUB , has focused on reducing costs and streamlining efficiency since the two banks merged in November 2008 to form Brazil�s largest bank. �But I can guarantee that we will not reduce our investment plans as part of that effort,� CEO Roberto Setubal said. Itau Unibanco has been rapidly expanding both within Brazil and across Latin America, capitalizing on success in consumer banking.
Regional growth
Itau Unibanco is just one of several banks with eyes on the rest of Latin America. �The flow of investments among the region�s various countries is increasing strongly,� said Andre Esteves, BancoBTG Pactual�s chief executive, in a statement. �Capita! l market s are developing at a fast pace in Colombia and Peru. Even the more mature markets, such as Brazil and Chile, continue to have high growth rates. We are very optimistic about the perspectives for Latin America.�
With money from Abu Dhabi, Singapore and China, BTG Pactual has grown to become one of Brazil�s top-10 banks. It recently expanded into Chile, Colombia and Peru and has reportedly been meeting with investment banks to launch its own shares over the next few months.
Recent analyst reports have suggested the major banks in Latin America, such as Itau Unibanco and BancoBradesco BBD , are losing market share to smaller, regional banks. We don�t see this as a reason not to invest in the larger banks. While they may end up losing share nationally, we believe the bigger banks will gain from their cross-border initiatives and from the rapid overall growth of banking in Latin America. Even if they did lose market share, that doesn�t mean their growth will slow. Like elsewhere, being bigger is a plus in Latin America�s banking industry.
There has been some backlash in Latin America as a result of the global financial crisis. Latin American countries have been more apt to approve regulations to protect consumers against fraud since 2008, and these same rules have not just protected consumers, but also shielded the local banking industry from foreign predators.
Even without better regulations, we expect you will start to see more intra-Latin America mergers and fewer acquisitions from developed countries. Already Latin American banks have pushed foreign banks from the top positions, in businesses including retail banking and investment banking. Last year, Itau Unibanco pushed Citigroup C �and Credit Suisse Group CS �CH:CSGN �from their top positions in investment banking.
But retail banking remains the key that most banks are after. In a survey for the Economist Intelligence Unit, most executives (27%) expect the greatest increase in competition in retail banking, compared with 17% in investment banking, 15% in corporate banking and 12% in consumer finance and cards.
The one country in Latin America where foreign banks have held onto their positions, and in some cases increased, is Mexico. Indeed, Spain�s Banco Santander ES:SAN �has amplified its penetration in Mexico, while also actively playing a large role in banking in Argentina, Uruguay, Chile and, to a lesser extent, in Brazil. Citibank, with its control of Banamex, has also benefited from its Mexico operations by penetrating retail banking and issuing more than a million credit cards per year.
Unbanked
And that brings us back to one of the strongest reasons to invest in Latin American banks: reaching the unbanked population. Half of the population in Latin America still does not use banks. In Brazil, 58% still use cash at supermarkets, with just 15% of purchases coming from credit cards and another 15% from debit cards.
A study by GrupoBursatilMexicano shows the potential of Latin American countries in bank loans to the private sector: If Chile is the model with close to 70% of private sector loans as a percentage of GDP, Brazil is still far behind at 50%, and Colombia (30% of! GDP) an d Mexico (less than 20%) are even further behind.
Latin Americans have devised their own ways to bring the unbanked into the mainstream. Even if it�s using a prepaid card for purchases, or having bank branches or ATMs in supermarkets, the growth of these will only pick up as the emerging middle class expands.
In Brazil, as in many South American countries, ATMs are often not operated by banks but by third parties. These kiosks are often much more prominent than the ATMs of banks. The largest of these is TecBan, which is planning to expand its network of Banco24Horas ATMs to 13,000 by the end of 2012, from 11,000 currently. TecBan plans to install ATMs at gas stations, supermarkets, shopping centers, drug stores, and subway, bus and rail stations. The company generates revenue by charging financial institutions a fixed price per transaction.
In summary, we think the banking sector in Latin America is going to benefit long-term from the growth of the middle class, and from greater access to the unbanked population, especially as new technologies gain adoption such as mobile banking and innovations in credit cards.