The Euromoney guide to emerging-market banks
When staff at a Brazilian bank switch on their computers in the morning, their screens are filled with a panoramic view of a tropical beach. A prompt in one corner asks: “Where would you rather be?” After fighting their way through São Paulo’s notoriously bad traffic to face the tough banking day ahead, the answer would seem self-evident. It’s meant to be. The unwritten message is: work hard, make money and you could soon be a wealthy retiree living in paradise.
No doubt bankers everywhere harbour such dreams. Some, however, may be able to speed up their emigration by landing jobs with fast-growing banks in places such as Trinidad and Tobago and the Dominican Republic in the Caribbean or in Malta in the Mediterranean.
While volatility is rocking major emerging markets such as Brazil, Indonesia and Russia, the latest Euromoney emerging market bank (Emba) bank ratings gives surprisingly high scores to banks in these smaller countries.
The image of the Caribbean as a place to launder drug money while the regulators look the other way is challenged. The reality in some of the islands is different. They have strong banks with dominant market positions undisturbed by foreign competition, but run by progressive management that has resisted the temptation to lapse into complacency. The banks operate under tight regulation born out of past crises. It’s a rare combination found in only a few parts of the world; most also blessed with natural beauty and sunny climes (hurricanes notwithstanding).
The story behind Banco Popular Dominicano, for example (it came sixth out of 350 banks in the ranking and just missed a triple-alpha rating) is of a highly profitable and well capitalized bank with a large market share, operating under solid regulations, in an economy dependent on tourism from the US and Europe and unaffected by the emerging markets’ crisis. There is little competition around and the bank is not heavily involved in derivatives.
The Royal Bank of Trinidad and Tobago which comes 10th also enjoys a privileged position. Together with Republic Bank, which comes 35th, it is one of the two banks which control over 50% of banking assets in their country. But Trinidad’s top banks are no slouches. Royal has increased net profits by 85% in three and a half years at the same time as buying five overseas banks. Three percent of the annual wages bill is devoted to staff development and the bank has a comprehensive Y2K-compliance programme.
Another island, another bank
While these Caribbean banks are private-sector showcases, Mid-Med Bank of Malta which comes 14th in the survey illustrates that government ownership (the state owns 67%) is no barrier to achievement. Mid-Med Bank and Bank of Valletta (25% state owned) account for more than 90% of total deposits. But apart from appointing the chairmen and some directors, the Maltese government does not interfere in the banks’ operations. Customer services have been modernized and the regulations have been brought into line with those of the European Union.
Every survey must have both winners and losers. Predictably, in this year’s Emba ratings Asian and Russian banks have tumbled, although Singaporean and Taiwanese institutions are exceptions. Singaporean banks, which were not included last time, have done well, with United Overseas Bank (UOB) taking top position. But analysts see storm clouds on the way for Singaporean banks given regional turmoil and Malaysia’s introduction of capital controls. Taiwanese banks are also unlikely to remain immune from the Asian crisis but Shanghai Commerce and Savings Bank, which came first last year, has again done well, coming second.
While the Philippines economy has not taken the knocks of Thailand and Indonesia, its banks have been pushed well down the table. Last year two Filipino banks were in the top 20. This year there are none. Languishing in the lower half of the table are Thai and Indonesian banks, some of which are not expected to recover in their present form. Russian banks are similarly afflicted.
To get the best out of the table, it’s important to understand how it was put together. The survey is carried out using a mathematical formula devised by credit analysts at Deutsche Bank in London. The formula consists of key variables such as the cost-income ratio, return on average assets, asset to loan growth, levels of non-performing loans, capital strength, disclosure, political risk and inflation. Only banks with assets over $1 billion and filing 1997 data have been included in this year’s survey.
The formula was originally tested for its correlation with Moody’s financial strength ratings which measure a bank’s intrinsic safety and soundness without taking account of whether the government or a bank’s shareholders would rescue it in times of crisis. A standard rating agency analysis would see these last items as critical to provide a complete picture. And indeed they are. A rating agency also carries out extensive field research on the bank.
But the aim of the Emba desktop approach to rating is to strip out the external variables and compare banks with each other on the basis of the numbers, regardless of their location or the depth of their owners’ pockets. Nor does the formula take account of other qualitative factors such as a bank’s franchise, its strategy and its management quality.
