Latin America: Argentine banks prepare for new Macri era

Rob Dwyer
Published on:

Low levels of credit offer opportunity; short-term funding presents operational risks.

Mauricio Macri president-R-600
Mauricio Macri will take office as president of Argentina on Thursday

Argentina’s banking system awaits the liberalization of the country’s tight banking regulation in 2016 after the election of Mauricio Macri as president.

However, while the removal of some of the key components of the financial system’s regulation will be a positive for bank earnings, the likely deterioration of the macroeconomic environment in the short term – and liberalization in other areas of the financial system – will continue to present stiff operational challenges.

The finance team of the new Macri administration has indicated that reforms to central banking rules that stipulate minimum deposit rates, maximum interest charges and limits to fees will be changed in 2016.

Rules concerning mandatory lending to the small and medium-sized enterprise segment are not expected to be included in the first wave of banking liberalization.

There is not expected to be any immediate change to banks’ ratings (as these are constrained by the sovereign, which will remain in default) but the rating agencies have said that reforms will be credit-positive for Argentina’s financial institutions.

"We expect the regulatory framework will be more flexible going forward, with the clear message of intent to soft regulation and this will lead to significant business prospects for banks," says Maria Valeria Azconegui, banking analyst at Moody’s, although she expects some asset-quality pressures in the short term as debt servicing is pressured by higher inflation and lower disposable incomes due to cuts in public subsidies.

Marcelo Dupont-160x186
Marcelo Dupont, ICBC
Argentina has low levels of private credit at $66.7 billion, equivalent to 12% of GDP; only 30% of the population have bank accounts. There is, therefore, upside potential through bankerization in the medium term.

Such credit growth has been seen in other Latin American countries over the past decade. However, analysts and participants also say that in the medium term banks will need to adapt their business strategies to meet a radically different economic environment, while consolidation of the sector’s 80-plus banks is expected.

At the moment, 65% of the all banks’ funding comes from sight deposits, and much of this is trapped in the financial system due to capital controls. If and when those controls are lifted much of the cash will seek to leave the country.

"That will definitely happen," Pablo Perez Marexiano, head of corporate and investment banking at ICBC, when asked if he thinks there will be capital flight from sight deposits when capital controls are relaxed.

"The sight deposits that will leave the system are in companies or industries that have been accumulating cash positions because of the nature of their business. This is quite concentrated, it’s not spread throughout the economy."

Alejandro Garcia, head of Fitch’s Latin America banks group, says: "Capital is not a major concern but is a material medium-term challenge.

"It has been a very unorthodox operating environment for the last 10 to 15 years, and the tenor profile of both assets and liabilities has shortened – the average duration of both is well short of one year."

Financial reality

The response will be a lengthening of the funding base as the financial system moves away from a transactional basis to a more traditional, broad-based economy that includes demand for longer-term credit and savings. The new financial reality will demand new business models.

Garcia says: "Loans have had very strong performance in recent years, probably because inflation is supporting performance because LTVs [loan to value] go down as long as you are repaying principal. If inflation goes down to single figures as is Macri’s target, then that dynamic disappears."

Banks will look to fund themselves with longer-term securities in the domestic capital markets – a trend that will accelerate when the sovereign has access to the international markets and stops crowding out the shallow domestic markets.

A select few will also have access to the international markets. This will lead to funding becoming a competitive advantage – the stronger will be able to outperform the banks that can’t access these markets or can only do so at high yields. In turn, this will likely lead to consolidation in the sector.

"I am really surprised M&A hasn’t happened already in Argentina – I think it’s a price issue," says Azconegui.