Outlook For Emerging Market Banks

Jun. 01, 2022 7:47 PM ETAKBTY, BBD, BCH, CIB, CIBEY, KSA, NGE, PAK, EWZ, VIV4 Comments
Dylan Waller profile picture
Dylan Waller


  • Emerging market banks will likely be among some of the most interesting contrarian buys within emerging markets, as investors will likely shift to safer consumer themed stocks.
  • Economic and political sentiment will continue to be poor among emerging markets, so stocks have certainly not reached a final bottom.
  • I am monitoring banks in Brazil and other emerging markets.

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Emerging Market Banks the Best Vehicle?

Emerging market banks could be one of the best ways to gain exposure to emerging market recovery during the next decade.

There are not many sectors within emerging markets that stand out in the current economic environment. Consumer or telecom companies will struggle with the high inflationary environment and subsequent decline in consumer sentiment. Healthcare ADRs are likely the safest, but options are limited or nonexistent when limited to smaller emerging markets. Unlike the previous inflationary environment last decade, which was spearheaded by booming demand for commodities from China, this commodity rally is being driven primarily by supply chain disruptions and geopolitical tensions.

Emerging markets are also at comparatively higher risks (inflation/sovereign debt default), so a comparison to post-2008 has limited relevance. However, emerging market banks will likely be among some of the most interesting contrarian buys within emerging markets, as investors will likely shift to safer consumer-themed stocks.

Brazil Example: Banking Underperforms

I will use Brazil as an example, given that this market has a solid selection of multiple ADRs operating in different industries. This graph compared the performance of a Brazilian bank and telecom company to the performance of the iShares MSCI Brazil ETF (EWZ).

VIv outperform

On a long-term basis, all three securities had a 23-37% decline during a 10-year period. What is interesting to note is that Telefonica Brasil S.A. (VIV) was a substantial outperformer during the past year and is likely the safest stock in this economic environment. Meanwhile, Banco Bradesco's (BBD) performance was in line with the ETF, although it is clear to see that it is positioned to outperform during a bull run.

There will likely be a period during the next two quarters where banks slightly underperform the ETF due to concerns regarding NPLs and credit growth. Some of these dips may be solid buying opportunities. I will provide a list of banking ADRs later, but the good news is that most countries have one or more banking ADRs that you can choose in lieu of an ETF. The two main exceptions include Saudi Arabia, Nigeria, and Pakistan. Finding solid banking, or even consumer stocks can sometimes be a good move, given that ETFs can sometimes have tracking errors. Although expense ratios are minimal (60bps or less), it can be good to avoid these.

Non-Performing Loans

I have read through various quarterly reports from emerging market banks, and it is clear that NPLs will likely continue to increase during the upcoming quarters. Non-performing loans are slowly on the rise, notably in Pakistan (7.9%). Global NPLs have risen as high as 5-7% on average between 2009-2013. Notably, Chile has been a stand-out emerging market, given that NPLs are still near a 10-year low.

Interest Rate Hikes and Emerging Market Banks

As the Federal Reserve continues to raise interest rates, it is key to note the following when considering investing in emerging market banks.

Capital Exiting Emerging Markets: As U.S. yields increase and global geopolitical risks rise, emerging markets will be increasingly viewed as risky assets. Stocks from all sectors will likely continue to suffer from capital flight. Emerging market portfolio flows stood at -$4 billion during April 2022, which was driven by equities (-$9.5 billion). However, lower valuations may eventually lead to more capital targeting emerging market equities, especially as emerging market debt is viewed as increasingly risky and not worth the relatively lower yield. Many smaller emerging markets and frontier markets offer a dividend yield that exceeds the current yield of emerging market debt (circa 5%).

Nigeria 6.9% dividend yield
Pakistan 6.4% dividend yield
Romania 6.7% dividend yield

Source: MSCI as of April 30, 2022

Benefits in EMs: Banks in emerging markets are all following suit with interest rate hikes, which can help to increase banks' NIM (net interest margin). However, the combination of declined credit growth and domestic macroeconomic risks may cause more banks to be prudent with their growth strategies. Banks that grow at a fast pace will also likely have issues with rising NPLs, which would hurt profitability.

