Call Participants

ATTENDEES

Kristen Hallam

Natasha McSwiggan

Presentation

You're listening to the Economics & Country Risk podcast from S&P Global Market Intelligence. In each episode, our experts will provide you with the where, how and when to make decisions that transform your business.

Kristen Hallam

Hello. I'm Kristen Hallam, Lead Content Strategist for Global Intelligence & Analytics at S&P Global Market Intelligence and your host for this episode of the Economics & Country Risk podcast. We're going to take a look at the banking risk landscape in emerging markets, particularly Mainland China, Ukraine, emerging Europe, Argentina and the UAE.

Joining me for this discussion of events that could alter this landscape is my colleague from Market Intelligence, Natasha McSwiggan, Senior Economist for Europe and Central Asia. Natasha, welcome to the podcast, and thank you for being here.

Question and Answer

Kristen Hallam

So Natasha, one of the trends that could impact the financial sector in emerging markets in May is increasing acquisitions of smaller rural banks in Mainland China by larger ones. Why are rural banks open to acquisition?

Natasha McSwiggan

So what we're seeing with the smaller rural banks is that they tend to have tighter liquidity positions compared to the larger banks. This is really due to the historical aggressive credit extension and the recent regulations that are restricting their abilities to obtain deposits outside of their service areas.

Kristen Hallam

So how might these acquisitions change the sector's structure?

Natasha McSwiggan

The sector's structure is likely to change as a result of these rural banks being absorbed into the larger entities. We'll likely see its branches and the rural bank's share of total sales assets will likely grow.

Kristen Hallam

And what other impact could this trend have?

Natasha McSwiggan

So for the other impacts, this move will likely guarantee continued liquidity for the activities of small and medium businesses, otherwise known as SMEs, which have been the main destination of loans for the rural commercial banks. We expect that the acquisition drive be approached by the authorities and local branches of financial regulators with the aim of ensuring the stability of funding with the local areas and so reduce risks or financial resistance.

Kristen Hallam

So Natasha, let's move on to Ukraine. How is the government's plan for privatization of two state-owned banks going?

Natasha McSwiggan

So what we saw was Ukrainian authorities noted in the memorandum to the International Monetary Fund or the IMF that it was seeking to sell two state-owned banks to private investors this year. So this forms part of its overall plans to privatize state-owned banks in Ukraine by the end of 2025 as agreed with the IMF. The privatization of state-owned banks is likely to be held back by the banks presenting additional activities.

Kristen Hallam

Is the ongoing conflict in Ukraine a factor holding these deals back?

Natasha McSwiggan

We do anticipate that the ongoing armed conflict to be at risk, fighting in the near to medium term.

Kristen Hallam

Understandable, I'm sure. So staying in Europe, let's talk about the first quarter data from the Central Europe and Balkans or CEB region. What do you expect to see there, Natasha?

Natasha McSwiggan

So what we have already seen is some data raises that will last a full term so far this month, which reaffirmed the noted credit expansion and also the ongoing asset synchronicity process in the region that we expected to see. And we also expect that further results reflect this also.

The release of financial sales indicators like the NPL ratio generally add [indiscernible] balance sheet indicator releases. Positively though, we have seen that the robust net interest margins brought on by the tight monetary policy environment are likely to continue supporting bank resilience.

Kristen Hallam

And where might we see upside to credit growth in the second half of the year?

Natasha McSwiggan

So it's slightly in sectors which already have risk and support in place, such as Hungary, which has its subsidized credit scheme, and also in Romania, which has its loan guarantee programs.

Kristen Hallam

Okay. So hopping over to Argentina, where banks have been wrestling with capital controls. There is the possibility of banks being able to use BOPREAL bonds to pay dividends overseas. First, could you tell us a little bit about what BOPREAL bonds are?

Natasha McSwiggan

Yes. To tackle the problems of paying importers due to the capital controls that are in place, the Argentinian President, Javier Milei, introduced the external trade bond known as BOPREAL at the end of 2023. So essentially, these bonds can be purchased with owned funds from import transactions and are denominated and payable in dollars. And so far from what we've seen of this program, it's been relatively successful supported by fiscal benefits at the shorter-term maturity.

Kristen Hallam

So what problem is Argentina's government trying to solve by opening these bonds up for use to pay overseas dividends?

Natasha McSwiggan

The demand for the third series of bonds has actually been low due to several factors, including its larger maturity, low fiscal incentives and lower exchange rate gap. The government has added owned dividend payments as another category that could access these BOPREAL bonds. Folks have been facing difficulties paying dividends abroad, as I've mentioned, due to the capital controls and the BOPREAL likely offers an option to pay the shareholders.

Kristen Hallam

And what do you expect to happen now that banks are permitted to offer BOPREAL bonds to foreign shareholders?

Natasha McSwiggan

Previously, the limited dividend payment has led to strong capital rebuilding, and we're assuming that if banks offer BOPREAL to foreign shareholders, their ability to continue rebuilding capital will be affected. But despite this, we expect the capital balance to remain at historically high levels.

Kristen Hallam

All right. And for our last stop on our global world tour, we're going to go to the UAE, which had extreme flooding in mid-April. Is the aftermath of that flooding going to materially impact the outlook for bank profits, Natasha?

Natasha McSwiggan

The impact on all bank profits from the [indiscernible] is expected to be limited, but losses to real estate management subsidiaries could be substantial and if they showed a much to repair burden. What would negatively affect our outlook is in its recovery for significantly exceed expectations to the point that they result in failure on large insurance or real estate development companies.

Kristen Hallam

And what about the potential impact on nonperforming loans?

Natasha McSwiggan

Generally, consumers are likely to be shielded from those damages associated with the extreme rainfall and flooding that's experienced in the UAE during mid-April. Given the property development support work has and the Central Bank's Director providing loan payment reprieves and requiring insurance companies to indemnify consumers against losses, this combined with the quick reopening of business activity will support continued to decline in nonperforming loans.

Kristen Hallam

And any final thoughts for our listeners, Natasha?

Natasha McSwiggan

Well, just generally to recap, the items that we are watching for in May are the increased acquisition of mid banks by larger banks in China at the first quarter data releases in 2024, which are likely to reaffirm the credit expansion, ongoing asset [indiscernible] in Central Europe and Balkans.

The Ukrainian privatization of state-owned banks and likely being held back by ongoing asset quality, capital concerns. And also in Argentina, with Argentinian banks likely to be allowed to use the BOPREAL bonds to pay dividends overseas, which may moderately reduce capital budgets. And lastly, the cost to insurers and banks in the UAE with the extreme flooding will become clearer in May but the outlook of those nonperforming loans is unlikely to be affected.

Kristen Hallam

All right. Well, all that's left for me to do is to thank you, Natasha, for sharing your insights with us on these events, shaping the banking risk landscape in emerging markets, and thanks you, our listeners, for tuning in. Please join us next week when we'll hear from our Purchasing Managers' Index team of economists, until then.

Thank you for listening to the Economics & Country Risk podcast. Connect with us on LinkedIn and Twitter and don't forget to subscribe to the podcast, so you never miss an episode.