Equity Analysis /
Global

Investors are not giving enough merit to banks in stricter regulatory regimes

  • Investors are insufficiently discriminating across markets for differences in the banking regulatory environment

  • In this report, we compare bank regulations across 17 FM and small EM markets

  • We also examine the stability of the regulatory environment

Investors are not giving enough merit to banks in stricter regulatory regimes
Rahul Shah
Rahul Shah

Head of Corporate & Thematic Research

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Rohit Kumar
Rohit Kumar

Global Financials/Thematics

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Tellimer Research
11 November 2019
Published byTellimer Research

When assessing the investment case for FM and small EM banks, the macro and company-specific outlook is clearly paramount. But, other things being equal, we believe investors should feel comfortable paying higher multiples for banks that:

  1. have stricter accounting frameworks; 
  2. operate in markets with stringent regulations; and 
  3. have bigger cushions over regulatory minimums.

In this report, we compare bank regulations across 17 FM and small EM markets, and consider accounting standards, Basel regulatory regimes, capital and liquidity requirements and depositor protection schemes. We also examine the stability of the regulatory environment. 

Our analysis suggests investors are insufficiently discriminating across markets for differences in the banking regulatory environment. 

A larger investment allocation to Nigerian banks – which have low valuations, high expected returns and robust regulatory environments – may be warranted, at the expense of Bangladesh and Vietnam, where returns do not seem as promising and regulations are more relaxed.

Expected total return (y-axis) versus regulatory oversight score (x-axis)

Note: A high regulatory oversight score signifies tighter regulations plus a good buffer. Source: Tellimer Research