Analysts expect the firms’ income in the next 12 months to be 22% higher than that in the past 12 months
LONDON • A US$2 billion (RM7.83 billion) corruption scandal is rocking India’s banks. Russia has taken over some of its biggest private lenders, while Latvia’s No 3 bank has been shut down amid US money-laundering accusations. Turkish financiers are under attack from Erdoganomics and warning signs are flashing for a Chinese bank crisis.
Then, why have earnings estimates for developing-nation banks jumped to 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 the firms’ income in the next 12 months to be 22% higher than that in the past 12 months.
That seems to ignore the mounting stress on emerging-market (EM) banks: India is locking the stable after horses bolted as it struggles to punish loan defaulters who left the country. The Bank for International Settlements has identified China among economies most at risk of a banking crisis. Negative news flow from Russia and Latvia and Turkey shows no sign of abating.
Yet, that hasn’t stopped the banks index from rallying 10% this year. Strategists from Renaissance Capital to Newton Investment Management said EMs are so heterogeneous that idiosyncratic risks don’t alter the big picture. Many developing nations have a low credit penetration despite a surge in consumer demand. That means while some pockets of the banking sector suffer, others continue to prosper. The banking stocks have climbed 0.8% this week.
This is how money managers view some of the key markets:
“We see a big difference in the condition and outlook for state-owned banks versus the private banks,” said Sophia Whitbread, a portfolio manager at Newton Global EMs Fund in London.
“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.
“Our positioning in India is focused upon the consumer sector and very selectively within the private banking sector, where we like the affordable mortgage section, which has received significant policy support.”
“The Russian banking sector looks good, benefitting from recovering credit activity and a stabilising macro picture,” said 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, and Russia would have a safer, sounder and much more sustainable banking sector than it had five years ago. That would be beneficial for the economy and for the public.”
“China’s banking system is dominated by large state-owned banks,” Whitbread said.
“These banks have been used as tools to implement government policy, and have placed generation of returns for shareholders as a lower priority. Our investments in China are focused on areas of structural and thematic growth, where we see continued structural growth, largely independent of credit levels within the economy.”
“The reorganisation of the Kazakh banking sector is largely completed, with the Halyk-KKB deal done and the second programme, aimed at improving the capital of other banks, running at full speed,” Kouzmin said.
“This would remove one of the major drags on the Kazakh banking sector of the past 10 years — the significant amount of bad debt. However, the major underlying drag — a lack of quality demand for credit in national currency — still remains in place. De-dollarisation should also help to improve this in the next years, but this might take more time for the recovery of banking balance sheets.”
“Turkey is one of the fastest growing countries in the region and the focus of the government is still very much on economic growth,” said Wouter Van Over-felt, 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 sell-off. We are now slightly underweight but every time there is stress in the markets, we tend to increase our exposure to the Turkish financial sector.”
“Nigerian banks are very profitable, they pay reasonably more than the sovereign, which I think is relatively tight,” said Van Overfelt.
“People were worried about capital ratios and non-performing loans, but in general, the banks have relatively good capital ratios and non-performing loans have been relatively stable.” — Bloomberg