Emerging market banks, buoyed by robust domestic growth and stress-tested by their own crises a decade ago, could offer investors a viable alternative to Western banks facing headwinds.
-- EM Loan growth, loan-deposit ratios above developed banks
-- Emerging banks less leveraged, more traditional
Lenders in countries ranging from Brazil to Indonesia are arguably in better shape than their western countertparts, and signs are that investors may increasingly look to them to fill their allocations for financials.
"Most EM banks are unlikely to see the stresses you see in Europe and essentially that is because they saw them already in the past," says Gabriel Wallach, chief investment officer for BNP Paribas' 48-billion-euro emerging equity portfolio.
"If you are a global investor you did well if you were overweight EM financials during the crisis. I would continue to overweight them now, relative to developed market banks, because of their capital ratios and growth prospects," Wallach added.
Russia's biggest lender Sberbank, for example, trades at a 2011 price-book of 1.6, with 2011 return-on-equity forecast at 21.5 percent, according to estimates by UBS.
Compare that with European banks. They may be trading much cheaper at an average P/B of 0.9 but ROE is also much lower at 11.4 percent. Spanish bank Santander, for example, has a 2011 P/B of 1.0 and ROE of 11.7 percent.
Western banks have posted forecast-beating results and passed sector-wide stress tests, but must contend with more regulatory scrutiny, anaemic economies and the need to refinance maturing debt.
Emerging banks, on the other hand, are poised to gain from fast economic growth in developing countries. High savings rates and rising bank penetration mean many big EM banks are seeing loans and deposits growing a sharp 15-20 percent a year.
And EM banks' loan-deposit ratios are a healthy 70-80 percent, meaning they can easily fund loans from their deposits.
European banks' loan growth is seen around 5 percent this year but because of the population's low savings level, their loan-to-deposit ratios are a whopping 130 percent.
Investors are taking note.
The MSCI emerging financials index is at a two-year high, up 3 percent in 2010, while global financials are down 2 percent on the year.
UBS analysts recommend staying underweight European banks and told clients in a recent note: "(We) prefer banks in emerging markets...that are better capitalised with strong deposit platforms and superior growth prospects."
They predict emerging banks' return on equity - profits generated on shareholders' investments - at almost 20 percent by 2012, double the ROE forecast for developed world banks.
Their top EM picks included Sberbank, Turkish Akbank, Banco do Brasil, India's Punjab National Bank and also HSBC which derives much of its revenue from the developing world.
BNP's Wallach picked Indian, Indonesian and Brazilian banks as his favourites, citing "super growth and high returns." To be sure, not all emerging banks look great - Hungarian banks, for instance, are unlikely to be on anyone's best-buy lists due to their overexposure to foreign currency loans.
South African and Korean banks' loans outstrip deposits, just as in Europe. Bad loans at state-run Chinese banks may rise after the recent lending spurt as the economy slows.
But on most metrics, whether loans, deposit growth, return on equity, or debt levels, emerging banks look attractive.
Developing world banks for the most part function like traditional banks, taking deposits and using the cash to lend. US and European banks rely more than emerging market banks do on wholesale borrowing to raise funds. They must soon start raising cash to repay the debt. Moody's says $5 trillion in bank debt will mature in 2010-2012 - $3 trillion of that in Europe - at a time when euro zone and US governments will also be rolling over vast quantities of bonds.
"You do not see the same kind of leverage of the system (in emerging banks) which left banks vulnerable to needing funds from other banks," said Phil Poole, head of macro and investment strategy at HSBC Asset Management in London.
A legacy of past financial crises and banking sector collapses is that emerging market bank capital adequacy ratios - the amount of capital deemed necessary to absorb sudden shocks - tend to be well above the 6 percent stipulated in the recent European stress tests.
Hungarian bank OTP came in at 16.2 percent, for example, and in countries such as Brazil, capital cushions are up to 18 percent.
"Having been burnt 10 years back, few emerging market banks have been affected (by the crisis) this time. EM regulators have operated in environments where they have always assumed stress might come," says James Syme, who runs $1.2 billion in emerging equities at Barings and is overweight the banking sector.
Syme names Indonesia, Turkey and Brazil as examples of countries where banks underwent a total transformation since the devastating emerging market crises between 1997 and 2002.
These relatively higher capital ratios should give emerging banks an edge when new sector regulations come in as the Basel III global banking regulations expected by end-2010, will almost certainly force banks to substantially raise capital buffers.