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).
Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

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.

SEE: How To Choose A Bank

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.

SEE: 5 Must-Have Metrics For Value Investors

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.

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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

Related Articles
  1. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  2. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  3. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  4. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  7. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  8. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  9. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!