(Bloomberg News) Banks in the biggest emerging markets are losing the confidence of investors as loans turn sour after a two-year credit binge.

Brazil's financial shares have lost more this year than counterparts in crisis-stricken Europe as consumer defaults hit a 12-month high in June and borrowing costs climbed to 46 percent. Bank stocks in China are trading at lower valuations than global emerging-market indexes for the first time since 2006. The country faces a financial crisis with bad debt that may jump to 30 percent of total loans, Fitch Ratings said.

In India, the cost of insuring banks against default has climbed to the highest level in a year. Loan-loss provisions at State Bank of India, the nation's largest lender, rose 77 percent in the first three months of 2011, while net income fell 99 percent.

"People are beginning to smell the credit cycle turning," Michael Shaoul, chairman of Marketfield Asset Management and chief executive officer of New York-based brokerage Oscar Gruss & Son, said in an interview. "Credit cycles have tremendous momentum, and whenever they turn you want to pay attention," said Shaoul, who recommends selling high-yield bonds in emerging markets and betting on further losses in bank shares.

Citigroup, HSBC

Loans to Brazilian shoppers, Chinese infrastructure projects and Indian developers have fueled the global economic recovery and turned emerging-market banks into some of the world's biggest companies by market value. Now increased debt burdens threaten growth as central banks raise interest rates to fight inflation, U.S. hiring stalls and Europe deepens austerity measures. China and Brazil may see expansion cut by at least 50 percent in the next few years, according to economic consulting firms A. Gary Shilling & Co. and Capital Economics Ltd.

A slowdown would curb profits at global banks including New York-based Citigroup Inc. and London-based HSBC Holdings Plc, which boosted lending in the fastest-expanding economies to fuel growth after the U.S. credit bubble burst in 2008. Prices of commodities such as copper are vulnerable to a drop in demand from China, the world's biggest consumer of the metal, said Gary Shilling, who founded the Springfield, New Jersey-based firm bearing his name and predicted the U.S. recession that began in December 2007.

"China isn't this juggernaut that's going to grow forever without any interruption," Shilling said in a July 14 interview with Bloomberg Television's Betty Liu, adding that the government may be forced to bail out banks as bad debts grow.

China Loan Surge

Chinese lenders expanded credit at a record pace in 2009 and 2010, making more than 17.5 trillion yuan ($2.7 trillion) of new loans as the government moved to offset a collapse in exports during the global recession. The surge in loans exceeded credit expansions in the U.S. before its financial crisis, in Japan before its stock and property bubbles collapsed in 1990 and in South Korea before the Asian financial crisis of the late 1990s, according to Fitch.