Strategy Note /

Five emerging market banks that could benefit from investors' greater value bias

  • EM banks should benefit from a growth-to-value shift; relative to market, the sector is still below pre-pandemic levels

  • We feature five high-yielders with sustainable cash payouts. The median valuation is 4x 2022 PE and 0.8x PB for 14% ROE

  • We also flag five banks that could suffer from any intra-sector growth-to-value transfer, with median 18x PE and 3.9x PB

Five emerging market banks that could benefit from investors' greater value bias
Rahul Shah
Rahul Shah

Head of Financials Equity Research

Rabail Adwani
Rohit Kumar
Tellimer Research
24 January 2022
Published byTellimer Research

A global transition from growth to value stocks is currently playing out. Key catalysts include the large performance and valuation differentials after growth’s decade-plus outperformance, and the rising long end of the yield curve as inflation and interest rate expectations have increased.

In emerging markets, this upheaval has been playing out for longer and with greater severity, with China’s tech woes a key contributor.

In this report, we highlight five emerging market banks that could benefit from investors' increasing preference for value stocks, and five names that could underperform in this environment.

Growth stocks are experiencing a reversal versus value names

EM banks could benefit from investors' increased value bias

We think emerging market banks could be key beneficiaries of this transition in investor preferences. The sector substantially underperformed at the beginning of the Covid pandemic, reflecting a combination of broader economic woes and regulatory changes that forced banks to offer forbearance to struggling borrowers and restricted their ability to reward investors with dividends.

Although half of this underperformance has since been recovered, there is still substantial catch-up potential for what is one of the larger market sectors. We expect a loosening of restrictions on dividend payments will further enhance the sector’s attractions for value-focused investors.

EM banks have yet to recover to their pre-pandemic level

Typically, there is an inverse relationship between the dividend yield demanded by investors and the payout ratio; dividends that are a high proportion of earnings could be expected to be more volatile and dependent on earnings delivery.

Emerging market banks: dividend yield versus payout ratio

Top sector value picks

We have built a simple three-factor model (based on payout ratio, profitability and capital strength) to generate a dividend sustainability score for c200 listed emerging market banks with market capitalisation above US$2.5bn. Banks that score highly on this basis and have high dividend yields should represent good income-generating assets for investors.

We highlight five such names below.

Halyk Savings Bank (Kazakhstan)

Founded in 1923, Halyk Bank is Kazakhstan's largest bank, with an asset base of US$26bn, representing c30% market share. It is also the largest stock in Kazakhstan, accounting for around two-thirds of the benchmark KASE index. The bank serves c9mn customers through its network of close to 600 branches and 4,500 ATMs. Its Homebank app (retail digital banking) has an active user base of 3.7mn and Onlinebank (SME-focused digital banking) has over 275,000; both of these numbers are growing strongly.

Halyk Bank is delivering strong financial performance with 9M 21 net income up 36% yoy, helped by higher net interest income (on the back of strong loan growth) and better fee income, along with lower credit risk costs. The dividend payout ratio stands at around half of its earnings and is well supported by the bank’s strong capital base. The capital adequacy ratio stands at 25.5% (median 16.7% for EM peers) and the tier 1 capital ratio is 24.4% (14.2% for peers). Bloomberg consensus is signalling a 40%+ rise in the dividend this year. A key risk relates to the recent emergence of protests and the heavy-handed response of the authorities, which adds uncertainty to the top-down outlook for the business.


Sberbank is the largest bank in Russia (and in the EEMA region) by total assets. The Russian state is a key shareholder. Sberbank has a network of 14,200 branches and 70,400 ATMs serving over 100mn retail customers and 3mn corporate clients. The bank has a very active digitalisation strategy, and currently has 71.3mn active users on its Sberbank Online App. It also has various non-financial digital products SberZvuk (music app), Okko (video-on-demand) and DeliveryClub (food delivery). In addition to digitalisation, the company also has a strong focus on ESG.

Sberbank’s strong market positioning, key shareholder support and successful digital shift give us reason to view the c13% prospective dividend yield as extremely attractive. Geopolitical risk is a key area for caution; unrest in Belarus and Kazakhstan, Ukraine tensions and the EU’s dependence on Russian gas supplies are all potential catalysts for negative surprises.

Bank of Chongqing

Bank of Chongqing was established in 1996 as Chongqing City Cooperative Bank, funded by 37 urban credit unions, 10 local financial bureaus and 39 public institutions. The bank was renamed as Commercial Bank of Chongqing in 1998 and as Bank of Chongqing in 2007. It operates 145 branches across three provinces of China. To meet its goal of serving the local community, the bank has developed products such as Hao Qi Dai, which are digital loans to micro and small enterprises leveraging big data analysis technology.

Bank of Chongqing’s shares offers an attractive dividend yield of 9.6% in 2021. This should be relatively secure given the low payout ratio (sub-30%) and given also consensus expectations of 20% earnings growth in 2021 and a 14% increase in the dividend. Key risks include slowing consumer spending, the debt overhang in key sectors and Covid-related disruption.

Banco do Brasil

Founded in 1808, Banco do Brasil is the oldest bank in the country. It has an employee base of 91,000 and a network of c4,000 branches across 97% of Brazil’s municipalities. It is also present in 15 foreign countries. The bank has a 16% share of loans, and is also Brazil’s leading Agricultural lender, with a 54% market share. Banco do Brasil has focused on digitalisation in recent years and now has c22mn active digital customers; 91% of all transactions are conducted through digital channels. It also has a 30% transaction market share on PIX, the government-operated instant payments platform.

The bank’s profits increased by 50% in 9M 2021 due to lower credit risk costs and controlled operating expenses. Banco do Brasil paid out 37% of its earnings in 2021, translating into a dividend yield of 7.8%. We think the bank could sustain its payout given a strong capital adequacy ratio of 21% along with Bloomberg consensus expectations of 40%+ earnings growth in 2021.

Bank Muscat

Established in 1982, Bank Muscat is the largest bank in Oman, with an asset market share of 35%. It has a domestic network of 174 branches, with its almost 3,900 employees serving over 2mn customers. Bank Muscat is also present in Saudi Arabia, Kuwait, the UAE, Iran and Singapore. The bank is a domestic leader in terms of profitability and capitalisation; it has an ROE of 9.9% (versus a local peer median of 2.2%) and a capital adequacy ratio of 20.5% (versus median 18.x%).

Bank Muscat’s 2021 dividend yield is 4.4%. Given a modest 38% payout ratio, strong capital base and influential shareholder base (the Royal Court is the largest owner with a 24% stake), we think investors can continue to enjoy high income in the future as profits continue to recover from the 2020 low. Key risks include the sustainability of public finances, which in turn could put pressure on the currency.

Emerging market bank value picks

Highly rated banking shares could come under pressure

Just as we are seeing a growth-to-value transition at the overall market level, we are likely to see similar trends within the emerging markets banks sector. The five highly rated names listed below could prove vulnerable in such an environment.

Highly-rated emerging market banks that could underperform