Portfolio strategists need to look beyond economic development when eyeing new investment.
To get a better understanding, we looked at the ratio of banking revenues as a share of GDP across global markets, deducting banks’ costs of risk.1 1. We deducted write-downs and loss reserves to arrive at the ratio of revenues after risk costs to GDP. As the exhibit shows, the old pattern of banking activity that is more entrenched in developed than developing markets no longer holds: penetration in China last year reached the same levels as in the United States; Brazil’s ratio is higher than the United Kingdom; and some Eastern European nations are more “banked” than Western Europe.
Economic development should be just the starting point for a growth discussion, as multiple factors—including capital-market depth, the growth outlook, asset mixes, margin trends, regulation, and risk—should all be taken into account. Margins in some developed markets, for example, are elevated as a result of market consolidation. That may be a signal that banks in these markets are more vulnerable to margin erosion, among other challenges to the continued success of established business models. Digital attackers—fintechs and even incumbents with new, lower-cost models—will find these markets increasingly attractive. Emerging markets with high margins such as those in Latin America and China may be susceptible to abrupt turns in the credit cycle. In China, corporate lending is vulnerable to an economic slowdown.