EM banks: the good, the bad and the ugly

LONDON: A $2-billion corruption scandal is rocking India’s banks. Russia has taken over some of its biggest private lenders, while Latvia’s third-ranked bank has been closed amid US money-laundering accusations. Turkish financiers are under attack from Erdoganomics and warning signs are flashing for a Chinese bank crisis.

So why are earnings estimates at a record? Analysts have increased their weighted average profit forecast for the MSCI Emerging Markets Banks Index by 6.5% this year, taking it above a previous high in 2013. In other words, they expect income in the next 12 months to be 22% higher than in the past 12 months.

That seems to ignore some mounting stresses: India is struggling to punish loan defaulters who fled the country. The Bank for International Settlements sees China among economies most at risk of a banking crisis. Negative news from Russia, Latvia and Turkey shows no sign of abating.

Yet, that hasn’t stopped the banking index from rallying 10% this year. Strategists say emerging markets are so heterogeneous that idiosyncratic risks don’t alter the big picture. Many developing nations have low credit penetration amid a surge in consumer demand. So while some pockets of the banking sector suffer, others prosper. This is how money managers view some key markets:

India: “For the state banks, whereas the recent recapitalisation was helpful, we don’t believe it was enough to do more than fill a hole, and will not solve the lack of growth in credit,” says Sophia Whitbread, a portfolio manager at Newton Global Emerging Markets Fund in London. She is focusing on private-sector banks and the consumer finance sector.

China: Chinese state-owned banks are tools to carry out government policy and returns for shareholders are a low priority, says Whitbread. “Our investments in China are focused on areas ... where we see continued structural growth, largely independent of credit levels.”

Russia: “The Russian banking sector looks good, benefiting from recovering credit activity and a stabilising macro picture,” says Oleg Kouzmin, an economist at Renaissance in Moscow. “We would ultimately like to see one or a few more bailouts. This means the lengthy job the Russian central bank was doing to clean up the banking sector will be coming to an end.”

Turkey: “Turkey is one of the fastest growing countries in the region and the focus of the government is still very much on economic growth,” says Wouter Van Overfelt, Zurich-based senior portfolio manager at Vontobel Asset Management. “We have to see how sustainable that is. Every time the currency sells off, companies come under a bit of stress but then the government takes the necessary action to prevent a complete selloff.”