Argentine banks turn the corner

Reshaping the banking landscape
How the crisis felled Argentina's banks

Jorge Stuart Milne: trying to reconstruct relationships with corporate clients

It was not an unusual idea but something needed to be done. Argentina's banks were reeling from the sovereign's debt default and the devamilluation of the peso in 2001/02. Some were struggling to stay afloat; even the very best were losing money. Recovering customers was imperative.

Cristofani's move paid off. When the scheme was introduced in June 2002, Río's share in the credit and debit card market was hovering just above 11%. Since then its market share has risen by 1% each year and today stands at about 15%.

For Cristofani, as important as business growth was the way the scheme restored the bank's credibility with the Argentine people. The Latin nation's banks suffered more than most from the financial crisis. Although the banks were largely innocent victims of government policies, many ordinary people blamed them as much as the politicians for their huge losses.

"The relationship between the bank and its customers was broken," says Cristofani. "It was essential to restore trust. We had to re-establish that relationship." Today, Río, which won Euromoney's best bank in Argentina award this year, is leading the fightback by the country's banks.

Slowly, they are recovering from the crisis. The financial system remains fragile but from state-owned institution Banco de la Nación to private-sector stalwart Río to upcoming player Banco Macro Bansud, Argentina's banks are making profits en masse for the first time since the upheavals.

The initial signs came last year when the financial system finally started showing profitability. But banks' reported results remained negative as they continued recognizing hidden losses on their balance sheets as a result of accounting discrepancies. It is only now that balance sheets have moved into the black, even after recognizing these losses.

"In general, it's clear that things are turning around," says Miguel Kiguel, a former finance secretary and president of Banco Hipotecario, who now runs a consultancy. "Banks have a positive net worth even if the public debt is marked to market."

Underpinning this better performance are five trends, according to Ana Gavuzzo, senior director at Fitch Argentina – "renewed loan growth; robust deposit expansion and high liquidity; improving asset quality; better operating earnings; and positive solvency trends."

With the economy showing steady signs of improvement and the government's debt exchange largely resolved, the banks have their healthiest operating environment in five years to sustain this progress. The big question is whether or not they will be able to do so.

That will depend on whether banks can continue to increase their lending to the private sector and resolve their asset/ liability mismatches. "Sustaining high-growth lending in the medium term is key to the viability of a healthy banking business," says Carina Lopez, director of financial ratings at Standard & Poor's.

Lending picks up

After five successive years of tumbling loans to the private sector, the trend reversed last year. With the economy emerging from recession, banks began to take tentative steps in lending again. Some had started earlier. In October 2002 Río, for example, became the first bank to resume lending after the crisis, initially through car loans and then with mortgages.

The vast majority, though, began with simpler, shorter-term products such as company overdrafts, credit cards and other commercial loans. Since last year, other types of loans have also started to flourish. Today, Argentina's banks are experiencing better than expected credit expansion. "Loans to the private sector grew at a high annual rate of 32% [on an annualized basis] in the first four months of this year," says Lopez.

Perhaps the greatest potential lies on the consumer side, especially in personal loans and credit cards. With inflation at 10% it's cheaper to borrow today in real terms than it was in the 1990s even though the interest rate charged is similar to that of 10 to 15 years ago. The typical charge on an 18-month personal loan is 18% to 20%, which is relatively low by Argentine standards.

Consumers are taking advantage. Cristofani says that before the crisis, Río sold on average 16,000 loans each month. In June they sold 38,000. Mortgages are another area that is becoming more popular. "For the first time since the onset of the crisis, in March 2005, new mortgage loans outpaced prepayments," says Lopez.

Still, despite this rebound, the financial system's overall lending figures are very weak. Loans, says Lopez, account for "a mere 60% of total assets". Equally worrying, the ratio of private loans to GDP "barely scrapes 10%". That points "to the still-low level of intermediation if compared with Argentina's recent history or other Latin American countries," she says.

Part of the problem for banks is that there are few candidates eligible for a loan – especially in the corporate sector. "Many firms that would like to borrow don't have the balance sheet or the track record, or are still restructuring," says Kiguel. "Also there is a group of firms that has just restructured but their ratings are weak. Therefore it's difficult for banks to lend to them too."

Bank lending to corporates is effectively restricted to blue chips and SMEs that are growing and that have a relatively healthy balance sheet. Jorge Stuart Milne, president of Banco Patagonia, which specializes in servicing these types of businesses, acknowledges the difficulties. The bank, which targets firms that have average net sales of between $2 million and $40 million, has been more successful than most – largely as a result of hard work. "We're very hands-on, we travel a lot," says Stuart Milne.