Russia's Impact is Somewhat Limited: While certain countries such as Turkey are widely vulnerable to Russia’s economic conditions, most countries have somewhat limited exposure. The bigger risk is the widespread economic downturn that will occur due to the heightened commodity price environment, which was already occurring prior to 2022. Net commodity importers may face issues and emerging market consumers will face harsher economic conditions. I plan to invest in some of these commodity importing countries during 2023 when stocks begin to enter a bottoming out phase.



So in general, it seems best to focus on countries with extremely low public/external debt, which also have favorable macroeconomic prospects and limited political risks. Commodity exporting countries, mainly Latin American countries, may be able to perform well in this environment, although this entails being exposed to stronger political risk relative to other regional markets such as Southeast Asia. However, equities in certain countries that do not meet all of these criteria are trading at extremely distressed levels and could be considered contrarian long-term plays. As interest rates continue to rise, banks with prudent management will likely be able to successfully navigate this decade and will likely offer returns that exceed the benchmark index.


Benchmark Interest Rate















Source: Trading Economics

Emerging markets have had to hike rates aggressively because of soaring food and energy inflation. As mentioned previously, this is mostly negative for banks because the combination of the macro and political risk in this environment easily outweighs the benefits banks receive from making loans at a higher rate. Furthermore, countries that import commodities are extremely vulnerable as well. Sentiment for equity markets in these countries may likely experience a downturn, while commodity exporters may experience limited only limited benefits as global growth is still at an uncomfortable low during this cycle.

Countries that have a high % of external debt will face additional risks if they have a large amount of USD debt. For example, Sri Lanka defaulted on its debt for the first time in history recently. Yet another appeal of certain Latin American economies includes the low levels of public debt, as seen in countries such as Chile. However, the greater risk is the stability of the country's currency, as even relatively low debt levels can be a substantial risk if the currency depreciates substantially (i.e., over half of Turkey's debt is external debt)


Public Debt % of GDP















Themes to Monitor

Below are some of the main emerging market banks on my watch list.

Latin America

Select banks in Latin America are very appealing for a large number of reasons. The three main countries that I follow, including Brazil, Chile, and Colombia, are all well-positioned to benefit from a rise in commodity prices. Brazil has a more diversified export mix, while Chile and Colombia offer exposure to copper and oil respectively. Banks in Colombia have been drastically outperforming, largely due to the surge in oil prices and partially because of the political risk associated with Chile and Brazil, which led to poor stock market performance. The three banks below trade in Chile, Colombia, and Brazil:

Bancolombia S.A. (CIB): Colombian bank that has returned around 50% in the past year. Banks in Colombia are poised to benefit from rising oil prices.

Banco de Chile (BCH): A Chilean bank that has mainly underperformed due to political risks that have occurred since 2019.

Bank Bradesco: One of the largest private banks in Brazil, which has underperformed both Chile and Colombia.


Chile and Brazil both look the most interesting here moving forward. Banks in Chile have historically had favorable performance and can be considered relatively safe. Key credit concerns that have emerged in Chile from 2019-2020 include the economic impact of Covid-19, rising social unrest, and the increase in Chile's debt levels since 2010 (although these are still low relative to emerging market peers).

Although Chilean banks performed extremely well post-2008, reaching peaks in 2012-2013 and 2018 (after commodity prices slumped), this cycle may be different for several reasons. Namely, political risk in Chile has increased, and the forces driving the copper bull market are very different this time, as strong China/emerging market demand has not been the catalyst for the price increase.

I have covered Banco Bradesco as well, and think this stock could outperform Brazil ETFs in the long run. However, this bank will likely face increased credit risk these coming quarters, and Brazil is holding elections this October.