The result is a list of banks ranked by the bare essentials and in the table is a Euromoney financial strength rating (the results of using our formula expressed in similar terms to Moody’s financial strength ratings). In the left column is the Emba rating, which is our own system for turning the numbers produced by the formula into an easier reference code using the Greek alphabet (see methodology).
Young, lean and aggressive
The banks that do well under this system tend to be newer, often smaller, private banks that don’t carry the baggage of the older, bigger, often state-owned, banks burdened with policy loans or bad assets from past crises. They are likely to be the most aggressive in pursuing new business, yet conservative in their use of capital and provisioning.
The survey has two major uses it throws up names of young and exciting banks that many in the industry have not heard of, and it gives a rudimentary credit guide at the press of a button. What it does not do is replace the credit analyst of the rating agency, or safely predict which banks could survive a wider breakdown or total system failure. As was illustrated by last year’s Asia crisis, the rating agencies themselves with all their manpower and resources struggle to plot this accurately.
Also, the Emba system is only as good as the quality of the data the banks provide which is variable and lags behind current events. The data quality also depends on local standards of disclosure and enforcement.
To remove anomalies and to better understand the results we have asked analysts to comment on the findings for the major countries. In some cases where the financial system is undergoing rapid change, such as in South Korea, Emba fails to provide an accurate gauge and these banks have been removed from the list. But, in the main, we have found interesting explanations for the results.
The strong showing of banks from the Dominican Republic, for example, reflects the tight regulation of the country’s banking system: loans past due for more than 60 days are classified (90 days is the international standard). What is more, Dominican banks are a model for the economy as a whole. “The banks are more developed than the economy and act as a teacher to the whole market,” says Agatha Pontiki, an analyst with Thomson BankWatch. “All the top five private banks are well managed but the largest, Banco Popular Dominicano, shows up best of all.”
Headquartered in Santo Domingo, Banco Popular Dominicano (BPD) is predominantly a corporate bank though retail and electronic banking are expected to gain in importance in future. The bank was founded in August 1963 as the country’s first indigenous private commercial bank. Among the initial shareholders was the Banco Popular de Puerto Rico which provided technical help. The bank’s profitability record is good but return on assets has fallen from 2.7% in 1996 to 1.8% in the first half of 1997 (with return on equity of 21.8%) as a result of restructuring costs since the bank’s holding company Grupo Financiero Popular merged its development and mortgage banks with BPD to form a multiple bank three years ago.
One great advantage Dominican banks have is a lack of competition. While US and European players have made aggressive forays into other Latin American countries, they have left the Dominican Republic alone. But banking in the country, which has 8 million people and shares the island of Hispaniola with Haiti, has not always been tranquil. In the early 1990s a banking crisis caused by economic instability saw five banks and more than 100 financial companies fail. This led to reforms in 1992 and 1993 and today’s well supervised system.
Pan-Caribbean strategies
In Trinidad and Tobago international standards also prevail yet the central bank does not make risk rating of loan portfolios mandatory or require minimum loan-loss reserves though most banks follow their own internal systems. The major banks have evolved from British or Canadian ownership with Royal taking over the operations of Royal Bank of Canada in the early 1970s and Republic (then named Colonial bank) becoming part of Barclays in the 1920s, then switching to local ownership in the 1970s. Colonial bank’s origins go back as far as 1837 with British ownership links. Now both banks have as major shareholders local insurance companies. One, the Colonial Life Insurance Company, holds 34% of Republic and 8% of Royal.
As in the Dominican Republic there is little in the way of foreign competition but Royal Bank, which has assets of TT$10.6 billion (US$1.7 billion), has developed a strong regional presence in the eastern Caribbean and Netherland Antilles. This strategy has proved highly successful.
Says Elsa Gomez, an analyst with Thomson BankWatch: “Royal’s strategy has proved favourable for geographic diversification of its lending and revenue base with 1998 profits on track to outperform the previous year. Dramatic asset growth of 72% over the past three and a half years has not diminished capital levels with acquisitions funded by fresh capital via rights issues.”
