Out of the ashes of the financial crisis, emerging market banks have emerged stronger while developed market banks have languished. That makes emerging market financial exchange traded funds (ETFs) an interesting investment idea.
The Economist reports that developing market banks are now well-capitalized and well-funded, while enjoying rapid growth. In terms of profits, dividends and market value, developing banks now account for up to half of the global banking industry. [Why Jeremy Siegel is Bullish on the U.S.]
However, emerging market banks will have to find innovative ways to grow profits. According to an interview by Patrick Foulis, banking editor of the Economist, emerging market banks will need more capital than their retained profits can generate in order to meet the demands of rapid credit growth and its associated bad debt. [New Poland ETF Debuts at a Good Time.]
In the past, two models for banking business were attractive to foreign banks. The first was to have a huge network of banks in different countries to facilitate consumer needs. The second was to build huge retail operations that acted like local firms. [Tom Lydon’s Picks on CNBC.]
The two models are now almost impossible to replicate for firms looking to establish a presence in emerging markets, reports Foulis. This is because the first model requires an extended period of expansion, and the second requires an opportunity to seize market share from local banks, which is not likely to happen at the moment. [Future Opportunity in Financial ETFs?]