Financial Inclusion in Emerging & Frontier Markets · Financial Inclusion within Emerging and...

For Professional Investors and Advisers Only

November 2018

Financial Inclusion in Emerging & Frontier Markets

RWC Emerging & Frontier MarketsStrategy Update Q3 2018

www.rwcpartners.com | E [email protected] | Authorised and regulated by the Financial Conduct Authority

The Team

John Malloy and James Johnstone co-manage the RWC emerging and frontier markets strategies. The team is composed of a further 16 analysts, economists and strategists based in Miami and Singapore, many of whom have worked together for over twenty years. The team joined RWC Partners in 2015 and now manages c. $5.5bn for its clients.

Emerging and frontier markets represent the fastest growing countries in the world. The RWC team believes the continued growth in these markets represents opportunities across a range of industries.

The highly experienced and dedicated team takes an index-agnostic, opportunistic approach which allows it to explore investment opportunities that are often off the beaten track.

In this edition we give an overview of our strategies over the third quarter of 2018 before exploring the theme of financial inclusion within emerging and frontier markets.

RWC Partners Limited Verde, 10 Bressenden Place, London, SW1E 5DH | T +44 (0)20 7227 6000 | F +44 (0)20 7227 6003

RWC Emerging & Frontier Markets 3

RWC Emerging & Frontier Markets

Review of Q3 2018

Emerging and frontier market equities continued to fall during the third quarter of 2018, despite some stabilization towards the end of the quarter. Turkey’s growing economic crisis and President Trump’s continued protectionist rhetoric continue to weigh on investor sentiment. Global growth remains robust, valuations are at attractive levels compared to developed markets and company earnings are strong. The RWC Emerging Market Equity Fund returned -8.0% compared to the MSCI Emerging Markets IndexReturn of -1.0%. The RWC Frontier Market EquityFund fell -6.8% versus the MSCI Frontier MarketsIndex Return of -1.9%.

China was responsible for the underperformance of the RWC Emerging Market Equity Fund. Hangzhou Hikvision, Semiconductor Manufacturing and Han’s Laser Technology fell significantly during the quarter. Hikvision reported strong earnings results, delivering +22.4% and +28.8% growth in revenue and net profitwith encouraging results from the group’s robotics,automation and auto segment. Han’s Laser’s +11%year-on-year increase in earnings was largely drivenby steady growth from the company’s EV battery, PCand panel sectors. All three companies will likely belong-term beneficiaries of increased domestic demandfor surveillance equipment, semiconductors and lasertechnology, respectively. The fund’s copper exposurewas also a significant detractor. Copper fell duringthe quarter as the release of fixed asset investmentdata in China fell to 5.5% year-on-year. First QuantumMinerals and KAZ Minerals both declined significantly.The investment theses for both stocks remains intactwith First Quantum’s Cobre Panama mine close tocompletion. Although the market reacted negatively,KAZ Minerals’ recent expansionary project suggestsan exciting new growth phase for the company.Furthermore, KAZ reported good earnings results with

EBITDA reaching $690 million, higher than analysts’ estimates, driven by better costs at its operations in the East Region, Bozymchak and Bozshakol. Tullow Oil was a significant contributor to the fund during the quarter. While higher oil prices were partially responsible, the company reported encouraging first quarter results with strong performances coming from both TEN and Jubilee. Production at the Ghanaian TEN field is set to ramp up to peak production of 80k barrels per day in early 2019 and recent earnings results showed the company generated $401 million of free cash flow in the first half of 2018, well above expectations. Thai hotel operator, Minor International, rose 29.2% as the company reported strong earnings results. Second quarter net profit rose +64% year-on-year to BT 1.2 billion and RevPAR in Thailand grew 6% year-on-year due to ongoing growth of the Anantara and AVANI Riverside projects.

Argentina was a significant detractor during the quarter for the RWC Frontier Markets Equity Fund. Financials such as Grupo Financiero Galicia and Grupo Supervielle declined -22.9% and -27.5% respectively. The Argentine peso continued to fall to 41:$, despite the IMF announcing a revised $57 billion package and the central bank’s increase in interest rates to 60%. While the IMF have called for a significant adjustment in the fiscal deficit which will require cuts in capital spending, the new level of the peso is now consistent with the very attractive real exchange rate levels post the 2001 default and a medium-term recovery for the Argentine economy is likely. The fund has begun to add to its Argentine holdings mainly in the banking sector. The fund also remains underweight the Kuwaiti market which is benefitting from index flows after the FTSE and MSCI decisions to re-assess the country’s frontier status. The fund has a significant holding in the country’s

Portfolio holdings are subject to change at any time without notice. This information should not be construed as a recommendation to purchase or sell anysecurity. Past performance is not a guide to the future. The price of investments and the income from them may fall as well asrise and investors may not get back the full amount invested.


biggest bank but most other stocks do not meet the fund’s growth or valuation criteria and so the fund remains significantly underweight. The fund remains index agnostic and will only invest in companies which meet our strict investment criteria. Egypt was also a detractor, despite a positive macroeconomic backdrop. Remittances rose +21% year-on-year to $26.5 billion, passenger car sales increased +29% year-on-year, foreign reserves were up $104 million to $44.4 billion and PMIs remain strong at 50.5. Vietnamese financials were significant contributors to performance. HD Bank and Saigon Securities rose +5.8% and 15.7%

respectively. The former will benefit from the growing retail and SME sectors in the country and the company plans to double its branch network from 221 to 400 by 2021. The latter will profit from its position as the largest brokerage in Vietnam with market share of 12% in addition to the Government’s privatization drive. ASA International was another contributor to performance rising 53.3% since its well-participated IPO in July. The micro-finance company specializes in small-ticket loans to female micro-entrepreneurs and is set to profit from increased credit penetration in South Asia and Africa.

