Strategy Note /

The best-performing emerging markets banks so far this year

  • Emerging market bank shares have outperformed the broader market so far this year, but downward pressure is building

  • GCC banks have performed best, buoyed by higher commodities and interest rates. Recent oil price weakness is a concern

  • Eastern Europe banks have lagged, reflecting geopolitical risk and economic disruption from Russia’s invasion of Ukraine

The best-performing emerging markets banks so far this year
Rahul Shah
Rahul Shah

Head of Financials Equity Research

Rabail Adwani
Rohit Kumar
Tellimer Research
11 July 2022
Published byTellimer Research

Emerging market shares peaked in early 2021, almost a year ahead of the developed market equities’ zenith. The key sector driving the early emerging markets downturn was consumer discretionary. At the country level, China was the main culprit.

Emerging market banks have proved more resilient than the broader market, continuing to rise until February of this year. The post-pandemic economic rebound and the related normalisation in interest rates have buoyed the sector. However, Russia’s invasion of Ukraine has led investors to rethink the outlook for the sector – increased geopolitical tension, sanctions and supply chain disruption have placed increasing doubt on the sustainability of the economic recovery.

EM banks have outperformed this year

Looking at year-to-date performance, banks have outperformed the broader emerging markets universe by around eight percentage points.

Emerging markets equities performance

Comparing their year-to-date performance against other sectors places them towards the upper end, between real estate and consumer discretionary.

EM sectoral performance

GCC and LatAm banks have performed best

Banks in the Arabian Gulf and parts of Latin America have outperformed this year. The key reasons for this include the beneficial impact of higher interest rates on bank margins and the economic boost to commodity exporters from higher prices.

By contrast, banks in Central and Eastern Europe have tended to underperform this year, reflecting the economic disruption and damage to sentiment arising from Russia’s invasion of Ukraine.

Other weak performers include Egypt and Vietnam. In Egypt, the financials sector and real estate names have led the market lower. Tighter global monetary conditions reduce the attractiveness of the EGP carry trade, which increases pressure on banks to finance the public deficit. In Vietnam, the underperformance has occurred only in the past few months. Smaller, less liquid banks have been hit hardest as investors consolidate their exposures. 

EM banks sector performance

Saudi banks have been among this year's standouts

The chart below highlights the best-performing emerging market banks so far this year. Saudi banks occupy five of the top 15 places in the year-to-date performance ranking, making this the standout sector for investors.

We have previously highlighted that Saudi bank margins are positively geared to higher interest rates. The main reasons for this are their large stocks of non-interest-bearing deposits and a predominantly variable-rate corporate loan book. An additional tailwind for these names has been the elevated oil prices, which are beneficial for the public finances of this major oil exporter. In turn, this translates into improved corporate and consumer confidence.

Retail mortgages have been a key driver of the strong loan growth Saudi banks have been delivering. Key sector risks include slower global growth reducing crude oil demand, and tighter liquidity conditions.

Best performing EM banking shares

Other GCC banks have also benefitted from these trends. However, their margins tend not to be as positively geared to the monetary tightening cycle.