The Banker’s Best Emerging Markets for Banking ranking, which analyses the largest 100 developing countries for ease of banking, sees South American nations leading the way, while those in Africa and Europe lag behind.

The Banker’s inaugural Best Emerging Markets for Banking ranking shows that the smaller countries in South America – Peru, Chile and Colombia – have much to offer to banks. Our research has found that these countries combine solid economics with good governance and healthy banking models.

Elsewhere, countries from the Asia and the Gulf area of the Middle East, while promising for banks, generally have challenging regulation landscapes. Most developing economies from Europe struggle in the ranking, primarily because they are still recovering from recession, while African countries tend to feature near the bottom. 

The ranking evaluates emerging countries according to three measures – the economic situation, the political landscape and the banking environment, as this shows the local market from the perspective of a potential investor. Because a country cannot support a banking system unless it has a sufficiently large economy, we have chosen to apply our methodology to the 100 largest developing countries in the world by 2014 gross domestic product (GDP) in US dollars. 

South America shines 

Central and South American countries have a visible presence in the upper echelons of the ranking. The top spot is occupied by Peru, followed by Chile in second place and Colombia in fourth, while Panama also features in the top 10, in ninth place. 

Their strength comes from combining strong economic growth and healthy banking models. The low and stable inflation rates of the past few years indicate that these countries’ governments are not inclined to meddle with monetary policies, and high projected GDP growth confirms their potential. Peru and Colombia also benefit from having relatively low banking penetration. As often is the case with banking sectors in developing countries, banks in Peru and Colombia record some of the highest net interest margins in the ranking.  

Despite these stellar results, challenges lurk for the region. Currently Peru’s central bank is wrestling with excessive dollarisation of the country’s financial sector. Dollar-denominated loans can turn problematic with a sudden drop of the local currency and investor sentiment is currently against the region. Moreover, the ongoing commodity rout could also make its mark on the local economies – both Chile and Peru are large exporters of copper. 

The regional heavyweights such as Brazil and Argentina lag behind their smaller neighbours. Argentina ranks 22nd while Brazil is 65th, even though they are the largest markets on the continent and relatively wealthy. Argentina has a problem with soaring inflation, which has averaged 10.46% over the past five years, and suffers from a low credit score. For Brazil, the biggest issue is low profitability in banking; its interest margin and return on assets are way below average for developing countries. 

Strong economics

Other countries at top of the ranking are generally there because of the sheer size of their economies or a dynamic growth rate. Malaysia has the highest score in the economics category due to stable monetary policy, and strong local wealth and growth prospects – the country expects an average GDP growth rate of 4.87% over the next five years. The category it scored worst in is banking. According to Fitch, the pressure on commodity prices and slowing economic growth in China could result in a deteriorating asset quality and slowing credit growth in Malaysia in the near future. 

China itself ranks eighth in the ranking overall and third in the economics category. While it is the single largest market worldwide, it still has a low GDP per capita relative to some of its peers. Moreover, banking in the country is not particularly profitable, with low net interest margins and average returns on assets. The political situation is also somewhat challenging, as it is very difficult to set up a local subsidiary. 

The economic and political situation is somewhat similar for Gulf countries. The local economies are largely wealthy although no longer growing at the same pace as they did in their pre-crisis heydays – the average expected GDP growth in the Gulf is between 2% and 3.4%. These countries are strong enough to be resilient in the face of an oil crisis, but the political picture is murkier. Although it is relatively easy to set up a local subsidiary in the region, these countries score low in categories that relate to equal legal treatment of foreigners.  

The banking sector in the Gulf is lucrative, but not without challenges. The local cost-to-income ratios are among the lowest in the ranking while returns on assets (RoAs) are among the highest. However, Gulf countries are often harmed by lack of foreign lenders, and in some cases non-performing loans (NPLs). In the United Arab Emirates, NPLs averaged 7.35% in 2015, while in Saudi Arabia they have been rising over the past year. 