Portfolio holdings are subject to change at any time without notice. This information should not be construed as a recommendation to purchase or sell any security.



Financial Inclusion within Emerging and Frontier Markets

Summary

Over 1.7 billion adults in emerging and frontier markets do not possess a bank account. Even if they have an account, most will have little more than a transactional deposit account. Financial institutions in developed markets offer a multitude of products, from credit cards to services such as wealth management and insurance. Today, a digital revolution is underway in the financial services industry and companies are adapting their products to the needs of a broader target audience. This move will likely allow financial institutions in emerging markets to realise their growth potential and leverage their technological

Investment Ideas

Sberbank Sberbank is the dominant bank in Russia and is a clear leader in financial technology. Sberbank Online (SBOL) is the centrepiece of its retail operations and it will benefit from Russia’s encouraging macroeconomic environment, despite sanctions risk.

Ping An Insurance Ping An is China’s second largest life insurance company. The company’s fintech and healthtech segment is growing rapidly and the company may benefit from increased insurance penetration. The company is correlated to China’s macroeconomic conditions.

OTP Bank OTP provides commercial banking services in Hungary and other, less developed, Eastern European countries. The region is enjoying a pick-up in investment activity, low unemployment and significant real wage growth.

capabilities to widen their product base and revenue streams. While spending, saving and payment trends vary considerably from country to country, emerging markets are particularly attractive for fintech investments as they offer new alternatives to traditional banking systems. Mobile Money has emerged in various countries such as China, India, Kenya and Bangladesh which has helped reduce logistical challenges and informal economic activity. Blockchain and cryptocurrencies are in nascent stages but have the ability to improve the efficiency of financial institutions over the long term.

Brac Bank Brac is a commercial bank operating in Bangladesh. The country is significantly under-penetrated with regards to bank accounts. Brac’s stake in mobile money leader, bKash, will likely drive earnings growth despite impending elections in December 2018.

ASA International ASA is one of the world’s largest non-bank microfinance institutions, providing small ticket loans to female micro-entrepreneurs. The company’s financial results are impacted by local currency depreciation.

Ho Chi Minh Development Bank Ho Chi Minh Development Bank is one of the largest private banks in Vietnam and may benefit from the country’s encouraging macroeconomic environment and increased consumer credit penetration.



Introduction

Money has moved over the past 5,000 years from clay ledgers, metal coins and paper bills to the plastic cards and mobile transactions that are currently used in modern society. Today, a digital revolution is underway in the financial services industry. Innovative technologies are changing the methods of delivery, speed, quality and cost of financial

services. Growth in GDP per capita and innovation have created conditions for an increase in financial inclusion worldwide. Encouraging demographics, disposable income growth and social development make the world’s emerging economies increasingly attractive to profit-driven financial institutions.

Financial Inclusion Opportunity

Globally, around 1.7 billion adults remain without an account at a bank or any form of organised financial institution. In developed countries, the penetration is as high as 94%. In the emerging world1, only 63% of adults have some form of account. Financial institutions in developed markets offer a multitude of products, from credit cards to services such as wealth management and insurance. Today, a digital revolution is underway in the financial services industry and companies are adapting their products to the needs of a broader target audience. This move will likely allow financial institutions in emerging markets to realise their growth potential and leverage their

technological capabilities to widen their product base and revenue streams. However, there is a significant divergence within emerging countries themselves. While countries such as Poland and Malaysia are well penetrated at 87% and 85% respectively, below 30% of adults possess an account in Pakistan, Vietnam and Myanmar. Furthermore, having an account does not necessarily imply adequate usage or formal saving. 20% of account owners worldwide were reported as having an inactive account, with no deposit or withdrawal in the last year. South Asian economies perform the worst statistically, with countries such as India having an inactive account share of 48%.

