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Banking On The Emerging World

At a time when the banking industry in much of the so-called "developed world" (Europe, North America, Japan/Korea) struggles to cope with tough regulatory requirements that end up in thousands of layoffs, balance sheet downsizing and refocusing on core activities, the financial sector is thriving in the emerging world.

There are common factors explaining this boom across the different emerging regions and specific factors related to each region.

First, let us look at the commonalities. Basically, we are talking here about the Macro outlook. We could easily elaborate on the argument made by Stephen King, HSBC's Chief Economist. Indeed, commenting the latest HSBC Emerging Markets Index (Q1 2012), Stephen said that the index :

the HSBC EMI underlines the relative immunity of emerging nations to the economic permafrost of the developed world. Emerging nations still have many years of economic "catch-up" ahead of them, suggesting that their growth rates - driven by continuous urbanisation alongside productivity gains linked to improved access to global capital - should remain significantly higher than in the west. They also have considerably more policy ammunition to deploy, including rate and reserve ratio cuts and, if necessary, fiscal stimulus.

Now let us turn to some specific factors :

1. In China and India, much of the banking sector is still controlled by the State and due to a lack of development of financial markets, banks still control the bulk of savings, which they can use to finance their lending activities with loan-to-deposits ratios that are among the world's highest. Cash-rich and supported by the authorities with limited foreign competitors (it is very difficult to compete against such giants as ICBC or Bank of China, or ICICI)

2. In Russia and in the Middle Eastern petrostates, the banks are also thriving on high commodity prices and the demand for financial services from these large oil&gas corporations as well as from the rest of the economy including households that are ramping up their portfolio of banking and non banking financial products (e.g. life insurance).

3. In South America, especially in Brazil and Argentina, commodities also play a key role but the booming manufacturing sector and growing middle class (in the case of Argentina, a recovering middle class) are also driving up the demand for banking services.

4. In Sub-saharian Africa, last but not least, there is a tremendous potential based on technological innovations such as mobile banking that allow the banks to overcome the lack of physical infrastructure. Africa is probably the most promising emerging region for the banking industry at the moment.

Now let us point to a few names you should definitely remember :

1. BTG Pascual is Brazil's largest investment bank. It has raised 3.7 billion reais ($1.9 billion) in an initial public offering (NYSEARCA:IPO) on April 24th that was said to be three times oversubscribed. BTG Pascual is owned by Brazilian billionaire, Andre Esteves (43), who has ambitions for BTG to become the dominant investment bank in all of Latin America.

2. Alfa Bank is Russia's first commercial bank that is not government-owned. Alfa Bank is part of Alfa Group a privately owned financial and industrial consortium, with interests in oil and gas production, commercial and investment banking, asset management, insurance, retail trade, telecommunications, mass media, water supply and disposal, as well as other industrial-trade and special-situation investments. With a regional reach and a modern management, Alfa Bank is definitively a rising star.

3. BMCE Bank, Morocco's second largest private lender, posted stronger net earnings growth in 2011 compared to 2010. BMCE Bank is controlled by Othman Benjelloun, one of Africa's most successful businessmen, who said recently that BMCE "aims to cover all African countries within 10 to 15 years, from the 21 countries where we are currently active, through our subsidiary Bank of Africa".

4. The two largest Turkish banks, Garanti Bank and Is Bank are also worth watching as they enjoy strong year-on-year profit growth and expand their activities both at the national and regional level.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.