LONDON 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 customers.
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 privatize 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 capitalization 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 analyze the earnings of a bank," said Hoguet at State Street Advisors. "They are all good candidates for detailed security analysis."
(Additional reporting by Philip Baillie; Editing by Ruth Pitchford)