Stunted growth

European countries put in a lacklustre performance in the ranking. Economic growth is the main challenge for the region as it seems tepid when compared with the rest of the developing world – most of emerging Europe is recovering from a recent recession. This is especially the case for the Balkan countries, where an economic downturn has not only checked their future GDP growth but has also been a drag on banking, leading to negative RoAs and average NPLs in excess of 15%. 

Poland is the lone European presence in the overall ranking’s top 10 – placing third overall – followed by Georgia in 13th position and then Russia in 32nd. Georgia earned the highest score in the banking category and received the third highest score for political governance. However, its economic performance was disappointing. The country’s score was harmed by high and volatile inflation as well as its small size. 

Poland benefits from years of steady development and relative wealth compared with other emerging economies – it ranks 10th by GDP per capita of all the countries ranked. Moreover, the country scores highly on governance and banking. But the ranking uses 2014 figures and with the banking levy introduced in early 2016, Poland might have lost part of its appeal. Hungary, which relies on a similar banking levy, ranks 33rd. 

One category where emerging countries in Europe perform well is political climate for banking. Compared with the rest of the developing world, Europe is the safest, least corrupt and most friendly towards foreign investors. Croatia and Georgia share the third spot in this category with Armenia and Poland among those in joint fifth. South American countries also perform well in this category, with Costa Rica and Chile coming in first and second, respectively.

Africa disappoints 

African countries generally perform poorly in the ranking. In the fifth spot, Morocco is highest scorer on the continent, with its worst segment being banking. Despite
high net interest margins and low costs, its country-wide RoA is only 1.16%. Ghana and Zambia also perform relatively well in the ranking, earning respective 18th and 26th positions, with both dragged down by the GDP per capitas, which are about $4000. The rest of the continent lags behind, with many African countries appearing in the bottom 10 of the ranking, along with troubled locations such as Venezuela and Ukraine. 

However, many African countries get a boost from high margins on the local banking scene. Ghana shares the top spot in terms of banking performance with Georgia. The local net interest margin is a whopping 10.68%, the highest in the entire ranking, which is reflected in the RoA for the entire banking sector – at 5% Ghana’s RoA is also the highest in the entire ranking. However, these profitability measures do not tell the entire story. The local banking sector is held back by high NPLs that averaged 12.36% between 2011 and 2015. 

BOX: How we did it

The methodology for this ranking is based on three categories that cover 18 indicators. The categories are the economic situation and prospects of the country, the political climate for potential investors and the local banking environment. We have included in our analysis 100 developing countries in the world by 2014 gross domestic product in US dollars. The indicators used are: 

Economics

  • Average yearly inflation in the years 2006-14, using International Monetary Fund figures.
  • Volatility of inflation in the years 2006-14, measured by standard deviation.
  • Average expected GDP growth for 2015-20, using International Monetary Fund data.
  • GDP per capita in 2014, using purchasing power parity, with data from the International Monetary Fund.
  • Gross country GDP at market prices in 2014, with data from the World Bank.
  • Composite country credit score, provided by Trading Economics.

Politics

The following indicators come from several sources but they are all compiled by the World Bank in its Worldwide Governance Indicators database.

  • The country security score, relying on iJET classification.
  • Questions assessing ease of doing business for a foreign investor and the degree of local corruption. All of these scores come from Institutional Profiles Database created by Centre d'Etudes Prospectives et d'Informations Internationales. 

Banking

  • Average non-performing loans between 2011 and 2015, using numbers from the World Bank.
  • Banking indicators from 2013 that are published in the Global Financial Development database of the World Bank.
  • Cost-to-income ratio.
  • Net interest margin.
  • Return on assets.
  • Percentage of foreign banks.
  • Population with bank accounts. 

We have ranked each country based on each indicator. For most indicators the country was assigned a score of between 0 and 50. The following indicators were super-scored on a scale of 0 to 100 – country GDP, ease of setting up a subsidiary, and return on assets. Countries were penalised if the data in any category was missing. The scores were then aggregated using the following weights: 50% for the economic score, 30% for the banking score and 20% for the political score. The maximum possible score is 350.

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