FIGURE 1: Penetration improving in developing economies

World High Income Developing

Accounts at Financial Institutions (% of total population)

0%

2011 2014 2017

20%

40%

60%

80%

100%

Source: RWC, Global Findex Database, 2011-2017

FIGURE 2: Significant divergence in financial inclusion

UA

E

Gre

ece

Thai

land

Chi

na

Chi

le

Sri

Lank

a

Sau

di A

rabi

a

Sou

th A

frica

Turk

ey

Rom

ania

Ban

glad

esh

Arg

entin

a

Col

ombi

a

Per

u

Nig

eria

Mex

ico

Phi

lippi

nes

Egy

pt

Vie

tnam

Mya

nmar

Pak

ista

n

Banked Adult Population (% of total population)

0

10

20

30

40

50

60

70

80

90

100

Source: RWC, Global Findex Database, 2017

1 Low – Middle income countries as defined by the World Bank



FIGURE 3: Inactive accounts are still prevalent

India Argentina Bangladesh World Brazil China

No Deposit/Withdrawal in 1 Year

0%

10%

20%

30%

40%

50%

60%

Source: RWC, Global Findex Database, 2017

FIGURE 4: Diversified credit card penetration

FIGURE 5: Large proportion of utility bills still paid in cash

Turk

ey

Chi

le

Bra

zil

Arg

entin

a

Chi

na

Rus

sia

Sau

di A

rabi

a

Mex

ico

Sou

th A

frica

Indi

a

Nig

eria

Phi

lippi

nes

Pak

ista

n

Ban

glad

esh

Credit Card Ownership (%)

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Egy

pt

Indo

nesi

a

Arg

entin

a

Mex

ico

Rus

sian

Fede

ratio

n

Chi

na

Indi

a

Nig

eria

Pak

ista

n

Kuw

ait

Utility Bills Paid in Cash (% of population)

0%

10%

20%

30%

40%

50%

60%

70%

80%

Source: RWC, Global Findex Database, 2017 Source: RWC, Global Findex Database, 2017

Spending, saving and payment patterns vary considerably from country to country. Credit card penetration is 41% in Turkey, above China and India at 20% and 3%, respectively. Nearly one quarter of the world’s adults receive payments from a government body and over a billion adults with an account still pay utility bills in cash. For instance, 68% of account owners in Egypt still pay utility bills in cash. This divergence suggests that every country is unique and has its own, idiosyncratic approach

to financial inclusion. Many financial institutions in emerging economies are well-placed to develop strategies and implement policies related to financial inclusion. National and regional banks are particularly likely to be at the forefront of a country’s financial development due to their superior distribution reach. The digital revolution is allowing certain economies to bypass traditional banking systems and leapfrog the conventional development model of banking services.


FIGURE 6: SOE banks control a significant share of assets

India Russia Brazil China

Market Share of SOE Banks as % of Assets

0%

10%

20%

30%

40%

50%

60%

70%

Source: RWC, Citi, 2018

FIGURE 7: Incumbent banks are still dominant

GlobalBanks

Top 10Banks

IncumbentPaymentPlayers

New AgePaymentsPlayers

Crypto-currencies

Bitcoin New AgeLendingPlayers

Market Value ($ billions)

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

$8,000

$9,000

Source: RWC, Bernstein, Coinmarketcap, 15th October 2018

Financial Technology

From mobile payment systems and digital wallets to artificial intelligence, machine learning and cryptocurrencies, financial technology and its evolution continue to take many different forms. Technology is changing the financial industry, but financial disrupters combined are still less than 10% of total bank market capitalisation worldwide which is around $7.8 trillion. In comparison, Amazon’s market value is twice that of all major retailers combined. While this suggests significant growth potential in the sector, the under penetration of financial technology relative to other disruptors implies that incumbent banks still possess competitive moats. Increasingly, emerging and frontier market banks are adopting these new technologies directly, leading to more competitive offerings.

Emerging and frontier markets are particularly attractive for fintech investments as they offer new alternatives to traditional banking systems. A large part of banking system assets in most emerging markets is controlled by State-Owned-Enterprise banks, some of which are at nascent stages of technological innovation. Digital payments are increasing across the emerging world and we expect further technological innovation in the coming years which will help banks preserve their high net interest margins relative to developed markets. Under-penetrated credit markets have the advantage of having less developed banking systems which allow players to leapfrog traditional banking models.



FIGURE 8: Net interest margin by country

FIGURE 10: Mobile and smart phone penetration continue to increase

Indo

nesi

aC

olom

bia

Mex

ico

Bra

zil

Per

uR

ussi

aS

audi

Ara

bia

Turk

eyE

gypt

Sou

th A

frica

Chi

leIn

dia

UA

EP

hilip

pine

sM

oroc

coQ

atar

Kuw

ait

CE

ETh

aila

ndG

reec

eU

SA

UK

(dom

)Ib

eria

Isra

elC

hina

Aus

tralia

Kor

eaH

ong

Kon

gM

alay

sia

Sin

gapo

reC

anad

aU

K (i

ntl.)

Ben

elux

Nor

dics

Taiw

anG

erm

any

Sw

itzer

land

Italy

Fran

ce

0%

1%

2%

3%

4%

5%

6%

7%

Developed MarketsEmerging Markets

2012 2013 2014 2015 2016 2017 2018E 2019E 2021E2020E

Global Mobile & Smart Phone Penetration

0%

10%

20%

30%

40%

50%

60%

70%

80%

Mobile Phone Penetration Smart Phone Penetration

Source: RWC, Citi, 2018

Source: RWC, Statista, 2012-2021E

.

