Equity Analysis /

Frontier and EM banks: What UK investors are thinking

  • We recently met FM and small EM-focused institutional investors in the UK 

  • Most appear resigned to their markets remaining out of the spotlight, meaning valuations will likely remain discounted

  • Consensus longs include COMI, GTB, Equity Bank

Rahul Shah
Rahul Shah

Head of Corporate & Thematic Research

Rohit Kumar
Nick Beazley
Tellimer Research
19 February 2020
Published byTellimer Research

We recently met FM and small EM-focused institutional investors in the UK (to access our full investor presentation click on 'download full report' at the bottom of the article). Most appear resigned to their markets remaining out of the spotlight, meaning that valuations will likely remain discounted, with poor liquidity and portfolio performance driven more by flows than fundamentals.

Consensus longs include COMI, GTB, Equity Bank. There remains very little appetite for Argentina or Saudi Arabia. While most investors appear to be sticking to their positions, we were able to detect some fresh interest in two of our top picks, namely MCB Group (Mauritius) and Hatton National Bank (Sri Lanka). TBC (Georgia, not covered) also garnered interest.

  • Large-cap top picks: GUARANTY NL, MCBG MP, UBL PA, VPB VN
  • Small-cap top picks: BRAC BD, CIEB EY, GCB GN, HNB SL
  • Favoured markets: Egypt, Ghana, Nigeria, Pakistan, Sri Lanka, Vietnam

Table 1: Tellimer sector scorecard for major markets (country level)

Major markets

Minor markets

Nigeria Tier 1Sri Lanka
VietnamOther East Africa
KenyaNigeria Tier 2
Saudi ArabiaOther GCC
Source: Tellimer Research, Bloomberg
Note: green = attractive; yellow = neutral; orange = unattractive.
Note: Other East Africa includes Rwanda, Tanzania and Uganda. Other GCC includes Kuwait and Oman

Feedback from our meetings

Argentina: The longest we spent discussing this market in any meeting was about 30 seconds. Most agree these banks are bust if restructuring goes the way the government wants. Just not worth it.

Bangladesh: Most investors see good value in BRAC Bank, even despite the threat of a loan rate cap. Improving liquidity often cited as a positive development. Very little appetite for any other Bangladesh bank (other than perhaps City Bank) and most investors are well aware that sector NPLs are a big problem, and likely much worse than they look. Lots of people have visited recently.

Egypt: Most agree that CIEB looks the top pick fundamentally, but liquidity keeps most happy to stay in COMI, which still delivers. Loan growth should be respectable. In general, most investors are fairly positive on Egypt macro. What impact forthcoming bank privatisations will have on the market was a question often asked.

Georgia: Is not a market covered by us on the equity side, but talked about by almost everyone. There’s big love for Georgia, provided the name is a London-listed stock, and everyone wants a trip to Tbilisi this summer. TBC seems to be consensus top pick.

Kenya: Most like Kenya Banks and still think the margin expansion story post rate cap repeal has some way to go. Loan growth will rebound sharply as borrowers make up for several lost years. Most investors don’t seem scared off by FX risks, risks to the agricultural sector (locusts) or real estate price weakness. Despite the recent rally most still see bank valuations as attractive

Mauritius: Possibly the least well-known story of any country we discussed. Most investors asked for a quick overview of the MCBG story – international foreign-currency (mainly African) lending in shape of commodities trade finance and structured product finance, with the bank benefiting from a strong funding cost advantage versus GEM peers. Concerns about how sustainable this growth would be if commodity prices softened significantly.

Nigeria: No real discussion outside GTB and Zenith. Given where valuations are there is no point going off-piste. Most investors have some kind of stake in one or both, but very few committing more capital there at the moment. FX deval risk mentioned by almost everyone and lack of country growth also an issue… but very cheap.

Pakistan: A halfway house as most don’t have to own Pakistan, so really needs to be very compelling for them to get involved. Nonetheless, most investors agree that the country is in much better shape, supported by the IMF and with a strong margin expansion story, but have they missed the boat?

Saudi Arabia: A no-go zone for many investors as a market given much better (and cheaper) growth stories elsewhere, with loan growth and margins not very compelling.

Sri Lanka: Most investors seemed interested in top pick HNB, given cheap valuations, and political stability providing fiscal stimulus, and HNB’s more favourable positioning in terms of capital and NPL recognition. But given the low liquidity of Sri Lanka stocks, is it worth bothering? And might international inflows preferentially seek out COMB?

Vietnam: In general most investors are bullish, but happy with what they have / couldn’t buy what they wanted anyway. New Vietnam ETFs is a story everyone hopes supports their holdings.