>BANKING BUBBLES: Earnings and Values Across the World

■ China Leads, Mexico Lags — Based on the market value of banks compared to the size of the local economy (“penetration”), the most penetrated major market is China (c30% of GDP) and the least is Mexico (c8%). China has a large banking market value due to high level of profits relative to GDP. The same is true for Brazil. But Mexico has both low earnings and a low relative market value.

■ Low-PE Markets: Turkey and Korea — Turkey screens as the lowest-PE banking system in our sample. The main concern is profit sustainability and political risk. We believe fears on both counts are overdone. We see Isbank, Bank Asya and Garanti as good plays on Turkish banking resilience. Korea also screens as a low- PE market and may benefit from margin and credit recovery.

■ Low Earnings Markets: Mexico and India — Mexico screens as having the lowest bank earnings in our sample. A macro recovery in Mexico should support bank earnings and penetration growth. We view BBVA as a good value play on Mexican growth. India also looks an attractive growth opportunity. Standard Chartered is a way to play growth in India, as well as in Korea and other emerging markets.

■ Australia: Example or Exception? — Australia has a bank market value to GDP close to China’s and bank earnings to GDP similar to Brazil. Market structure, a robust economy and supportive shareholders all help explain Australia’s high earnings and valuation multiple. An oligopoly structure can be replicated, but the rest is harder. Turning Aussie (or Canadian) won’t be easy for the UK.

To read the full report: BANKING BUBBLES