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:
- have stricter accounting frameworks;
- operate in markets with stringent regulations; and
- 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.
Note: A high regulatory oversight score signifies tighter regulations plus a good buffer. Source: Tellimer Research