In the last year, the Federal Reserve has tightened policy at the fastest pace in 45 years. The failure of SVB Financial in this context has triggered an investor mad dash to figure out whether there are other banks globally that aren’t wearing swimsuits.
While not immune to the ongoing stress, in our view most banks from the emerging world we cover have sizable buffers to weather the storm. Investors looking for direct exposure to emerging market financial institutions should consider focusing on the large, systemically important banks that are likely to receive government support in times of financial stress. We cannot rule out a flight-to-quality migration to the detriment of smaller financial institutions. Secondary market liquidity is also likely to dry down, more so in the case of securities issued by second-tier entities. In our experience, financial entities that find themselves under stress do not restructure but end up in liquidation.
Asia banks
Asian banks do own securities portfolios with unrealized losses as a result of the increase in bond yields. That said, exposure to mark-to-market losses is low. For one, on average, the held-to-maturity portfolio accounts for about a high-single-digit percentage of the overall assets of Asian banks, compared to mid-double-digit percentage for SVB Financial. The increases in Asian government bond yields since end-2021 have also been far smaller than in other markets. In China, for example, local bond yields barely rose during this period. In addition, Asian banks have a diversified deposit franchise. The region’s deposit trends over the past six months have also been stable and even increasing in some key markets. While Asia’s smaller banks may still face a risk of heightened deposit outflows, following the pandemic-driven asset quality fears in 2020 authorities have accumulated experience preventing such situations from becoming systemic.
Latin America banks
In our view, financial industry regulatory frameworks and supervisory standards in major Latin American economies under our coverage are strong. Sector concentration is adequate; the deposit base is broad and well diversified; and the asset-liability mismatch is low. Similar to Asia, available-for- sale securities held in balance sheets of large, systemically important banks covered by CIO are periodically and routinely marked-to-market. While asset quality in major banks has deteriorated in recent quarters in line with the current phase of the economic cycle, the increase in nonperforming loans is adequately covered by provisions for loans losses, in many cases well above 100%. In addition, capital ratios measured in accordance with Basel guidance are sound.
Middle East and Türkiye banks
Middle Eastern banks under CIO coverage are among the largest in their respective economies. They have solid domestic franchises, relatively sticky deposit bases, and sizable capitalization, and are likely to receive state support in case of need. We note that in S&P's view, the Gulf region banks that it rates are not very likely to require selling "meaningful volumes" of investment securities given their sound liquidity and funding and their high chances of state support if needed. For Türkiye, we are cautious on Turkish banks under our coverage due to a range of country-specific headwinds, including the fallout from the two major earthquakes earlier this year and the potential uncertainty over macroeconomic policies after the election in May.
Main contributors: Alejo Czerwonko, Donald McLauchlan, Tatiana Boroditskaya, Delwin Kurnia Limas, Xingchen Yu
Content is a product of the Chief Investment Office (CIO).
Full report - How well can emerging market banks weather the ongoing stress? 20 March, 2023.