FIGURE 9: Digital payments are growing in developing economies

2011 2014 2017

Made or Received Digital Payments in the Past Year (% of total population)

0%

20%

40%

60%

80%

100%

Developing EconomicsHigh Income

Source: RWC, Global Findex Database, 2011-2017

Mobile Money

As mobile and smartphone penetration increases, the adoption of mobile money continues to grow. Mobile wallets have the ability to hold a previously defined payment instrument such as credit or debit card or a digital equivalent of a currency which can be used to transfer money between two entities. This helps to reduce logistical challenges which will likely keep the money in the banking system and reduce informal economic activity. Currently, there are c.800 million

active mobile money users globally. China has c.500 million users, India has over 100 millionwhile Kenya has around 30 million. This can beattributed to the relatively high levels of mobile andsmartphone penetration in emerging economiescompared to formal banking penetration. Globally,around 60% of the population have a mobile phonewhile 34% have a smartphone.


The launch of Smart Money & Gcash in the Philippines during the early 2000s was the first example of a mobile platform-based payments system. However, this only had modest success. The introduction of m-Pesa in Kenya in 2007 through mobile operator,Safaricom, was the first time the full potential ofmobile money had been realised. Today more than70% of Kenyan adults are active users of m-Pesa,with only 55% of adults having traditional bankaccounts. One of the main reasons for m-Pesa’s

success is the lenient attitude of the Kenyan banking regulator. In comparison, penetration has stalled in most Emerging markets where the banking regulator is more conservative and wants to protect the customer. The Kenyan market looks saturated with P2P transactions totalling $22 billion which is roughly 30% of GDP and total mobile wallet transactions totalling 75% of GDP. Conversely, markets like Bangladesh look attractive from an investor perspective with total transactions at $34 billion which is only 13% of GDP.

FIGURE 11: China dominates mobile money

FIGURE 12: Other countries look more attractive in terms of penetration

ChinaIndia

KenyaBangladesh

PakistanTanzania

Ghana PhilippinesUganda

Active Mobile Money Users (million)

0

100

200

300

400

500

600

China

India

Kenya

Bangladesh

Pakistan Indonesia

TanzaniaGhana Philippines

Uganda

Mobile Wallet Transaction Value as % of GDP

0%

20%

40%

60%

80%

100%

120%

140%

Source: RWC, Citi, 29th September 2018 Source: RWC, Citi, 29th September 2018

Blockchain & Cryptocurrencies

Bitcoin was originally developed in 2009 to enable anonymous P2P transactions of electronic money that did not require the involvement of a third party. Blockchain is the technology that was designed to facilitate these transactions. While price volatility currently precludes bitcoin and other cryptocurrencies from being used for widespread consumer payments, blockchain has the potential to transform every industry. As data on blockchain is registered and

stored across a network of computers as opposed to a database, no one person or entity controls the system. This minimises the risk of centralised corruption, failure or censorship of individual entities. Financial institutions are exploring the possibility of using blockchain to replace business processes that require labour-intensive third-party intermediaries to approve and verify transactions, amongst other procedures.



Penetration of distributed ledger technology (DLT) is still in its early stages and Figure 13 suggests that 2017 was a year of blockchain and cryptocurrency pandemonium. Nonetheless, Russia and China seem to be pioneering blockchain technology in their own right and we think that over the long term companies will likely integrate blockchain into their operations. Recently, a Russian entrepreneur has raised $20 million for an initial coin offering called Brickblock which will allow worldwide participants to invest in German real estate. Furthermore, a state-

owned commercial bank in China, Bank of Communications, issued RMB 9.3 billion of residential mortgage-backed securities through its proprietary blockchain network, Jucai Chain. Although it is likely that DLT technology is here to stay, there are numerous issues that must be resolved along the way. The technical capabilities of different platforms, regulatory and jurisprudential matters in addition to core concepts of ownership of information, trust and digital security all imply that we are at the nascent stages of dissemination.

FIGURE 13: Cryptocurrency price volatility

Bitcoin Price ($) vs. Bitcoin Vol (30 Day)

Bitcoin Price ($) (lhs) Bitcoin 30-Day Vol (rhs)

Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Apr-18 Sep-180

5,000

10,000

15,000

20,000

25,000

0

20

40

60

80

100

120

140

160

Source: RWC, Bloomberg, 28th March 2016 – 17th October 2018

FIGURE 14: Blockchain use cases

2016 2017 YTD 2018

Blockchain Use-Case Announcements

Cou

nt o

f Blo

ckch

ain

Use

-Cas

es0

50

100

150

200

250

300

350

Source: RWC, Citi, 2016 – 28th September 2018

Investment Opportunities

Sberbank Sberbank is the dominant bank in Russia. It has the largest branch network and over 46% market share in retail deposits. After the oil price crash in 2014 and sanctions following the annexation of Crimea, Russia went through a consumer credit crisis. Following a period of deleveraging, consumer loans

stand at just 8% of GDP which is far below emerging market peers such as Brazil (16%), Poland (14%) and Turkey (13%). Mortgages are also incredibly low at only 5% of GDP and household debt to GDP is insubstantial at just 13%. The bank is attractively valued at 0.9x 2019 price to book and generates a return on equity of 23.1%, on our estimates.


2 ATOL is a producer of retail cash registers and QIWI is a payment service provider

RWC does not offer investment advice nor should this be construed as a recommendation to purchase or sell anysecurity. Portfolio holdings are subject to change at any time without notice. This information should not be construed as a recommendation to purchase or sell any security.

