It's a perfect cocktail: the developed-world crisis rages for almost half a decade while emerging market growth outperforms. In this context, investors have been willing to pay through the nose for emerging market banking stocks in recent years – historically the easiest way to gain exposure to macroeconomic growth. But are there any banking bubbles appearing in these relative safe havens? Are some investors paying too much for safer exposure? By comparing emerging market banks, specifically those in the Bric countries, Citi analysts offer a top-down look at the data for investors to make up their own minds.
According to Citi, during the past year there has been a notable decline in Bric banks' market capitalization relative to GDP. The recent softening in economic growth – combined with credit-quality concerns – has helped to skim the froth out of valuations in banking stocks in China and Brazil especially, which were stretched in March 2010.
China had one of the largest banking sectors relative to GDP in 2009, with a bank market capitalization to GDP of c30%. Based on current values, however, China’s bank sector market capitalization to GDP has dropped to c18%. The other Bric economies have followed a similar pattern:
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| Source: Citi |
The debate surrounding whether there will be a hard landing there or not has affected the share price of banks:
| ... bank share price de-rating has been driven by numerous investor-concerns including (1) asset-quality fears, (2) slowing GDP growth, (3) interest rate liberalization and related NIM pressure, (4) political headwinds including fears that the government thinks banks are “over-earning” and (5) disintermediation and the growth in shadow banking. The actual banking earnings in China have moved largely in line with GDP in the past couple of years but despite this there has been an almost one-third decline in market capitalization relative to GDP. |
The decline in Bric banking market capitalization relative to GDP:
| "... is largely due to multiple de-rating. All four of the Brics banking systems have experienced a PE multiple contraction in the past couple of years. Chinese banks’ shares, for instance, have declined from trading at c10x 2010 earnings to 6x 2012E earnings. Other Bric banking systems have similarly de-rated with their PE multiples dropping from 2010 to 2012. The picture is more varied if we look at earnings-to-GDP trends: they are relatively stable for China and India, up materially for Russia (driven by Sberbank) and down marginally for Brazil. By contrast, among the current crop of the largest banking systems relative to GDP, Australia and Canada have had stable PE multiples and rising earnings/GDP.... ... The weak performance of Chinese and Brazilian bank shares has had a marked impact on the performance of regional bank-share aggregates: 2012 year-to-date, Latin America is the worst-performing region in the world, with Asia (ex Japan) only marginally ahead. The weak performance of Latin American bank shares ytd is driven by markets such as Brazil and Chile more than offsetting a very strong performance by the Mexican sector. Asia’s poor ytd bank stock performance is largely driven by the weakness of China offsetting the rebound in India. In contrast to the weak performance by many large emerging markets ytd, Australia is the second best-performing region in the world for bank shares, trailing only the US." |
Even with a recent sell-off, banking stocks in China have relatively high PE ratios, as well as EM counterparts Malaysia and Peru. Underscoring investor desire to pay up for exposure to non-crisis economies, the market capitalization of the listed banking sectors in Australia and Canada have jumped relative to these economies' GDP :
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| Source: Citi |
So, are there any reasonably priced banking sectors right now? Citi's conclusion:
| "Firstly, the developed markets of Australia and Canada that today have higher bank market capitalization-to-GDP ratios than the Brics and have also maintained their bank equity value relative to economic size relatively constant. Secondly, several of the previously smaller EM bank sectors have seen material increases in equity value, most notably Mexico (+4ppt to c15%, 2010-12) and Nigeria (+5ppt, 2010-12). The only other notable EM banking sector where equity values outpaced GDP growth was the Philippines (+1ppt to c14%, 2010-12). And finally... Japanese bank market capitalization is equivalent to c5% of GDP and Italy’s c4%." |
