Author: Keri Geiger
Considering the size of China’s economy, it is no surprise that Chinese banks lead the pack in this year’s emerging market banks poll, compiled by Moody’s. With similar rankings last year, the top four Banks were Industrial & Commercial Bank of China, Bank of China, Agricultural Bank of China and China Construction Bank.
Elsewhere in Asia, the effects of the 1997 Asian crisis are still being felt, but South Korea is showing signs of a slow recovery. Seoul Bank is the top mover this year moving 153 spots from 234 to 81.
Brian Oak, vice president and Asian bank analyst for Moody’s, notes that the Asian crisis hit South Korea hard and their recovery is due mainly to billions of government capital injected into the banks. “The banks were so financially distressed that while the rise in the poll does indicate some improvement, it does not reflect a return of full economic health.”
Seoul Bank was one of the largest benefactors of government capital, receiving almost 5 trillion Won ($4.5 billion) and it is still struggling. Deutsche Bank was also called in as a management advisor and has brought in its own muscle to turn the bank around.
Aside from the obvious effects of the crisis, Korean banking suffers from internal problems as well. “Commercial banking was deeply troubled from the demise of several Korean corporates, but the banks have also been under strict government control and have not been granted the autonomy to run their own business. This has definitely contributed to the problems today,” says Oak.
Korean banks have experienced significant consolidation and are also undergoing internal restructuring to improve their competitiveness, thereby enhancing the stability of the banking system. Now the banks are trying to take focus on moving towards retail banking because corporate lending has stagnated since the crisis. Borrowers increasingly bypass the banks and are heading straight for the capital markets.
Thai banks are not recovering as quickly as South Korea, but the worst is over. According to Deborah Schuler, vice president and bank analyst for Moody’s Asia Pacific office, Thai Farmers Bank ( placed 51) and Bangkok Bank (14) each raised a billion in equity, but the capital raised was largely wiped out by bad loans, so they have had to go back to the international capital markets and it’s not clear how much more tolerance they have in the Thai or international equity markets.
Shanghai Pudong Development Bank of China rose an impressive 90 places on this year’s poll to 79. Schuler noted that Pudong is plugged into a healthy local capital market in China and able to raise funds. Even with China’s perennial plague of bad policy loans, Pudong does not have this burden. Combine this with a modern management system and access to a local capital market, it is not particularly surprising that it shot through the ranks in 2000.
The promise of Turkey’s future is showing in its banking industry’s overall gain in shareholder equity. The major Turkish banks, Pamukbank (91), Demirbank (148) and Yapi Kredi (30) are slowly but surely reflecting the growing investor confidence in the Turkish economy.
Recovering from the earthquake of August 1999 Turkey is trying to look forward. With the excitement of the European Union candidacy on the horizon, a devaluation of the lira, interest rates lowering and massive privatization taking place, Turkey may be showing signs of eventually becoming a first-world economy.
Turkey’s Central Bank has unveiled a three-year plan intended to slowly but surely improve and stabilize the Turkish economy. This reform program is aimed at reducing inflation to 25% by the end of the year and to bring about a sharp reduction in interest rates. With the hopes of achieving a coveted place in the EU, Turkey may just be willing to go the distance to achieve the kind of reform that is needed.
Darren Stubing, chief bank analyst for Capital Intelligence says, “Turkish banks are going through a major transitional period right now. They will try to reposition their balance sheets away from government securities and refocus towards retail and commercial lending. Privatization of the state banks will have a dramatic effect as they are currently a huge drain on the system as well as a distorting influence.”
The IMF has approved a $4 billion credit facility to lend support for the three-year reform programme giving it additional credibility.
“The potential of Turkey in the medium to long term is undoubted. It is one of the world’s biggest emerging economies, has a well managed infrastructure, good corporate base, a young and highly educated population and this is recognized by the international community,” says Stubing. “Yet Turkey’s coalition government, which is promoting economic reform, may not be as stable as investors would like.”
The sharp fall among several of the Brazilian banks, most notably Banco do Estado de Minas Gerais (80, down from 8) and Banco do Estando do Rio Grande do Sul (213, down from 167), may not be an accurate reflection on what is happening in the Brazilian banking sector.
Celina Vansetti, the Brazilian bank analyst and vice president at Moody’s says, that “last year was very profitable because of the devaluation and interest rates were very high (45%). Comparing last year and this year will give a distorted view because last year gave an extraordinary return. But now the interest rate has come down to 16.5% and inflation will not be more than 6% this year.”
With the decrease in interest rates, banks may be more prepared to lend to borrowers other than just to the government, where Vansetti says, “they make money by inertia”. Corporate lending is extremely competitive because they demand very low spreads, so the focus is moving to the SME sector and retail markets.
“But Brazil has not learned to deal with the middle market. Some banks do work there, but it is not a reality for most,” says Vansetti.
So with the huge debt problems of Brazil and the seemingly chronic effects of the Asian crisis, many emerging market banks are continuing to struggle. Both South Korea and Brazil do indicate that the poll rankings need to be looked at with a critical eye. The political risks of countries like Turkey can also create volatility in a seemingly stable market. The table shows how the banks are coping with the challenges.
This ranking of emerging market banks was compiled by Moody’s Investors Service from commercial banks’ annual reports and financial statements for 1999 and 1998.
Where possible, figures are presented in consolidated form. Banks owned by other financial institutions are not listed separately. Subsidiaries and branches are not shown either.
Notes:
Turkey: international accounting standards are shown except where noted. For those which are inflation adjusted a constant 1999 exchange rate has been used.
Definitions:
Shareholder equity: the sum of issued common stock, capital surplus/premium, statutory reserve, legal reserve, revaluation reserve, contingency reserves, retained earnings, net profit for the year and minority interest. Where consolidated data are used, shareholder equity includes group equity attributable to minorities.
Total assets: as reported in financial statements.
Net income: as reported in financial statements before appropriation.
Return on equity, period-end: net income divided by equity at fiscal year end.