FIGURE 15: Digital sales are increasing

FIGURE 16: Online users are trending higher

Q4 2016 Q1 2017 Q2 2017 Q3 2017 Q4 2017 Q1 2018 Q2 2018

Share of Retail Product Sales Digitally

10%

12%

14%

16%

18%

20%

22%

24%Sberbank Online Active Users

2016 1H 20180

20

40

60

80

100

120

0

10

20

30

40

50

60

70

27.1

20.6

25.1

47.5

30.2

38.8

24.5

60.9

Source: RWC, Sberbank, Q4 2016 – 29th June 2018

The bank is a clear leader in financial technology and does more P2P transactions than the whole of India. The centrepiece of its retail operations is Sberbank Online (SBOL) which is by far the most used online banking platform in Russia with over 33 million active users. The concept behind the platform is to provide a comprehensive range of products and services for companies at all stages of development. Another digital product is Evotor, a joint venture

between Sberbank, ATOL and one of the founders of QIWI.2 The company develops smart terminals that combine small cash registers and simple sales analytics functions to improve the efficiency of small and medium-sized enterprises in Russia. Additionally, Sberbank is a majority shareholder in Yandex.Money, a leading non-bank online payments provider, and operates a team dedicated to exploring distributed ledger technology.

FIGURE 17: Diversified loan portfolio

Sberbank Loan Portfolio

13%

38%

4%

18%

15%

12%Sberbank International

CIB

SME

Corporate Business

Mortgages

Consumer Loans

Source: RWC, Sberbank, 29th June 2018

FIGURE 18: Fee & commission income a beneficiary of digital trends

2017 2020E

Fee & Commission Income (RUB bn)

0

100

200

300

400

500

600

700

Source: RWC, Sberbank, 2017 – 2020E

Digital Users (rhs)Text Bank Apps Web

Source: RWC, Sberbank, Q4 2016 – 29th June 2018




With the price of brent crude oil at $76, the country’s macroeconomic environment seems encouraging with c.$500 billion of foreign exchange reserves and a current account surplus of 5.6% of GDP. The unpredictability of

further sanctions on Russia remains a risk. Nonetheless, the Trump administration’s deal with North Korea and the conclusion of NAFTA give us reason to believe that current geopolitical issues will likely ease over time.

FIGURE 20: Sberbank Share Price

2013 2014 2015 2016 2017 2018

Sberbank Share Price ($)

0

5

10

15

20

25

Source: RWC, Bloomberg, 2013 – 17th October 2018

FIGURE 19: Sberbank Online

Source: Sberbank Online for Android

Ping An Insurance Ping An Insurance is China’s second largest life insurance company. The company possesses strong asset yields versus its variable liability cost and is one of the few insurers in Asia without negative carry. China’s insurance sector is under penetrated at

only c.4.5% of GDP compared to the United States at 7.3% and Japan at 10.8% of GDP. Ping An is embracing technological change and has 486 million digital users across the group. The bank trades on 9.9x 2019 earnings, a discount to global peers, and generates a return on equity of 19.1% on our estimates.

FIGURE 21: Gross written premiums continue to grow

FIGURE 22: Digital users are increasing

2012 2013 2014 2015 2016 2017 2020E2018E 2019E

Gross Written Premiums

RM

B m

illio

n

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

2016 2017

Ping An Insurance Users (million)

0

100

200

300

400

500

600

Internet Users1H 2018

Fintech/Health UsersCustomers

Source: RWC, Ping An Insurance, 2012 – 2020ESource: RWC, Ping An Insurance, 2016 – 29th June 2018



The company’s fintech and healthtech segments are growing rapidly with net profit for the segment for the first half of 2018 at RMB 4.2billion a 10-fold increase year-on-year. The firm also invests c.$1 billion per year in research and development partially to explore the use of artificial intelligence capabilities such as facial and voice print recognition in business specific applications. The company’s

recent listing of Good Doctor, a B2C player in online consultation, health products and services in e-Commerce, valued at $7.5 billion at its initial publicoffering, is just the start of Ping An’s push to convertits technological ambitions into profits. The company iscorrelated to China’s macroeconomic environment andwill likely be affected by any material deterioration.

FIGURE 23: Value of new business is expanding

FIGURE 24: Ping An Share Price

Value of New Business vs. VNB Margin

Value of New Business (RMB mn) VNB Margin (%)

2017 2017 2017 2017 2017 2017 2018E 2020E2019E0

20,000

40,000

60,000

80,000

100,000

120,000

25%

30%

35%

40%

45%

50%Ping An Share Price ($)

2012 2014 2015 2016 2017 20180

2

4

6

8

10

12

14

Source: RWC, Ping An Insurance, 2012 – 2020E Source: RWC, Bloomberg, 2012 – 17th October 2018

OTP Bank OTP Bank provides commercial banking services in Hungary and has c.50% of its assets in Eastern Europe including Bulgaria, Romania, Serbia and many other under-developed countries. The macroeconomic environment is improving within the region and Hungary, in particular, is enjoying a pick-up in investment activity, with low unemployment and significant real wage growth boosting consumer

demand. Asset quality and capitalisation levels have been improving at the bank and we forecast the non-performing loan ratio to decline from c. 8.0% today to 6.3% by 2020. The bank is also the market leader in digital banking services in Hungary with more than 1 million active monthly users via internet and 250,000 active monthly users on mobile. The bank is attractively valued at 1.3x 2019 price to book and generates a return on equity of 17%, on our estimates.




