Emerging Markets Weekly

Anyone in doubt about the opportunities in banking and other financial services in BRIC markets should consider the opportunity for credit growth to the household sector over the next decade and well beyond. While mortgage lending in the United States, UK and other developed markets hit its pinnacle in 2006 due to very lax lending standards and low interest rates, those markets are in the process of unwinding from an unsustainable credit boom.

Emerging markets also experienced a lending boom over the past decade but crucially from a much lower base. Credit penetration in the BRIC markets remains exceptionally low with mortgage credit currently less than 10% of GDP in contrast to the Unites States where mortgage credit is equal to nearly 75% of GDP. The contrast in numbers is an encouraging indication of one of the many opportunities in banking in the BRIC countries as households gain access to mortgage credit in Brazil, Russia, India and China for the very first time.

It is expected that banks in the developed world will continue to shrink assets and assume less leveraged balance sheets over the next few years as regulators attempt to get a better handle on risks in the financial system. In contrast, it is expected that banks in the emerging markets will undertake significant loan growth due to the lower gearing that they have carried over the past few years.

Not only will mortgage credit rise as a percent of GDP, but output will also rise much faster in the developing world with China now expected to experience output growth as high as 10% in 2010. This one-two combination means that the banking sector could easily see double-digit loan growth over the next few years.