In an effort to expand its presence in Mexico, Western Union Co. (WU - Analyst Report) has signed an agreement with Banco Ahorro Famsa, one of the most renowned banking institutions in the region. Per the agreement, Western Union will offer its money transfer service across 300 Banco Ahorro Famsa locations in Mexico from November this year.
Banco Ahorro Famsa will also offer its service Vigo, and Orlandi in the region.
Banco Ahorro Famsa’s long history of approximately 4 decades of operations in Mexico encouraged Western Union to enter the deal with the former. The region accounts for around 6% of Western Union’s revenue. It ranks among one of the major receive locations.
Receive locations are the ones with large inbound remittance markets. The company has been operating in the Mexico corridor for more than a century. Although, Mexico accounts for a significant amount of the company’s annual remittance volumes, in the past three years it exhibited a lackluster performance.
Revenues in 2010 were flat against transaction growth of 2%. Recessionary conditions in 2009 resulted in a 12% transaction decline and a consequent 15% decline in revenues. Nevertheless, with a gradual improvement in the economy, the region showed a 2% revenue growth in 2011, with transaction volumes remaining unchanged relative to 2010.
Western Union is evolving its business model and practices pertaining to Mexico. The company is in the process of renewing agent agreements and changing the way it operates in the region, including compliance-related changes. As a result of these factors, management expects its Mexico business to decline in the near term, as the company modifies the business. During the second quarter, Mexico-based revenue was down 7% and transactions were down 5% year over year.
Barring the above factors, we note that Mexico qualifies as one of the top four inbound remittance countries in the world and it is anticipated that the remittance market will continue to recover as the global economy improves.
Mexico’s vast remittance market has also dragged Western Union’s close peer Moneygram International, Inc
. (MGI - Analyst Report
). The company offers its services in the Mexican market in partnership with Visa
(V - Analyst Report
), which allows consumers to visit any of the 35,000 MoneyGram locations in the U.S. to send funds to eligible Visa accounts in Mexico.
Western Union currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on its shares.