FIGURE 26: Asset breakdown (%) is diversified across Eastern Europe

Hungary 51%

Bulgaria 15%

Croatia 14%

Russia 5%

Romania 5%

Serbia 4%

Slovakia 3%

Ukraine 3%

Montenegro 2%

Source: RWC, OTP Bank, 2010 – 2022E

FIGURE 25: OTP market share is strong across all segments

TotalAssets

RetailLoans

RetailDeposits

CorporateLoans

CorporateDeposits

AssetManagement

OTP Market Share in Hungary (%)

0%

5%

10%

15%

20%

25%

30%

35%

40%

Source: RWC, OTP Bank, Q2 2018

FIGURE 27: OTP Bank Share Price

2013 2014 2015 2016 2017 2018

OTP Share Price ($)

0

5

1015

20

25

30

35

40

45

50


Brac Bank Brac Bank is a full service commercial bank operating in Bangladesh. The country presents growth potential with only 20% of the population having a formal bank account and total loans to GDP at c. 41%, well below regional peers such as India.The bank is focused on SME lending which accountsfor 46% of its total loan portfolio. It is the largest mobilebanking player in Bangladesh with c.70% market

share in mobile money through its 51% stake in mobile banking subsidiary, bKash. While the macroeconomic environment in Bangladesh is weaker than normal due to the impending elections, Brac’s growth potential in terms of credit penetration and digitisation will likely prosper over the long term. The bank trades on 1.9x 2019 price to book and generates a return on equity of 18%, on our estimates.



FIGURE 28: bKash dominates mobile money in Bangladesh

67%

25%

8%bKash

Rocket

Others

Source: RWC, BRAC (bKash), 2018

FIGURE 29: Deposit growth remains strong

BRAC Bank Deposits

Deposits (BDT millions) Deposit Growth (YoY)

2010 2011 2012 2013 2014 2015 2016 2020E2017 2018E 2019E0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Source: RWC, Ping An Insurance, 2012 – 2020E

The mobile money industry has grown rapidly in Bangladesh with over 60 million registered users with transactions worth $34 billion, or 13% of GDP. bKash is the market leader with over 45 million registered users and 180,000 active agents and an extra 50,000 agents signed on. We estimate that gross revenues and net income for bKash could grow to BDT 41 billion and 1.7 billion, respectively, resulting

in a CAGR of 23% and 29% between 2018 and 2022. Alibaba’s financial payments arm, Ant financial, has recently taken a stake in bKash. The experience and payments knowledge of Alipay will likely open new opportunities for bKash. Management are currently focused on growing international remittance revenues through a new, competitive product offering in addition to developing QR code technology.

FIGURE 31: BRAC Bank share price

2012 2014 2015 2016 2017 2018

BRAC Share Price ($)

0.0

0.2

0.4

0.6

0.8

1.0

1.2


FIGURE 30: bKash android application

Source: bKash for Android




FIGURE 35: ASA International Share Price

Jul-18 Jul-18 Aug-18 Aug-18 Sep-18 Oct-18Sep-18Sep-18

ASA International Share Price (£)

3.0

3.5

4.0

4.5

5.0

5.5

Source: RWC, Bloomberg, 12th July 2017 – 17th October 2018

ASA International ASA International is one of the world’s largest non-bank microfinance institutions. With operations in 12 countries across Africa and Asia, the company provides small ticket loans to un-banked, low-income

female entrepreneurs. The company currently has c. 2 million clients and our estimates suggestthat the company’s current addressable marketis 365 million potential clients, or 59% of thefinancially excluded women in Africa and Asia.

FIGURE 32: Gross loans and clients are growing exponentially

FIGURE 33: Spreads remain robust across regions

FIGURE 34: Client satisfaction and retention remains high

Gross Loans vs. No. of Clients

Gross Loans ($ mn) (rhs) Number of Clients (mn) (lhs)

2020E 2021E 2022E2017 2018E 2019E0100

200

300

400

500

600

700

800

900

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5ASAI Spreads by Region (%)

West Africa South East Asia East Africa South Asia0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

Degrees of Customer Satisfaction

Did our loan productsmeet your needs?

Overall client satisfaction rate

Clientretention

0

10

20

30

40

50

60

70

80

90

100

Source: RWC, ASA International, 2017 – 2020E Source: RWC, ASA International, 2018E

Source: RWC, ASA International, Survey 2017



Unlike most micro-finance institutions, ASA International operates with a high level of client interaction and offers individual loans. This is reflected in the company’s superior asset quality with a non-performing loan ratio of just 0.9%. Most micro-finance institutions have to increase loan ticket sizes as credit penetration increases. ASAI’s constant foray into

under-penetrated credit markets suggests that the company can continue to keep loan ticket sizes small at around $165 on average whilst maintaining high asset yields. The company generates 40% return on equity and trades on 14.8x 2019 earnings on our estimates.

