Credit growth is returning to Argentina and is right on time to help the banks that are having to shift their business models.
The growth in credit demand in the country is being led by the corporate sector, but the recovery is broad-based. There is a burgeoning increase in mortgages – albeit from a practically non-existent base – while other retail lending is also seeing positive trends.
Sergio Grinenco, CEO of Banco Galicia, says recent results show that the long anticipated demand for credit is now playing out.
“The system is now showing a good performance in lending,” he says, adding that deposit growth is lagging due to the liquidity in the system, with many Argentines preferring to invest in mutual funds or buy central bank securities, such as Lebacs.
According to Credit Suisse analysts, Galicia’s strong results – net income rose 34% year on year, unadjusted for inflation that is around 22% – were driven mostly by growing demand for credit.
“We note significant acceleration in lending volumes [with] annual growth rate of 26.3% implying significant acceleration in real growth from 7% to 21%,” they wrote. “Strong growth for Galicia is an indication credit in Argentina is picking up faster than anticipated and seems to be sector-based.”
Rodrigo Park, head of economics research for Santander Rio, a privately held company, confirmed that the largest bank in the country is also benefiting from this phenomenon, saying: “We have started to see credit demand growing and there is going to be a big difference between the past drivers of bank profits.”
Many banks in Argentina have made profits from investing deposit funds – inflation meant deposits have negative interest rates – into central bank securities. The level to which the banks have relied on securities income is uneven, but most have boosted results through this passive investing technique.
“Lebacs are still an interesting investment, but since the beginning of the year we have seen a movement with the banks [needing] to be more creative and proactive,” says Maria Valeria Azconegui, banking analyst at Moody’s in Buenos Aires.
“The new scenario requires extending credit again and competition is high.”
Santander Rio’s Park says the bank is anticipating a normalization of the country’s banking market, with lower intermediation margins leading to profits being more a function of volume – and with fees a higher proportion of the revenue mix.
One of the signs of normalization has been the development of mortgages. The central bank created an inflation-adjusted unit called the UVA – similar to Chile’s UF – which has enabled Argentines to access long-term financing for homes for the first time in a generation.
Demand has been impressive, with the nominal value of mortgages growing to around $1 billion from zero in the past year, but the relative size of this new credit product remains small, at around 1% of GDP.
Banks say they have been struggling to keep up with demand for mortgages. In the first instance, banks used internal capital, but as demand has grown banks have been seeking natural inflation-linked assets.
Banco Hipotecario issued a UVA bond in the local market and there have been some experiments with UVA-linked time deposits.
However, the banks say that unless Anses, the nationalized pension fund, steps in to actively provide the bolster the other side of the UVA mortgage, there will be frustrated demand.
“We are talking to the government, but if we don’t see any public-sector funding for UVA mortgages we will have to stop issuing new mortgages in between six and 10 months because the size of the mortgage portfolio relative to the entire credit portfolio will get too high and we don’t want to run an unmatched risk,” says Nerio Peitiado, COO at Banco Supervielle.
Banks report that they have been seeking securitization structures that would enable them to sell bundles of UVA-denominated mortgages in the local capital markets.
There have also been discussions with the World Bank as bankers explore the potential for guarantees to bridge the contractual flexibility – UVA mortgages can be extended if the gap between inflation and pay rises exceeds a pre-agreed levels – that, for the moment, makes such securitizations impossible.
The mortgages aren’t a very profitable product, but Azconegui at Moody’s says the banks are taking them seriously because of their strategic importance.
“Banks say mortgages provide a 20-year relationship with clients and that gives them the ability to cross-sell other products and tie customers to their banks,” she says.
“All the banks say they are interested in writing more mortgages, but they would be more interested if they could securitize them because at the moment the structure of bank funding is extremely short term.”
Ivana Recalde, banking analyst at Standard & Poor’s, says the good news is that the banks are, in the main, prepared for the new credit-focused environment.
“The banks have maintained all their credit analysts and the internal structures that ensure they have knowledge of the credit quality of the markets,” she says.
However, the major boon is the scope for growth, with credit to GDP at around 15% of the economy.
Even if GDP growth disappoints in the coming years there should be plenty of scope for credit growth acceleration as Argentina looks to catch up with the rest of a region, which has an average credit penetration of more than double that level.