Among the overseas acquisitions is the former Nevis Cooperative Bank operating in Nevis and St Kitts since 1955 which was bought two years ago and put into profit. Royal aims to make all its overseas banks conform to its own operational practices over the next three years. The only real threat to Royal is that it becomes so attractive that a foreign bank buys it.
Bankers who are not attracted by nights sipping rum punches in open air bars and morning swims in tropical seas, can always look to the Mediterranean. European bankers could even work in Malta during the week and commute back to London, Paris or Frankfurt at the weekends. But this is Europe remember and the nanny state is never far away. Banks cannot cut staff but must redeploy them. Market forces are permitted, however, in the form of foreign competition and the surprising absence of a deposit insurance scheme.
Malta like Trinidad is a former British colony which means there has been historic involvement of British banks, and Mid-Med Bank, the largest Maltese bank, is another former offshoot of Barclays Bank. The new bank established in 1975 took on a large customer base. The return on average assets last year was 0.9% and return on equity 19.6%. What has spurred on both Mid-Med Bank and its rival Bank of Valletta to modernize has been the arrival of foreign competition, chiefly that of Midland Bank which set up a full branch in 1996.
“Midland’s keen competition for top-tier corporate business has not only raised expectations for more efficient customer service, but also tightened interest margins and shaken some fundamental assumptions that have existed in the market such as the requirement for government guarantees and other collateral,” says a Moody’s report on the Maltese banking sector. “By applying cashflow lending on an unsecured basis and offering finer rates, Midland has pushed the two dominant local players into a new dimension. For instance, when Midland lent to a public entity without a government guarantee, other banks were compelled to consider lending to prime companies or government controlled corporations without cover.”
Not every island is paradise
Banking is clearly getting tougher and more competitive in Malta. And things are even less certain in Cyprus where the Russian crisis will hit both tourism and the offshore sector.
Bankers seeking a complete escape should opt for the safe havens of the Caribbean where the EU and the Russian crisis cannot intrude. They should definitely avoid any of the countries whose banks came in the top three of the Emba table Singapore, Taiwan and Argentina. Banks in those countries face major challenges and there are few, if any, sinecures to be had.
Given the extent of the Asian crisis, many analysts are putting sell recommendations on Singaporean banks but SG Securities has taken a moderate approach with two buys (Development Bank of Singapore and Ovesea-Chinese Banking Corporation), one sell (Overseas Union Bank) and one hold (UOB) on the big four.
Analyst Lee Che Wei thinks they deserve their high Emba ratings because of high capital ratios and conservative management. “UOB’s strategy has been consistent over the past 10 years,” he says. “Even in a bull market when other banks were leveraging, UOB remained very conservative.” In today’s volatile markets those kinds of banks are the ones to be invested in.
Latin America’s best
The Asian crisis has now become a world crisis and most major centres are experiencing some fallout. Argentina’s Banco Rio de la Plata, for example, which comes third in the Emba survey and is one of only four banks to receive a triple-alpha rating, was recently put on negative creditwatch by Standard & Poor’s due to the international situation.
“It’s the best bank we rate in Buenos Aires,” says S&P’s Christian Krossler. “It used to be the best bank before Santander [bought in] and now with their presence its strength has been enhanced.”
In general the new foreign ownership of Latin American banks is too recent to have had much impact on the table. Developments have been clouded further by the Asian crisis which has held back expansion plans. “What is happening in Latin America is that the foreign banks are going through a process of reinforcing the capital base, concentrating on deposits rather than lending. It’s not the time to be lending, anyway,” says Charles Prescott, head of financial institutions at Fitch IBCA.
So a bank like Rio de la Plata was good before foreign participation and remains good while Brazilian banks such as HSBC Bamerindus and Banco Excel Económico, recently bought by Spain’s BBV, have lower rankings (beta minus) because their new owners have not had time to fix them or are taking things slowly.
Banco Bozano Simonsen, with its strong investment-banking franchise, is Brazi’s second highest entry on the ranking. This is another interesting feature of the Emba system. Conventional ratings analysis would tend to mark investment banks lower because of the additional risk implied by their trading activities, but Emba makes no such distinction. In Bozano’s case this is probably a correct assumption. “There is a perception that they are active traders but that doesn’t mean they are putting huge amounts at risk,” says Peter Shaw, an analyst with Thomson Bankwatch.