FIGURE 36: James Johnstone (RWC Frontier Markets Portfolio Manager) at ASA Headquarters

Source: RWC

Ho Chi Minh Development Bank Ho Chi Minh Development Bank is one of the largest private banks in Vietnam. The bank’s core strength is in loans to small and medium-sized enterprises and the retail segment which account for c.96% of the loan book. The company continues to invest in its current distribution network and its operations are nimble compared to the country’s inefficient State-

Owned-Enterprise financial institutions. Management forecasts the branch network to double from 221 to 400 by 2021 which will drive earnings growth going forward. On our estimates, the bank trades on 1.9x 2019 price to book, generates a return on equity of 18.2%, and has a 5 year earnings per share CAGR of 33.5%.



Portfolio holdings are subject to change at any time without notice. This information should not be construed as a recommendation to purchase or sell any security. No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment.

FIGURE 39: HD Bank share price

Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18

HD Bank Share Price ($)

1.2

1.4

1.6

1.8

2.0

2.2

2.4

Source: RWC, Bloomberg, 12th July 2017 – 17th October 2018

Vietnam remains relatively un-banked with below 30% of the population possessing a formal bank account. Furthermore, the establishment of the Vietnam Asset Management Company (VAMC) in 2013 has allowed total banking sector non-performing loans to reduce significantly and the State Bank of Vietnam continues to develop policies to improve system-wide capitalisation and asset quality. From a macroeconomic perspective, household debt to GDP remains low at only 20% and the macroeconomic environment remains encouraging. Our estimates suggest GDP will grow at c.7% in 2018, while inflation remains manageable at c.2.5% and the current account surplus remains strong at 2.5% of GDP. Nonetheless, the country’s exchange rate is correlated to the Chinese Renminbi and a significant deterioration in the RMB could affect the Vietnamese Dong.

FIGURE 37: Deposit growth is best in class

FIGURE 38: Non-performing loan ratios remain low in absolute and relative terms

Deposit CAGR 2012 – 2018E (%)

HD Bank LPB BIDV CTG VCB VPB ACB MB EIB TCB0%

5%

10%

15%

20%

25%

30%

35%Non-Performing Loan Ratio Q2 2018 (%)

ACB HD LPB TPB MBB VCB CTG BIDV TCB VIB SHB VPB0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Source: RWC, HD Bank, 2012 – 2018E

Bank

Source: RWC, HD Bank, 29th June 2018

Conclusion

Fundamentally, financial inclusion is a key theme within emerging and frontier markets. Bank account penetration, growth in mobile money and general increases in digitisation suggest that financial development will evolve differently than in more

advanced economies. The team are constantly monitoring financial trends across the globe and the speed and pace of technological advancement implies that further opportunities will undoubtedly arise over the coming years.

On The Road, Q3 2018

Patricio Danziger with Argentina's Minister of Finance Jaimin Shah at AmorePacific headquarters in Seoul

Ferdinand Campbell with CFO of Sampath BankJessica Lim at a BIM Land project in Halong

RWC does not offer investment advice nor should this be construed as a recommendation to purchase or sell any security.


