beyondbrics

When there’s a financial crisis, not many investors want to be long on banks. But is that true for all markets?

Bank shares around the world this year have moved pretty much in tandem, as hopes early in the year of a global recovery have given way to fears of a new recession driven by the eurozone crisis. Is there any glimmer of hope? And how does this compare to the dark days of 2008-09?

Although we are in what is termed a eurozone crisis, emerging market and developed market bank shares have this year moved more or less together, as the chart below shows – although the vulnerable banks of central and eastern Europe have seen their stocks underperform more than other regions.

Bank share prices rebased to 100 at Jan 1, 2008. Source: Thomson Reuters Datastream

Over 2011, DM banks are at 73 per cent of their January value. But EM banks aren’t much behind at 78 per cent. Breaking EM down into Asia ex-Japan, LatAm and eastern Europe, the percentage falls are, respectively 79, 78 and 70.

When the world went into financial crisis in 2008, bank shares plunged around the world as investors dumped their shares in the run for cover.

Bank share prices rebased to 100 at Jan 1, 2008. Source: Thomson Reuters Datastream

The low point for almost all banks was March 2009. But the recovery has been unequal – EM banks recovered more strongly in 2010 than DM banks, and the disparity has hardly closed up since. This reflects the quicker rebound from the crisis amongst the emerging economies – many of which avoided recession although their economies slowed along with the rest of the world.

But within emerging markets, it has been unequal too. The banks of Latin America and to an extent Asia have outperformed eastern Europe quite comfortably. The disparity this year is understandable, but it actually starts back in 2008-09 – a period of great uncertainty.

Bank share prices rebased to 100 at Jan 3, 2011. Source: Thomson Reuters Datastream

The current crisis is European in both origin and nature, which is reflected in the European bank share prices, and has been a concern for longer than just this year. If Greece or Italy default, the main banks to be hit will be west European, and the impact will be felt in eastern Europe too.

But the eurozone crisis that has lurched on all year is not confined to Europe. As wholesale financing from Europe and elsewhere dries up, this could hit the supply of credit to other regions and translate into lower domestic lending in emerging markets, including in Asia. As Erik Lueth, senior regional economist for Asia at RBS wrote in a note on Wednesday:

The situation becomes more pressing considering that loan-deposit ratios have increased in several countries…  Korea suffers from a combination of a high share of foreign currency borrowings and a high loan-deposit ratio. Based on this combination, risks are also high in India, Indonesia and Malaysia. Effectively, a withdrawal of foreign liquidity could result in a significant credit squeeze in these countries.

A credit squeeze is not good news for banks, or investors in banking stocks.

However, it’s not all grim news.  As Simon Ho, banks analyst at Citi pointed out: “When things are uncertain globally, investors hide in smaller countries where there is less liquidity – Indonesia, Philippines, Thailand (pre-floods). This is true in other regions as well – think of Peru and Argentina vs Brazil.”

This is because the bigger EMs have high inflation to contend with, as well as other problems. “Will there be a hard landing in China? Is growth sustainable? In India, there have been a lot of rate hikes, and that’s starting to bite,” added Ho. There are also concerns in both counties over non-performing loans.

That adds up to Chinese and Indian banks underperforming in 2011 – and the same is true in Brazil. The regional picture is muddied by the bigger countries, while banks in smaller countries may be holding up better.

But overall, the picture is not a pretty one. As Michael Kurtz, chief Asia equity strategist at Nomura put it in a note on Thursday: “Asia has remained highly sensitive to the daily headlines emanating from [Europe]. The tail risk is indeed wagging the dog.”

Related reading:
Serbian banks: the end is not near, beyondbrics
Brazilian banks: risky business? beyondbrics
HSBC chief warns of Asia credit crunch, FT
Eastern Europe has most to fear from banks’ retreat, FT