Carolyn Cohn London

THE EURO zone debt crisis has made investors wary of western European bank stocks and they are seeking more value and less risk in banks in central Europe, Russia, Turkey and even Africa.

The problems of the area’s banking sector, from losses on Greek debt to a bailout for Cyprus that hit big depositors or the governance scandal at Italy’s Monte dei Paschi, have undermined assumptions about Europe’s relative stability.

Central and eastern Europe may require careful stock picking as the troubles of the euro zone pile financial pressures on to bank customers.

In parts of central Europe, government efforts to hold down debt have helped tip economies into recession and foreign currency mortgages have put a drag on spending.

But the MSCI emerging Europe financials index, which includes banks in Russia and Turkey, has so far held on to the 40 percent gains it made last year, outperforming the overall MSCI stock index for the region, which has slid more than 5 percent so far this year.

By contrast, major European banking stocks have underperformed benchmark European stocks this year.

In some emerging economies, “banks are in many cases in a stronger position than western European banks”, HSBC head of global emerging equities John Lomax said.

The International Monetary Fund noted risks including rising bad debts but said on Friday that for the five largest banking groups, business in eastern Europe was substantially more profitable than in the West.

Slovenia, a euro zone member that is still classified as a frontier market, is a notable exception: the only ex-Communist country in Europe that did not privatise its major banks is struggling to manage their bad debts and avert a bailout.

But investors say banks in countries such as Turkey have already gone through crisis and reform, making them safer bets. They say it is always possible to find attractive options on local exchanges in emerging markets, because these tend to contain large numbers of financial services stocks.

“In a country you may have 20 banks but only three good ones, [so] you can avoid all the risks,” Silk Invest chief investment officer Daniel Broby said. The frontier fund manager invests in countries such as Turkey and Kazakhstan, and regions including the Persian Gulf and sub-Saharan Africa.

Banks in developed Europe have a leverage ratio based on assets to equity of more than 20 times, compared with 6 to 8 times for some of the stronger banks in emerging Europe, investors say, while valuations in emerging markets tend to be cheap because of low liquidity or political risk.

Picks include Russia’s Sberbank, which has been trading at a cheap 1.1 times price to book but with a return on equity of 24 percent, and Turkey’s Halkbank with a price to book at 1.5 times yet return on equity of 26 percent. – Reuters