Anil Tewari at Unification Highway along the De-Militarized Zone in Korea

Christopher Siow with IGL Management



The term “RWC” may include any one or more RWC branded entities including RWC Partners Limited and RWC Asset Management LLP, each of which is authorised and regulated by the UK Financial Conduct Authority and, in the case of RWC Asset Management LLP, the US Securities and Exchange Commission; RWC Asset Advisors (US) LLC, which is registered with the US Securities and Exchange Commission; and RWC Singapore (Pte) Limited, which is licensed as a Licensed Fund Management Company by the Monetary Authority of Singapore.RWC may act as investment manager or adviser, or otherwise provide services, to more than one product pursuing a similar investment strategy or focus to the product detailed in this document. RWC seeks to minimise any conflicts of interest, and endeavours to act at all times in accordance with its legal and regulatory obligations as well as its own policies and codes of conduct.This document is directed only at professional, institutional, wholesale or qualified investors. The services provided by RWC are available only to such persons. It is not intended for distribution to and should not be relied on by any person who would qualify as a retail or individual investor in any jurisdiction or for distribution to, or use by, any person or entity in any jurisdiction where such distribution or use would be contrary to local law or regulation.This document has been prepared for general information purposes only and has not been delivered for registration in any jurisdiction nor has its content been reviewed or approved by any regulatory authority in any jurisdiction. The information contained herein does not constitute: (i) a binding legal agreement; (ii) legal, regulatory, tax, accounting or other advice; (iii) an offer, recommendation or solicitation to buy or sell shares in any fund, security, commodity, financial instrument or derivative linked to, or otherwise included in a portfolio managed or advised by RWC; or (iv) an offer to enter into any other transaction whatsoever (each a “Transaction”). No representations and/or warranties are made that the information contained herein is either up to date and/or accurate and is not intended to be used or relied upon by any counterparty, investor or any other third party.RWC uses information from third party vendors, such as statistical and other data, that it believes to be reliable. However, the accuracy of this data, which may be used to calculate results or otherwise compile data that finds its way over time into RWC research data stored on its systems, is not guaranteed. If such information is not accurate, some of the conclusions reached or statements made may be adversely affected. RWC bears no responsibility for your investment research and/or investment decisions and you should consult your own lawyer, accountant, tax adviser or other professional adviser before entering into any Transaction. Any opinion expressed herein, which may be subjective in nature, may not be shared by all directors, officers, employees, or representatives of RWC and may be subject to change without notice. RWC is not liable for any decisions made or actions or inactions taken by you or others based on the contents of this document and neither RWC nor any of its directors, officers, employees, or representatives (including affiliates) accepts any liability whatsoever for any errors and/or omissions or for any direct, indirect, special, incidental, or consequential loss, damages, or expenses of any kind howsoever arising from the use of, or reliance on, any information contained herein.Information contained in this document should not be viewed as indicative of future results. Past performance of any Transaction is not indicative of future results. The value of investments can go down as well as up. Certain assumptions and forward looking statements may have been made either for modelling purposes, to simplify the presentation and/or calculation of any projections or estimates contained herein and RWC does not represent that that any such assumptions or statements will reflect actual future events or that all assumptions have been considered or stated.Forward-looking statements are inherently uncertain, and changing factors such as those affecting the markets generally, or those affecting particular industries or issuers, may cause results to differ from those discussed. Accordingly, there can be no assurance that estimated returns or projections will be realised or that actual returns or performance results will not materially differ from those estimated herein. Some of the information contained in this document may be aggregated data of Transactions executed by RWC that has been compiled so as not to identify the underlying Transactions of any particular customer.The information transmitted is intended only for the person or entity to which it has been given and may contain confidential and/or privileged material. In accepting receipt of the information transmitted you agree that you and/or your affiliates, partners, directors, officers and employees, as applicable, will keep all information strictly confidential. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information is prohibited. The information contained herein is confidential and is intended for the exclusive use of the intended recipient(s) to which this document has been provided. Any distribution or reproduction of this document is not authorised and is prohibited without the express written consent of RWC or any of its affiliates.Changes in rates of exchange may cause the value of such investments to fluctuate. An investor may not be able to get back the amount invested and the loss on realisation may be very high and could result in a substantial or complete loss of the investment. In addition, an investor who realises their investment in a RWC-managed fund after a short period may not realise the amount originally invested as a result of charges made on the issue and/or redemption of such investment. The value of such interests for the purposes of purchases may differ from their value for the purpose of redemptions. No representations or warranties of any kind are intended or should be inferred with respect to the economic return from, or the tax consequences of, an investment in a RWC-managed fund. Current tax levels and reliefs may change. Depending on individual circumstances, this may affect investment returns. Nothing in this document constitutes advice on the merits of buying or selling a particular investment. This document expresses no views as to the suitability or appropriateness of the fund or any other investments described herein to the individual circumstances of any recipient.AIFMD and Distribution in the European Economic Area (“EEA”).The Alternative Fund Managers Directive (Directive 2011/61/EU) (“AIFMD”) is a regulatory regime which came into full effect in the EEA on 22 July 2014. RWC Asset Management LLP is an Alternative Investment Fund Manager (an “AIFM”) to certain funds managed by it (each an “AIF”). The AIFM is required to make available to investors certain prescribed information prior to their investment in an AIF. The majority of the prescribed information is contained in the latest Offering Document of the AIF. The remainder of the prescribed information is contained in the relevant AIF’s annual report and accounts. All of the information is provided in accordance with the AIFMD.In relation to each member state of the EEA (each a “Member State”), this document may only be distributed and shares in a RWC fund (“Shares”) may only be offered and placed to the extent that (a) the relevant RWC fund is permitted to be marketed to professional investors in accordance with the AIFMD (as implemented into the local law/regulation of the relevant Member State); or (b) this document may otherwise be lawfully distributed and the Shares may lawfully offered or placed in that Member State (including at the initiative of the investor).Information Required for Distribution of Foreign Collective Investment Schemes to Qualified Investors in Switzerland.The representative and paying agent of the RWC-managed funds in Switzerland (the “Representative in Switzerland”) is Société Générale, Paris, Zurich Branch, Talacker 50, P.O. Box 5070, CH-8021 Zurich. In respect of the units of the RWC-managed funds distributed in Switzerland, the place of performance and jurisdiction is at the registered office of the Representative in Switzerland.

CONTACT US

Please contact us if you have any questions or would like to discuss any of our strategies.E [email protected] | W www.rwcpartners.com

Unless expressed otherwise, all opinions within this document are those of the RWC Emerging & Frontier Markets investment team, as at 07 November 2018.

RWC LondonVerde, 4th Floor 10 Bressenden Place London SW1E 5DH T +4420 7227 6000

RWC Miami2640 South Bayshore Drive Suite 201 Miami Florida 33133 T +1 305 602 9501

RWC Singapore80 Raffles Place #22-23 UOB Plaza 2 Singapore 048624 T +65 6812 9540

Financial Inclusion in Emerging & Frontier Markets · Financial Inclusion within Emerging and...

Documents

Transcript of Financial Inclusion in Emerging & Frontier Markets · Financial Inclusion within Emerging and...