Equity Analysis /

FM & Small EM Banks: Global loan quality outlook – disclosure levels, headline ratios and risks costs compared

  • Asset quality disclosures vary considerably across our covered markets

  • GCC countries appear to have stronger asset quality than peers

  • The cost of risk is likely to rise in Pakistan

Rahul Shah
Rahul Shah

Head of Financials Equity Research

Nkemdilim Nwadialor
Rohit Kumar
Tellimer Research
8 May 2019
Published by

Asset quality disclosures vary considerably across our covered markets. Banks in Oman, Zimbabwe, Pakistan and Mauritius typically publish detailed loan quality disclosures; those in Tanzania, Sri Lanka, Morocco and Uganda disseminate more limited information. We rank our coverage by looking at the range of available disclosures pertaining to loans, NPLs, provisions and additional asset quality information.

Why disclosure levels matter. Headline NPL and provisions numbers cannot provide a full picture of underlying asset quality. In some markets, we think the volume of problem loans is understated. It is also difficult for investors to ascertain a prudent level of required provisions given limited visibility regarding collateral quality and value. Therefore, additional information – like loan mix, the ageing of past-due loans, disclosures on collateral, etc. – can help investors better assess true asset quality and potential risk cost headwinds (see Tables 3 and 4 for more detail).

GCC countries appear to have stronger asset quality than peers. Saudi Arabia and Kuwait have NPL ratios of less than 2%, cost of risk below 100bps and provision coverage exceeding 100%. Sub-Saharan Africa banks scan less well, notably Zimbabwe (cost of risk: 3.4%; provision coverage: 11%), Ghana (NPL ratio: 7.6%; cost of risk: 3.4%) and Tanzania (NPL ratio: 7.2%; provision coverage: 51%).

The cost of risk is likely to rise in Pakistan, where banks are currently benefiting from recoveries against legacy NPLs. In contrast, the cost of risk is likely to fall in Ghana (falling NPLs) and Kuwait (excess provisioning).

Some of our markets have not yet implemented IFRS9, including Pakistan, Bangladesh and Vietnam. The experience elsewhere suggests that implementation could lead to a sizeable one-off increase in provisions and might also have some recurring impact on the cost of risk. 

Top picks for the sector. Among our larger cap coverage, we prefer KNCB KN (strong retail franchise and growing alternative revenue channels), MBB VN (strong asset quality and margins), UBL PA (decline in international risk costs and strong earnings growth) and ZENITH NL (healthy capital ratios and rising adoption of technology). Small cap names we favour include BRAC BD (superior corporate governance and strong balance sheet), CIEB EY (above-average margins and strong retail franchise), GCB GN (high loan growth and expected synergies from recent mergers) and HNB SL (superior margins and asset quality).