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Emilio Botin, chairman of Spain's largest bank Santander, speaks in Mexico City Sept. 4, 2012.© Henry Romero/Reuters

Banco Santander's $4.1-billion (U.S.) market debut of its bank in Mexico puts the Latin American country's bulls to the test. It's a handy sum for the Spanish bank's coffers. And at 2.2 times book value it might look reasonable for a Mexican retail finance business churning out 20-per-cent returns. But fervent competition, newbie borrowers and rising default rates could soon put that under pressure.

No one can accuse Santander chairman Emilio Botin of poor timing. Mexico's economy grew by an annual 4.7 per cent in July, easily besting the region's giant, Brazil. And the business-friendly Institutional Revolutionary Party is set to take over the reins of government in December. That's a good environment for bringing the country's fourth-largest bank by assets to market.

What's more, Santander Mexico boasts some impressive headline numbers. Its $702-million profit in the first half of this year equates to a 20-per-cent return on equity – better than virtually all its peers and something most U.S. banks can only dream of. And the bank is growing, too, with loans up 22 per cent in June year on year – in part a function of low interest rates. Add to that its rarity value – Banorte is the only other publicly listed bank in the country, trading at the same multiple of book value despite lower returns.

But it's not all fun and games. Santander's growth relies on pushing more loans to Mexico's financially inexperienced population. Sure, the bank points to a 1.7-per-cent rate of non-performing loans in June, a slight down tick from 1.8 per cent a year earlier. But the rapid rise in new loans masks how many older loans are starting to go sour. And its credit card portfolio is already defaulting by almost three times as much – and rising.

Competition for customers is also fierce, both from local banks and deep-pocketed international rivals BBVA and Citigroup. That means there's a risk of cutting fees to win business. And slashing costs might not be easy: Santander Mexico's efficiency ratio is already just 35 per cent of income, the second best in the sector.

Combined, these could quickly become a drag on the bank's heady profits of the past couple of years. If so, that'll leave bullish investors shaking their horns.