Share on linkedin

Why We Prefer EM Banks Over Their DM Peers


Portfolio Manager
Sr. Research Analyst

Research Analyst

Research Analyst


In light of the recent developments with Silicon Valley Bank and Credit Suisse, many clients have asked us if emerging markets banks have exposure to similar risks. The answer, as we explain in this and a related article, Why Leading EM Banks Don’t Present the Same Risks SVB and Credit Suisse, is a resounding “No.” Emerging markets banks, in fact, have more growth opportunities and less risk exposure than many of their developed markets counterparts, including those that do not face the challenges confronted by Silicon Valley Bank and Credit Suisse.

May 2023

Overall, banking is not an industry in which we see sizable growth opportunities for long-term investors. In general, banking, or any lending business based on leverage, is fraught with credit, liquidity, and regulatory risks. Substantial credit or asset impairment losses, for example, can wipe out a bank’s equity or capital. That can make the business unsustainable unless there is a substantial capital injection. Overall, these risks make banks relatively unattractive compared with the other sectors in which Sands Capital has historically invested. Still, there is a considerable difference between the growth prospects of emerging markets (EM) versus developed markets (DM) banks.

In the developed markets, banking is mostly a mature industry that sells commoditized products and services. In most emerging markets, however, the very low rates of penetration for financial services create secular growth opportunities for banking and other financial services firms. A disproportionate share of the value created tends to be captured by a select number of leading institutions that have superior brands, strong distribution capabilities, a diverse array of products, significant capital, and high-caliber management teams. All these advantages have, over a long period, generally delivered above-average growth for the banking industry in emerging markets, with sustainable competitive moats for the region’s leading banks.[1]

The Persistent Challenges for DM Banks

In developed markets, the combined effects of slow gross domestic product growth and high credit penetration now limit the growth opportunities for many banks’ lending operations. The maturity of the financial systems in developed countries also creates substantial room for competitors to offer some of the core services that banks have traditionally offered. Loans can be acquired from the bond market, shadow banks, and other financial intermediaries, while deposits can be directed to money market funds, investment assets, or insurance products. The result of these combined factors is that DM banks do not have an underlying secular growth trend that can support their businesses. Instead, DM banks rely more heavily on financial engineering to drive their growth.

The Benefits of a Less Mature Banking Sector in EM

The situation is far different for banks in emerging markets. In many EM countries, the baseline economic growth rate exceeds 5 percent annually, and credit penetration is often substantially below the level seen in DM countries (see exhibit below.) The opportunities to provide access to basic financial services—such as credit, savings, payment mechanisms, and wealth management—can deliver secular growth for the banking industry in these markets. The fact that these markets are still in the early stages of access to financial services can create a foundation for sustainable earnings growth because, as the leading EM banks are likely to grow by simply focusing on the core banking functions of taking deposits and issuing credit.

Much Lower Levels of Debt Penetration in Emerging Markets

Source: World Bank as of December 31, 2022., Bank of International Settlement (BIS) as of Feb. 27, 2023.

In India, for example, even after decades of double-digit retail loan growth, household credit penetration, as a percentage of GDP, is just 35 percent, compared with about 75 percent in the United States. Additionally, in emerging markets, there are very few alternatives to the major banks that can meet customers’ savings and borrowing needs. This concentrates the secular growth opportunity into the hands of the leading banks, which are able, in turn, to leverage their superior scale, brand equity, and capital to benefit disproportionately from these markets’ growth potential. The result is often a set of large banks with significant profitability and growth relative to their DM peers. These large EM banks can also take less risk. They do not need to expand into complex and esoteric financial activities to create long-term value for their shareholders.

Related: Why Leading EM Banks Don’t Present the Same Risks SVB and Credit Suisse Did

[1] Source: RBI Database, HDFC Reporting, as of December 31, 2022.