Turkey and Egypt

Turkey and Egypt have both been on my radar, but I am only considering initiating a position in Egypt this year at the right price. Both are extremely vulnerable to the risks associated with food inflation and heavily rely on Russia for imports.

Akbank T.A.S. (OTCQX:AKBTY): Turkey's 7th largest bank and 4th largest lender.

Commercial International Bank (Egypt) S.A.E (OTCQX:CIBEY): One of Egypt's largest banks.


Banks in Turkey and Egypt have experienced major setbacks following Covid-19. Egypt was actually on track for the beginning of a bull market, following its stellar performance in 2019. However, Egypt's economy struggled after 2020, as Egypt is heavily reliant on tourism. After two years of declined growth, Egypt has now had to request assistance from the IMF as the country is struggling with high levels of debt and rising inflation. It will likely take years for Egypt to experience a bull market, as seen from examining the equity market's response to the 2016 IMF bailout and subsequent economic improvements. 2018-2019 ended up being better years for Egypt's economy/stock market, while investors remained more skeptical during 2016-2017.

Saudi Arabia, Nigeria, and Pakistan

Saudi Arabia, Nigeria, and Pakistan are all on my radar, but I have only initiated a small position in Nigeria.

Nigeria ETF

Notably, the Global X MSCI Nigeria ETF (NGE) offers strong exposure to banks relative to other ETFs. Around 47% of the ETF's assets are invested in Nigerian banks, which is extremely intriguing because of the relatively low valuation. This is also one of the main reasons why Nigeria is so cheap relative to other frontier markets, and this fact should be kept in mind when making relative comparisons (i.e., other frontier markets have a lower weighting, and even MSCI Nigeria only has a 28% financials sector weight).


Saudi Arabia ETF

While I think there are certainly much better ways to play an oil bull market, it is interesting to note that Saudi Arabia has been a massive outperformer in the past year. The iShares MSCI Saudi Arabia ETF (KSA) has already doubled from its 2020 Covid lows. Nearly half of the assets of this ETF include banks, which is relatively high. Notably, Saudi Arabia's economy grew by 9.6% during Q1 2022, and it will likely deliver stellar growth during 2022 and 2023.

Pakistan ETF


I am waiting for news regarding Pakistan's ability to secure debt from other countries, as it did in 2018, but for now, it is worth noting the performance of Pakistan's stock market during the past 5-10 years. The Global X MSCI Pakistan ETF (PAK) is down considerably since its 2016 launch.


Emerging markets will be a very intriguing long-term investment this decade, and I plan to likely have stronger exposure to emerging markets in 2023-2024. Investing in emerging market banks may be a solid long-term investment, as these stocks are likely to be more vulnerable this year, but may outperform the broader index later when things start to correct. I will likely slowly initiate positions in these countries, excluding Saudi Arabia, during 2023 and 2022 in very select cases. My biggest fear is a potential wave of sovereign debt defaults in emerging markets.

Either way, there are not too many reasons to be extremely excited about emerging markets this year. This is not to mention other factors unrelated to emerging market countries (i.e., Fed QT), which could negatively impact all equity markets.

Nigeria: I am currently long Global X MSCI Nigeria ETF purely as a speculative way to gain exposure to higher oil prices. Nigerian equities, especially banks, are also extremely cheap relative to other frontier markets.



Brazil: Banco Bradesco is on my watchlist, and I will likely accumulate it before the elections in October/after additional tapering from the Fed.

Watchlist: The political landscape in Latin America, namely Chile and Peru, is too complex at the moment so I am waiting for more clarity. I also think that Akbank and Commercial International Bank (Egypt) S.A.E. could be interesting distressed buys later when there is more clarity regarding Egypt and Turkey.

This article was written by

Dylan Waller profile picture
I am interested in frontier/emerging stock markets and other international markets ( ie. Japan/Korea).  My articles will primarily focus on stocks I am monitoring now based on quality of management/emerging market exposure/valuation.

Disclosure: I/we have a beneficial long position in the shares of NGE either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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