With bank branches blanketing the United States, Canada and most of Western Europe, and seemingly everyone holding some sort of debt, it seems hard to imagine what an under-banked market might look like. Look no further than Peru, then, where significant economic growth and increasing penetration of retail banking services is driving a great growth story for Credicorp (NYSE:BAP).
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What's Under-Banked Mean?
There's ample room to argue about what the "right" level of banking activity in a country is and the best way to measure it. For sake of simplicity, I'm going with loan-to-GDP. In developed countries, that ratio is 137%. In Chile, which in many respects is the most "European" of South American countries, the ratio is 86%, while the ratio drops to 57% in Brazil.

What about Peru? Well, Peru comes in at 24% - one of the lowest levels of the larger Latin American countries.

While there is a little discrepancy between the extent to which Peruvians borrow money from banks and save their money at banks, the fact remains that the average Peruvian doesn't utilize banking services to nearly the same extent as the average American. And that means organic growth opportunities for Credicorp.

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Growing from a Position of Strength
Credicorp is already the largest player in Peru's growing banking market. The company has about 30% of the country's loan market, around 20% of credit cards and more than one-third of the country's deposit market share.

BBVA's (NYSE:BBVA) Peruvian operations are relatively close in terms of deposit share, while Scotiabank ((Bank of Nova Scotia (NYSE:BNS)) is a more distant third and Interbank is even further behind. That's not the end of the story, though. Citigroup (NYSE:C) still has some operations in the country, and other global banking operators like HSBC (NYSE:HBC) and Santander (NYSE:STD) have interest in the Peruvian market.

All of this competition means more choices for the Peruvian customer and more pressure on existing operators to find the right balance between service (opening branches, offering more services, etc.) and profitability.

Can Investors Trust the Peruvian Banking Market?
Over the long course of history, emerging market banking has been a white-knuckle experience, with arguably some of the worst volatility coming from Latin America. Consequently, a lot of investors may look at Peru's recent stretch of solid economic performance as too good to last much longer, particularly if China's demand for copper fades.

It's a fair concern, as are the demanding growth expectations built into Credicorp's price. If Credicorp can maintain a 20% return on equity (ROE) (which is what most sell side analysts expect over the next five years), earnings will grow at a mid-teens rate. That's demanding and many banks fall off after years of 20% ROE, but it doesn't look so ridiculous compared to the underlying growth potential of the Peruvian banking market.

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The Bottom Line
Latin American regulators seem to have learned from past mistakes, not only within the region but from the global credit crunch as well. All in all, then, I'm not necessarily worried about an imminent collapse of the Peruvian banking sector or Credicorp.

That said, there doesn't look to be a lot of potential left in the shares after a strong multi-year run (which has included some sizable pullbacks). At a consistent 20% ROE, these shares look to be worth about $125. If the bank could somehow drive 25% ROE (which would be incredible on a sustained basis), the price target would jump to $160, but that seems like an incredible and unsustainable level of performance to expect.

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At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.