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The emerging markets most exposed to the banking sector

  • The fallout continues from Silicon Valley Bank's collapse. Credit Suisse, First Republic are receiving liquidity support

  • EM bank shares have so far proven more resilient than in DM. We flag the markets most exposed to any sectoral sell-off

  • Banks are likely to become more risk averse, which could affect the economies most dependent on credit extension

The emerging markets most exposed to the banking sector
Rahul Shah
Rahul Shah

Head of Corporate & Thematic Research

Tellimer Research
18 March 2023
Published byTellimer Research

Policymakers are still struggling to contain the fallout from Silicon Valley Bank's (SVB) collapse last week. The US banking sector is down by over a quarter from its recent highs. And concerns over solvency are drying up liquidity in the interbank market for some participants; Credit Suisse has been offered a US$50bn liquidity line from the Swiss National Bank to shore up confidence, while California's First Republic is receiving US$30bn deposits from a consortium of banks.

This note identifies the emerging market economies and stock markets that could be most affected by weaker risk appetite from banks, and lower portfolio allocations to the sector from investors. This work complements our earlier work on the emerging market banks most exposed to SVB-like risks from their investment portfolios.

Banking sector performance in 2023


The economic influence of banks varies widely across EM

For the largest emerging markets, the median private sector loans/GDP ratio is around 55%, with a wide range from 12% in Nigeria to 180% in China, where real estate and infrastructure projects have traditionally been vehicles to drive economic growth.

Given recent developments, it is likely that banks will reduce their lending appetite, for two reasons:

  • They may choose to hold a bigger liquidity cushion than in the past, to avoid having to sell investments at below their carrying values

  • They may they gauge that their true capital ratios are lower than those reported, since not all their investments are marked to market.

In such a scenario, economies that are most dependent on bank credit, such as China, Qatar and Malaysia, could suffer a bigger brake on their growth than those where banks play a smaller economic role. 

Monetary sector credit/ GDP ratio

Banks are likely to drag down broader market indices

Banks are a key component of emerging market stock markets. For our country sample, their median weight (by market cap) is 20%, ranging from 12% in Kazakhstan to 70% in Slovakia.

Emerging market investors have yet to bail out of the banking sector as aggressively as their developed market counterparts have done. However, if sentiment towards the sector were to deteriorate to the same extent, markets with the largest banking weightage, such as Slovakia, Qatar and Kuwait, could be hit hardest.

Banking sector's weight in local equity markets

The banking Buffett ratio highlights the GCC region as being the most exposed

Another ratio worth looking at in the current scenario is a banking version of the so-called Buffett ratio, which tracks the market cap of the banking sector relative to GDP, and therefore combines some elements of the two ratios considered above. The median value for this ratio in our sample of countries is 6%, ranging from close to zero in Ukraine to 80% in Kuwait.


Related reading:

EM investors are still ignoring lessons from Silicon Valley Bank's collapse

Lessons for EM from Silicon Valley Bank’s woes

Silicon Valley Bank fallout: Implications for EM sovereigns

The most attractive real yields in EM as SVB collapse raises chance of Fed pivot