Emerging Market Banks Haven’t Suffered from the Financial Contagion of 1Q23
In developed markets, banks took centerstage in March 2023 as overly aggressive management teams and highly concentrated customer deposit bases led to a good old-fashioned “run on the bank.”
In developed markets, banks took centerstage in March 2023 as overly aggressive management teams and highly concentrated customer deposit bases led to a good old-fashioned “run on the bank.” Unlike the credit issues of the Great Financial Crisis of 2008-2009, this was instead a crisis of confidence. In the U.S., as potential losses mounted at Silicon Valley Bank due to management’s aggressive investment portfolio; there simply was not enough cash to cover withdrawals as the bank’s investment portfolio of securities faced growing losses as interest rates trended higher. Outside of the U.S., the reverberations were felt hardest in Europe. Swiss regulators orchestrated the takeover of Credit Suisse amid the turmoil, a casualty of systemic fears from the last crisis, while Japanese banks fell in sympathy with their developed market peers although there was no intervention, and it does not appear any is necessary at this time.
We did not see a similar phenomenon within the emerging markets Financials sector in March. Financials stocks did underperform the broader emerging market index in March, but in absolute terms were up modestly while U.S. and non-U.S. developed Financials sectors were down in March, erasing earlier gains in the quarter. The chart below highlights how well banks have held up in emerging markets relative to their developed market peers.
We attribute the better performance in emerging markets banks to fewer direct linkages within emerging markets to the affected banks. Generally, with a few exceptions, emerging market banks do not have concentrated deposit bases and are supported by rather granular (often, but not always, retail oriented) deposit franchises. Further, emerging market banks have learned from prior experiences―in several cases, quite painful―given their experience in navigating prior country-specific and overall macroeconomic volatility due to politics, interest rates, currencies, commodities, and financial conditions.
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Emerging Markets stocks are represented by the MSCI Emerging Markets Index and Developed Market stocks are represented by the MSCI World Index.
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