What's in store for international banks?

The financial crisis revealed several winners and losers among banks around the world

Erin Davis 23 November, 2009 | 12:26PM
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Despite their reputation as risky bets, many emerging-market banks--along with their countries' economies in general--fared much better during the last two years than their more "developed" cousins. Even within the developed world, there are dramatic differences between the performance of banks that took on too much risk and those that did not, with some banks having nearly destroyed their businesses and others winning market share as their rivals struggle. We think the significant divergence among international banks during the last two years will extend into the recovery, and we expect to see stark contrasts between the winners and the losers in both the speed and strength of their recoveries.

After they reported third-quarter earnings, the three Brazilian banks we cover--Itau Unibanco, Banco Bradesco, and Banco Santander Brasil--all displayed a common theme: The worst of the crisis may be over in Brazil. Together with Banco do Brasil, a government-controlled bank, they dominate Brazil's banking market. Although we think there are some convincing data points to support this optimism, we doubt that there will be a sharp recovery--especially with regard to credit quality.

Although nonperforming loans (NPLs) kept climbing across the board, they did so at a slower clip. The pace at which net new NPLs are forming has been constantly declining since early 2009. Hence, we think that in the near term we should start seeing NPL balances actually declining. Another heartening indicator was the fall in early delinquencies--loans overdue between 30 and 60 days. That said, though it is commonplace for banks in emerging markets to have high bad-loan balances that are compensated by fat interest margins, we think NPLs of around 7% or more are no laughing matter. To be sure, even though nonperforming loans may start to trend down, actual loan losses should remain higher than usual for some time, which will pressure banks' bottom line, in our view.

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Erin Davis  is a senior banking analyst for Morningstar.

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