Bad Loans Haunt Banks in Brazil, China, and India

Loans to Brazilian shoppers, Chinese infrastructure projects, and Indian property developers have fueled the global economic recovery and turned emerging-market banks into some of the world’s biggest firms by market value. The party may be ending. Worrisome inflation rates in Brazil, Russia, India, and China have local monetary authorities raising interest rates and tightening credit conditions. That, plus evidence nonperforming loans are on the rise, has investors rethinking their enthusiasm for BRIC bank stocks.

Brazil’s financial shares have fallen more this year than counterparts in crisis-stricken Europe as consumer defaults rose to a 12-month high in June. Bank stocks in China are trading at their lowest valuations since February 2009. In India the cost of insuring banks against default has climbed to a 12-month high. “People are beginning to smell the credit cycle turning,” says Michael Shaoul, chairman of Marketfield Asset Management.