By Carolyn Cohn
LONDON, April 28 The euro zone debt crisis has
made investors wary of western European bank stocks and they are
seeking more value and less risk in banks in central Europe,
Russia, Turkey and even Africa.
The problems of western Europe's banking sector, from losses
on Greek debt to a bailout for Cyprus that hit big depositors or
the governance scandal at Italy's Monte dei Paschi,
have undermined old assumptions about relative stability.
Central and eastern Europe in particular may require careful
stock picking as the troubles of the euro zone, the region's
main export market, pile financial pressures onto bank
In parts of central Europe, government efforts to hold down
debt have helped tip economies into recession and foreign
currency mortgages have put an extra drag on spending.
But the MSCI emerging Europe financials index
, which includes banks in Russia and Turkey, has
so far held on to the 40 percent gains it made last year,
outperforming MSCI's overall stock index for the
region which has slid more than 5 percent so far this year.
By contrast, major European banking stocks have
underperformed benchmark European stocks this year.
In some emerging economies, "banks are in many cases in a
stronger position than western European banks," said John Lomax,
head of global emerging equities at HSBC. "Domestic demand has
held up, loan growth has held up."
The International Monetary Fund noted risks including rising
bad debts but said on Friday that for the five largest banking
groups, business in eastern Europe was substantially more
profitable than in the West.
Slovenia, a euro zone member that is still classified as a
frontier market, is a notable exception: the only ex-Communist
country in Europe that did not privatise its major banks, it is
now struggling to manage their bad debts and avert a bailout.
But investors say banks in countries such as Turkey have
already gone through crisis and reform, making them safer bets.
Investors say it's always possible to find attractive
options on local emerging market exchanges, because these tend
to contain large numbers of financial services stocks.
"In a country you may have 20 banks but only three good
ones, (so) you can avoid all the risks," said Daniel Broby,
chief investment officer at frontier fund manager Silk Invest,
which invests in countries including Turkey, Kazakhstan, the
Gulf and sub-Saharan Africa.
Developed European banks have a leverage ratio based on
assets to equity of over 20 times, compared with 6-8 times for
some of the stronger banks in emerging Europe, investors say,
while valuations in emerging markets tend to be cheap because of
low liquidity or political risk.
Picks include Russia's Sberbank, which has been
trading at a cheap 1.1 times price to book but with a return on
equity of 24 percent, and Turkey's Halkbank with a
price to book at 1.5 times yet ROE of 26 percent.
Hungary's OTP offers lower ROE of 8 percent but a
price to book of less than 1. For Nigeria's Zenith, the
measures are 24 percent and 1.2 times respectively.
By comparison, Banco Santander has a low price to
book ratio but ROE of only 7 percent, while Societe Generale
has an ROE of 1 percent, according to Reuters data.
Despite economic slowdown or recession in much of central
and eastern Europe - plus political risks, such as Hungary's
levies on banks - investors say many banks in the region compare
well on standard performance measures and are tapping economies
with scope to grow faster than those further west.
"You have much better levels of capitalisation than European
banks, and often much better liquidity positions," said Thomas
Wilson, fund manager at Schroders, who is overweight financials
in his $1 billion emerging Europe fund.
Globally, emerging market banks are enjoying a return on
equity of 17-20 percent, above the average for emerging market
companies as a whole, analysts say.
"Things we take for granted, like mortgages, car loans, are
a new phenomenon in many new emerging markets," said George
Hoguet, global investment strategist at State Street Global
Advisors. "There is tremendous demand."
Growth inevitably brings risks of bad debts. UBS analysts
say non-performing loans in emerging market banks are likely to
rise this year for the first time since 2009, with risks in
Europe, Middle East and Africa including an expansion into
consumer loans, particularly in Russia.
And some of the governance issues in western Europe are a
reminder that the banking sector is not always transparent.
"It's hard to analyse the earnings of a bank," said Hoguet
at State Street Advisors. "They are all good candidates for
detailed security analysis."