The views expressed are the opinion of Sands Capital and are not intended as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell any securities. The views expressed were current as of the date indicated and are subject to change. This material may contain forward-looking statements, which are subject to uncertainty and contingencies outside of Sands Capital’s control. All investments are subject to market risk, including the possible loss of principal. Readers should not place undue reliance upon these forward-looking statements. There is no guarantee that Sands Capital will meet its stated goals. Past performance is not indicative of future results. A company’s fundamentals or earnings growth is no guarantee that its share price will increase.  

Silicon Valley Bank and Credit Suisse were not held in any Sands Capital strategies and is referenced for illustrative purposes only.

References to “we,” “us,” “our,” and “Sands Capital” refer collectively to Sands Capital Management, LLC, which provides investment advisory services with respect to Sands Capital’s public market investment strategies, and Sands Capital Ventures, LLC, which provides investment advisory services with respect to Sands Capital’s private market investment strategies, which are available only to qualified investors. As the context requires, the term “Sands Capital” may refer to such entities individually or collectively.

As of October 1, 2021, Sands Capital was redefined to be the combination of Sands Capital Management, LLC and Sands Capital Ventures. Both firms are registered investment advisers with the United States Securities and Exchange Commission in accordance with the Investment Advisers Act of 1940. The two registered investment advisers are combined to be one firm and are doing business as Sands Capital. Sands Capital operates as a distinct business organization, retains discretion over the assets between the two registered investment advisers, and has autonomy over the total investment decision-making process.

Information contained herein may be based on, or derived from, information provided by third parties. The accuracy of such information has not been independently verified and cannot be guaranteed. The information in this document speaks as of the date of this document or such earlier date as set out herein or as the context may require and may be subject to updating, completion, revision, and amendment. There will be no obligation to update any of the information or correct any inaccuracies contained herein.

This material is for informational purposes only and does not constitute an offer, invitation, or recommendation to buy, sell, subscribe for, or issue any securities. The material is based on information that we consider correct, and any estimates, opinions, conclusions, or recommendations contained in this communication are reasonably held or made at the time of compilation. However, no warranty is made as to the accuracy or reliability of any estimates, opinions, conclusions, or recommendations. It should not be construed as investment, legal, or tax advice and may not be reproduced or distributed to any person. 

In the United Kingdom, this communication is issued by Sands Capital Advisors – UK Ltd (“Sands UK”) and approved by Robert Quinn Advisory LLP, which is authorised and regulated by the UK Financial Conduct Authority (“FCA”). Sands UK is an Appointed Representative of Robert Quinn Advisory LLP. This material constitutes a financial promotion for the purposes of the Financial Services and Markets Act 2000 (the “Act”) and the handbook of rules and guidance issued from time to time by the FCA (the “FCA Rules”). This material is for information purposes only and does not constitute an offer to subscribe for or purchase of any financial instrument. Sands UK neither provides investment advice to, nor receives and transmits orders from, persons to whom this material is communicated, nor does it carry on any other activities with or for such persons that constitute “MiFID or equivalent third country business” for the purposes of the FCA Rules. All information provided is not warranted as to completeness or accuracy and is subject to change without notice. This communication and any investment or service to which this material may relate is exclusively intended for persons who are Professional Clients or Eligible Counterparties for the purposes of the FCA Rules and other persons should not act or rely on it. This communication is not intended for use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

Related Articles

Investment Strategy
Delivering Value to the Modern Consumer
Consumer spending is a huge part of the global economy, and we’ve found that businesses that can harness the power of the internet to put their products in front of millions of customers at once have an edge. Research Analyst Katherine Okon explains why she favors those companies that combine digital and physical operations.
Investment Strategy
EM Still Works
Selective active managers should still be able to find value in emerging markets by looking beyond the MSCI Emerging Markets Index. Discover why headwinds that have pressured the asset class are likely to abate.
Investment Strategy
Following the Fundamentals Through Volatile Times
As we continue to emerge from one of the most difficult periods in our history, we are encouraged by the results of our investment strategies. In 2023, we delivered by sticking with our time-tested investment strategy, following our process, doing our research, and executing.