As hard as it may be to believe now, some banks will turn out to be good investments as the uncertainty caused by the global financial crisis begins to subside.

Most investors don't feel confident in betting yet on which banks these might be, but one observer who has some interesting thoughts on the matter is Gregory Larkin, a senior analyst who heads the financial services team at RiskMetrics Group. Larkin came from Innovest Strategic Value Advisors, which recently was acquired by RiskMetrics. In October 2006 while at Innovest, Larkin predicted that the subprime meltdown wouldn't be limited to the banking sector and that a spike in foreclosures would reverberate in the capital markets.

Environmental, social and governance (ESG) risks were long Innovest's specialty, and Larkin thinks a bank's performance on those issues is critical in determining how well they're positioned to perform against their peers.

"ESG risk in the banking sector is a fundamentally different animal than ESG risk in the oil or chemical sectors. Banks don't emit carbon, they don't really extract oil and they don't depend on outsource sweatshops in China. However, all of their balance sheets are exposed to these risks because of the companies and activities that they finance. And many of these risks historically have been treated as sort of peripheral ethical concerns. And I would argue that's a mistake," he commented during a Webinar this week.

The financial consequences of these risks continue to grow and often "are the black swans that upend portfolios," he said.

Larkin and his team recently rated banks by looking at risk and opportunities based on consumer credit and corporate finance issues. In particular, they evaluated which companies are in a good position to serve the areas of the world that are underbanked but offer tremendous growth. They also looked at those companies that provide loans with less ESG risk.

China and India offer extremely promising growth because real wages in those countries are growing faster than credit and they both are underbanked, he says. But the loans that are given to these new consumers must be fair, transparent and responsible if these new opportunities are to be realized, he adds.

One bank his firm recently rated "triple-A" is Credit Agricole, a leading European retail-banking group based in France. He said the firm had "incredible discipline and foresight to not aggressively move into emerging Europe's booming consumer credit market, even as its two main rivals, BNK Paribas and Societe Generale, made enormous profits in those regions. We feel this will bear fruit for investors (in Credit Agricole) as Eastern Europe continues to unravel," he says.

He also called Standard Chartered, a London-based international bank, and Scotiabank, based in Canada, extremely exciting because they've entered high-growth, underbanked emerging markets where they have offered loans on fair, conservative terms.

On the corporate finance front, he said that Citibank and Bank of America were two that still have a big backlog of high-risk assets to purge from their systems. Larkin and his team review all publicly filed syndicated loans and measure the environmental risks of the portfolios. Through this analysis, the team identified 303 high-risk deals at Citibank, he said. He adds that his team has found huge disparities in what firms claim they do on sustainability compared with the loans they finance.

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