Banks in Argentina circumvent currency crisis but face complex horizon

Banks in Argentina circumvent currency crisis but face complex horizon

Banks in Argentina managed to overcome the domestic currency crisis in 2018, very far from the hecatomb suffered by local financial institutions in 2001-2002, but they will still have to face a complex horizon in this year that is beginning.

The banking sector was put to the test in recent months, after the end of April unleashed a significant instability in the currency exchange that caused a sharp depreciation of the Argentine peso.

With accelerated inflation, the Central Bank established a contractionary monetary policy with high interest rates and increased reserve requirements, the portion of deposits that banks must keep immobilized to face the withdrawal of deposits by their clients.

"The shocks experienced in 2018 were a good test for the system," he said in a recent meeting with journalists Claudio Cesario, president of the Association of Argentine Banks (ABA), which represents foreign-funded banks with operations in the country. South American

For Cesario, the "good news is that the financial system proved to be solid, solvent and liquid but, above all, it proved to be reliable" and whoever wanted to withdraw his savings could do so.

"It was clearly proven that the problem was foreign exchange, not banking, and that it came out of it without recipes of the past such as exchange restrictions or the implementation of stocks," said the head of ABA at the meeting, of which Efe participated.

According to sector data, the delinquency rate of bank clients is 2.3%, while the profitability of the system is around 33%, which, although nominally positive, becomes negative in real terms due to the high inflation in Argentina ( about 47% in 2018).

According to the last sector report of the Central Bank, last October the local financial system showed "high levels of liquidity and solvency and low delinquency".

However, the rating agencies are cautious when evaluating the entities and show their concerns about the prospects for 2019.

In a recent report, Moody's indicated that high inflation and the economic recession (a fall in GDP of 2.5% in 2018 and 1.5% in 2019) "will result in a marked contraction of the loan portfolio" and a rise in delinquent loans, albeit from low levels.

However, according to Valeria Azconegui, a senior analyst at Moody's, the bank's outlook for banks in Argentina is "stable" because the high liquidity of the entities and the good financing profile "will help offset the risks arising from deterioration." in portfolio quality, in capital levels and in profitability adjusted for inflation ".

"The solvency of the banks will remain solid," Azconegui said.

Meanwhile, in the perspective of Standard & Poor's (S & P), banks in Argentina will continue to operate in the coming quarters under more adverse economic conditions due to the contraction of GDP (-0.8% in 2019, according to S & P), a monetary policy restrictive and still high interest rates until inflation starts to recede.

"This situation is already affecting the growth of credit in real terms and indicators of asset quality," the agency said in a recent report.

In mid-November last, S & P decided to keep the Argentine banking industry in what it calls "group 8" (on a scale that goes from 1 – less risk – to 10 – higher risk), but, due to the impact of the deterioration of the economic environment, the note went down to the debt of the banks to B (highly speculative investment), from B +.

However, the rating agency noted that the deterioration in the indicators of the local banking system occurs from "healthy" levels and stressed that entities are taking measures to contain losses.

"We expect the banking system to remain profitable, but with a mix of income more in line with that registered in the previous administration and with higher provisions charges in response to the increase in delinquency," S & P forecast.


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