Emerging Market Financials: No Toxic Asset Exposure
In the midst of this economic crisis, Emerging Market financial companies have stepped to the global forefront. Following the near collapse of the developed world’s banking system the 3 largest global banks by market capitalization (and 4 of the top 10) are now headquartered in the Emerging Markets.
These top 3 Banks, ICBC, China Construction Bank ,and Bank of China, collective market capitalization of almost $400B approximately equals the total of the next seven banks combined. What makes these companies so attractive in today’s environment?
First, because these financial companies have had a steady inflow of new customers via the rural to urban push, they never needed to extend “NINJA” (no income, no job, no assets) loans to unqualified borrows in order to expand their stocks earnings . These toxic assets that were partly to blame for Western financial collapse didn’t exist in these countries.
Second, they’re attractive because of the thematic infrastructure play. Think of financials in Emerging Markets in a similar fashion to utilities. Over the next decade billions of people in these countries could end up moving from rural areas to expanding urban cities and begin their first non-agricultural employment. This new lifestyle requires them to open their first savings accounts and establish credit in order to obtain mortgages for homes and finance their first car.
Third, corporate credit is the lifeblood of any expanding economy. As these Emerging Market cities expand, it is necessary to fund the expansion of basic utilities, to build residential and commercial real estate in order to manufacture consumer goods and provide business services.
With toxic assets still sitting on the books of the developed world banks and their market cap severely damaged, it brings into question what’s next for Western banks. There are still many concerns about commercial real estate markets, further write-downs, and deleveraging of balance sheets.
Ten years ago these Emerging Market banks weren’t even in the top 50, much less the top 10. Think about what the list will look like in another decade…
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As of 6/30/09, EFN held 10.6% in ICBC, 8.18% in China Construction and 5.49% in Bank of China
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