Emerging market banks aren’t immune to the turmoil sweeping their Western peers. They are holding up better, though.
Shares in Singapore’s biggest bank, DBS Group Holdings (ticker: D05.Singapore), have held up even since March 8, when news of Silicon Valley Bank’s collapse catalyzed market calamity. Indian investor favorite HDFC Bank ( HDB ) is off 5%; Itau Unibanco Holding (ITUB), Brazil’s top private financier, is down 8%. That compares with a 10% selloff for BNP Paribas (BNP.France), the largest bank in the Europe Union, and 14% at Bank of America (BAC).
Distance from the crisis epicenter may explain part of this outperformance, but not all. Past shocks and endemic volatility have left emerging market financial sectors, on the whole, more consolidated, more firmly regulated, and more careful about matching assets to liabilities than the U.S. and Europe.
Large unbanked populations spell more growth potential, too. “We like emerging market banks a lot more than developed market banks,” says Richard Schmidt, global equity portfolio manager at Harding Loevner. “They’ve learned their lessons on maturity mismatches, and they can grow the old-fashioned way: by lending to individuals.”
The U.S. interest-rate hikes that famously eroded SVB’s bond assets are child’s play for Latin American houses like Itau or Mexico’s Grupo Financiero Banorte (GFNORTEO.Mexico). Brazil’s central bank has tightened rates by 12 percentage points over the past two years, Mexico’s by seven.
The banks avoid SVB’s fate with “more floating-rate assets and shorter duration loans,” Schmidt says. Some 60% of Banorte’s loan book, for instance, consists of credits that adjust every 30 days. Fixed-rate loans have an average term of five years.
Emerging market banking systems are compact. India’s 1.4 billion citizens are served by all of 34 licensed banks. The U.S. has more than 4,000. In Brazil, the top five banks hold more than 80% of all assets.
Consolidation yields two advantages when times get tough, says Conrad Saldanha, a senior emerging market portfolio manager at Neuberger Berman. All publicly listed banks have wide retail depositor bases, less fickle than the tech bros who panicked at SVB. And regulators can keep a sharper eye on them.
In India, for example, the central bank has to approve all board appointments. “Emerging market banks benefit from an older style of regulation,” echoes Samy Muaddi, portfolio manager for emerging market bonds at T. Rowe Price. “Capital adequacy has been in a healthy position for the past five or 10 years.”
Banking in China, the largest emerging market, is sui generis, not least because it’s dominated by state institutions that many investors steer clear of. Other countries can’t insulate themselves so well from the storm roiling global money centers.
Whatever the fundamentals, sentiment will turn against emerging markets if more banking dominoes topple in the West, Muaddi predicts. “If this gets bad enough, emerging markets will underperform,” he says. “It’s still the tail of capital markets.”
For now, Harding Loevner is holding positions in 15 emerging market banks, Schmidt says, led by HDFC, Banorte, Itau’s Brazilian rival Banco Bradesco (BBD), and Indonesia’s Bank Central Asia (BBCA.Indonesia).
Neuberger Berman is considering buying on the current dips. “We’ll be looking at opportunities in conservative institutions with a broad deposit base,” Saldanha says. Candidates include Itau, HDFC and its Indian competitor ICICI Bank (IBN).
Emerging markets as a haven from developed markets financial follies? It isn’t as strange as it sounds.
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