Turning to eastern Europe the key influence is privatization. Foreign ownership has also had a longer time to deliver results. Hungary’s embracing of privatization has enabled its banks to perform well and Budapest Bank comes out in seventh position overall. GE Capital has a major stake in Budapest Bank and has cleaned up and strengthened the balance sheet. The question mark, says analysts, is over whether GE’s core competences leasing and consumer finance will be the right ones to take Budapest Bank forward as a universal bank.
Czech banks, which still have large state involvement, fare worse with Zivnostenska Banka, the first central European bank to be privatized in 1992, coming out best at 97. BHF-Bank’s 47% holding was sold to Bankgesselschaft Berlin last year and the bank concentrates on trade finance, project finance and private banking.
“In the Czech Republic it’s the smaller banks that often have problems following a rash of licences being handed out five or six years ago while the larger banks have better expertise,” says Thomas Kenzik, an analyst with Capital Intelligence. “In Slovakia it’s the large banks that tend to have the debt overhangs and serious political problems whereas smaller banks tend to be a bit more efficient.”
Jumping up the rankings
It is of course possible to jump up the Emba table with exceptional results following the sale of assets. This appears to have happened to Bank of Bahrain & Kuwait which is in fifth position, with a double-alpha-plus rating. Although the bank was the strongest Bahraini bank last year, it came only 47th overall. Analysts say the bank’s major achievement was disposing of its stake in an Omani bank when the Omani stock exchange was at its peak which gave a considerable boost to earnings.
Investment gains have also helped Taiwan’s Shanghai Commercial and Savings Bank, something of a star performer in the Emba system, coming first last year and second this year. Shanghai Commercial was founded in mainland China in 1915 and its fortunes followed those of the defeated nationalists who eventually fled to Taiwan in 1949. Shanghai Commercial was forced to move its head office to China’s wartime capital Chongqing in 1938 and on to Taiwan in 1954, though commercial banking operations were not resumed until 1965. The bank is not listed and the precise ownership structure is not widely known.
A report by Fitch IBCA says: “SCS [Shanghai Commercial] is one of the most profitable of Taiwan’s banks although its earnings have in recent years been artificially high as a result of investment gains that have represented increases in the book value of such investments without cash having been received. These interests are not disclosed but are believed to mainly comprise SCS’s indirect but majority holding in SCB [the Hong Kong operation known as Shanghai Commercial Bank].”
One of last year’s star performers which has done less well this year is MashreqBank of the United Arab Emirates, down from fifth to 15th. But, says one analyst, it has “an aggressive retail lending policy which is a new area in the UAE and has not been tested”.
… a long way from paradise
With system-wide non-performing loans of 50% in Indonesia, even good banks are in for a rocky ride in that country. In Thailand ownership changes in the offing are likely to change the banking structure radically and in Russia a similar overhaul must happen eventually.
“No bank in Indonesia is without significant problems,” says Mark Jones, an analyst with Thomson BankWatch. “But some of the banks that were in better shape before the crisis began and were conservatively run have seen the benefits of this.”
The two most often mentioned in this context are Bank Bali and Panin Bank which are the best-placed Indonesian institutions. Panin had the good luck to do a rights issue prior to the Asian crisis and boasted a 20% capital ratio, 90% of which was tier-one capital. It was the most liquid bank before the crisis and SG Securities’ Lee says “it was even more conservative than Singaporean banks”.
In Thailand six banks are under government administration and may be restructured or the assets given to other banks. State-owned Krung Thai Bank will be expected to play its role and analysts wonder how this will affect its own operations. Krung Thai ranks sixth among Thai banks in the ranking.
“It will be quite a task for Krung Thai. It has its own asset quality problems to deal with and on top of this they will have additional assets to manage,” says Tony Chan, an anlyst with Thomson BankWatch.
But even in bad systems it is possible to find a gem. China’s banking system is riddled with asset quality problems and the affects of policy lending but the Bank of Communications which is triple beta is an exception.
It’s new, it’s big, it has the backing of the communications ministry, it is based in Shanghai and it specializes in infrastructure loans which are unlikely to dry up in China. If the Caribbean flights are full, maybe Shanghai could be an option.
