Fitch Ratings says in a newly published special report that emerging market (EM) banks in different regions will face divergent challenges in 2011. However, most EM bank ratings have a Stable Outlook as ratings adequately reflect current trends and risks.

Emerging market banks' growth and performance trends have diverged further in 2010, a process which was evident in 2009 and that Fitch expects to continue in 2011. Banks in much of Asia and Latin America, and Turkey, have resumed growth, having performed relatively well during the crisis. In contrast, most CEE/CIS lenders are still focused on asset quality management, and some have continued to deleverage, following the sharp deterioration in loan performance and earnings in 2009.

Accordingly, Fitch expects EM banks in different regions to face different challenges in 2011. The main task for lenders in growth markets will be to maintain satisfactory underwriting standards, in particular where interest rates remain low and risks of asset bubbles exist. However, banks in most of emerging Europe will need to stabilise and improve asset quality, strengthen domestic funding franchises and protect top line performance.

Although most emerging market banks have a Stable Outlook, some ratings could be upgraded over time as sovereign credit profiles and operating environments in individual countries gradually converge towards more developed markets. However, downgrades are also possible in both growth markets (if asset quality risks increase markedly) and markets more negatively affected by the crisis (if loan losses exceed current expectations and performance weakens further).

Fitch forecasts that nine of the 31 emerging markets covered in the report will record real credit growth of around 15% or more in 2010. The risks of credit expansion are particularly significant in China, where leverage is already high and loan growth was rapid in 2009 as well as 2010. However, risks in other growth markets are mitigated by low (in Argentina, Peru, Indonesia and Colombia) or moderate (in Brazil, Turkey, India and Qatar) leverage and generally healthy margins. In both these markets and China, risks are also reduced by favourable economic growth prospects and limited reliance on external funding.

In the CEE/CIS, asset quality remains very weak in Kazakhstan, Ukraine, Latvia and Lithuania, and a significant concern in Hungary, Romania, Bulgaria, Russia and Estonia. Pre-impairment results in some of these markets have also come under pressure as weak asset performance and deleveraging have reduced revenues. Loans/GDP and loans/deposits ratios, as well as foreign currency lending, remain high in certain markets. Recapitalisation of the Ukrainian sector has continued in 2010, and the Kazakh system's solvency has been supported by debt restructuring at three large banks.