With Argentine banks struggling to adapt to the evaporation of credit demand as recession and very high interest rates have followed the country’s recent currency crisis, investors are trying to reevaluate the sector’s longer-term outlook.
The rapid growth in the Argentine bank stocks in the pre-crisis years – Galicia’s CEO Fabian Kon points to the “crazy” ride of its shares from $50 in September 2017 when it conducted a $550 million follow-on equity transaction to $73 a couple of months later only to fall to $20 after last August’s crisis to a recovery of around $40 today – was largely fuelled by optimism in the structural opportunity.
Many investors saw similarities for Argentine banks with the growth of the Brazilian banking system between 2003 and 2007. Credit Suisse’s banking analyst Marcelo Telles was one of those who drew parallels with the period in which annual loan growth reached as much as 26% per year in real terms and the leading private sector banks consistently traded at elevated multiples of around 3.5 times book value and 15 times price-to-earnings.
The very low level of credit in the country was another factor in the optimistic view on the Argentine banks, with total loans at around 15% of GDP – compared to over 90% for Chile, 50% for Colombia and around 47% for Brazil.
The current crisis has led many to postpone this bullish view on the sector, but not abandon it. They believe that, should the new monetary policy work and inflation and interest rates fall and economic growth return, to propel president Macri to a second term as president, then the opportunity for a strong bull run will return.
As well as the presidential election, 22 out of 24 provinces are electing governors, and half of the Lower House and one third of the Senate will be elected this year, as well as many mayoral and local council elections.
However, this bullish view on the outlook for Argentine banks is not a consensus view. Juan Manuel Pazos, chief economist at TPCG Valores, warns that there are key differences between the future growth outlook for Argentina’s banks today and Brazil’s during their period of rapid growth.
In Argentina the capital markets are mostly undeveloped and... the system won’t have the capacity to grow at the same exponential rate that Brazil achieved- Juan Manuel Pazos, TPCG Valores
“The Brazilian banks’ growth came at a time when there was huge growth in the financial markets and the world economy,” he says. “Between 2003 and 2008 the commodities super-cycle created huge stability for the Brazilian economy and I don’t think you are going to see another five years in EM like those – it’s unrepeatable.”
But Pazos thinks there are other differences that will limit the speed of growth of Argentina’s banks when a recovery comes. The Brazilian banks in 2003 to 2008 had access to very developed capital markets.
“The Brazilian banks have the infrastructure they needed to finance themselves and to pass credit to institutional investors. This enabled them to finance the huge increase in loans when credit to GDP doubled from 20% within a decade. In Argentina the capital markets are mostly undeveloped and so banks are unable to pass credit over to large investors and as a result the system won’t have the capacity to grow at the same exponential rate that Brazil achieved during those years.”
Pazos also says Argentine banks are also more risk sensitive than their peers in Brazil. He points to the fact that in the 1990s when the country enjoyed decent economic growth the banking system never grew loans above 20% of GDP.
“The Argentine banks only go over the ABC1 customers – clients with very low repayment risk – and they charge high rates to them. They don’t loan to anyone else – there is a reason why the banking system has astonishingly low NPLs,” he says. “If you want the system to grow loans-to-GDP to around 60% of GDP then the banks would have to take risk and the banks here just don’t like to take risk.”
“We could grow faster but we would need to have bigger credit risk appetite,” agrees a senior retail banker in Buenos Aires. “But this is a strategic decision – it depends on elections. If I had more aggressive credit policies… we could grow faster than the market. We haven’t grown because we don’t want to not because we can’t.”
To be fair to the Argentine banks they haven’t had to take risk – the income they generate from buying government securities has been traditionally the major source of income for many.
The hope is that, should the current dose of IMF medicine bring the interest rates down and lead to economic growth, then the banks will have to start pursuing more orthodox banking strategies – extending credit and building up deposit bases.
For the moment, though, a lot of analysts are in wait-and-see mode. BTG Pactual has its model for the Argentine financial sector “under review” and “expects a deceleration in loan growth and deterioration of asset quality to weigh on earnings in the next couple of quarters, as the economy weakens.”
BTG’s analyst Alonso Aramburu thinks that bank stocks remain “highly reliant on the evolution of country risk, which will have a higher component of political risk in coming months given the upcoming 2019 presidential election”.