Despite their reputation as risky bets, many emerging-market banks--along with their countries' economies in general--fared much better during the last two years than their more "developed" cousins. Even within the developed world, there are dramatic differences between the performance of banks that took on too much risk and those that did not, with some banks having nearly destroyed their businesses and others winning market share as their rivals struggle. We think the significant divergence among international banks during the last two years will extend into the recovery, and we expect to see stark contrasts between the winners and the losers in both the speed and strength of their recoveries.
After they reported third-quarter earnings, the three Brazilian banks we cover--Itau Unibanco
), Banco Bradesco (BBD
), and Banco Santander Brasil
) --all displayed a common theme: The worst of the crisis may be over in Brazil. Together with Banco do Brasil, a government-controlled bank, they dominate Brazil's banking market. Although we think there are some convincing data points to support this optimism, we doubt that there will be a sharp recovery--especially with regard to credit quality.
Although nonperforming loans (NPL) kept climbing across the board, they did so at a slower clip. The pace at which net new NPLs are forming has been constantly declining since early 2009. Hence, we think that in the near term we should start seeing NPL balances actually declining. Another heartening indicator was the fall in early delinquencies--loans overdue between 30 and 60 days. That said, though it is commonplace for banks in emerging markets to have high bad-loan balances that are compensated by fat interest margins, we think NPLs of around 7% or more are no laughing matter. To be sure, even though nonperforming loans may start to trend down, actual loan losses should remain higher than usual for some time, which will pressure banks' bottom line, in our view.
Notwithstanding, Itau's and Bradesco's profitability has shown signs of resilience, with returns on equity staying around 20%. For these two, we think that after a couple of quarters or so, we should start seeing returns creeping back to their former levels of around 25%. The laggard, Santander, still has to cope with higher bad-loan balances and provisions to replenish its reserves which will prevent it from enjoying as speedy a recovery as its competitors. Further, it has by far the fattest equity base, which quells its returns. Nonetheless, even comparing returns on assets, it is way behind.
A significant portion of Brazil's economic recovery--which arguably started in the second quarter--is because of the country's domestic demand, particularly from individuals. In our opinion, a growing middle-income class that consistently calls for more financial products will continue to provide fertile grounds for banks to profitably expand.
The results of Switzerland's largest two banks, UBS
) and Credit Suisse
), continued to demonstrate the divergent impact of the financial crisis. Credit Suisse, which stayed away from accepting government support, has been profitable every quarter so far in 2009, even earning an return on equity of around 25% in the third quarter, as it benefited from its client-focused business model and solid reputation. So far this year, it has garnered net new asset inflows of more than CHF 30 billion, demonstrating its clients' faith in its solid private bank. UBS, on the other had, has steadily reported losses, losing some CHF 4 billion thus far in 2009, as it suffered continued write-downs on its trading assets and a shrinking business. The damage done to its reputation, both by losses at its investment bank and numerous scandals at its private bank, shows up in its net new assets. In sharp contrast to Credit Suisse, UBS has so far shouldered net asset outflows of more than CHF 90 billion in 2009.