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Argentina's banks hit by bolt from the blue

Argentina's banks hit by bolt from the blue Order ...

Argentina's banks hit by bolt from the blue


This crisis is much smaller than previous ones, but it was largely unexpected, so that’s why we are feeling this one in such a very full-on way,” says Nerio Peitiado, chief operating officer of Banco Supervielle in Buenos Aires.

“This came from nowhere,” echoes Banco Galicia’s chairman, Sergio Grinenco. “It was a sudden and unexpected stop that we weren’t expecting. Argentina has been through worse crises, but this time the challenge isn’t so much the stress i tself but rather the fact it came with almost no warning.”

The crisis has knocked Argentina’s banking industry back to its previous model of treading water. High inflation and even higher interest rates suppress real credit growth and the banks compensate by generating high securities returns from cheap funding.

There are still around 70 banks in the system, and in this environment not everyone will survive
- Maria Valeria Azconegui, Moody's

Argentina’s banks have responded by retreating from their recent strat egies, which had seen them issue equity in the international markets to fund capital investment for volume growth. For the first time in well over a decade, economic growth and falling inflation had led to strong credit demand in real terms.

Banks looked like a sure-fire investment: the country’s debt-to-GDP ratio is a meagre 17%, while the growth potential from a normalizing economy gave Supervielle a very successful IPO â€" and even better post-deal performance.

From an initial price of $11 a share in May 2016, the bank went on a run that saw it hit $32.75 in January this year.

Then the storm came, catching the industry unawares and leaving Supervielle’s share price at $5.30 at the end of August (it was trading around $7 as Euromoney went to press).

The most vulner able business lines are the consumer segments that are financed through the markets â€" portfolio sales or interbank loans.

160x186 Maria Valeria Azconegui

Maria Valeria

“These are unable to re-price or if they do, they won’t collect,” says Moody’s senior analyst Maria Valeria Azconegui, who points to BNP Paribas’ consumer finance operation in the country, Banco Cetelem, as an example.

She says it has already been hit with non-performing loans at around 30% and the French bank has had to twice inject fresh capital into the entity.

Unsurprisingly, consumer loans is the segment that has seen the most deterioration in the central bank’s system-wide statistics, with NPLs rising fro m 2.9% in December to 3.7% in July.

“This is an example of a rated entity that shows how tough it is for [consumer finance banks] and there are a lot of these entities that are not rated by us that are really suffering,” says Azconegui, drawing a distinction between consumer finance and captive finance companies in the country, which were created by companies such as Toyota and John Deere to finance dollar-denominated assets targeted at the affluent segments and that have portfolios enjoying loan-to-values of around 50%.

However, Azconegui has a stark warning: “There are still around 70 banks in the system, and in this environment not everyone will survive.”

She says she has noticed an increase in sales of distressed portfolios, which are typically sold for around 7% and 12% of their nominal values.


The banking system is showing deterioration but not to stressed levels â€" yet. The recession is beginning to bite just as the countryâ €™s new monetary policy tries to anchor the economy. There is much for that policy to do: the monthly inflation figure for September was 6.5%.

However, bankers in Argentina are taking some comfort from the performance to date: NPLs have risen from a low of 1.8% of gross loans at the end of 2017 to 2.3% by July. Delinquencies in the system’s corporate loans remain low â€" currently 1.3%, up from 1% in December. Moody’s expects the system average to top 4.5% by the end of the year, but much will depend on the depth and length of the recession.

As it is impossible to state with any confidence the size of the coming economic contraction and the date of the return to positive growth, modelling the impact on asset quality is highly speculative. If unemployment spikes, then NPLs could well rise above 5%.

Back in retail banking, mortgages are performing well. The mortgage loan book surged by 70% last year and grew another 25% in the first four months of 2018 in real terms, but origination has fallen 50% since May, though some new mortgages are still being issued.


Nerio Peitiado,
Banco Supervielle

Supervielle’s Peitiado says it is unsurprising that mortgages are performing well despite product interest rates being linked to surging inflation. Although the repayments are in pesos, real estate in Argentina is still valued in dollars.

And so although repayments are becoming more challenging, the collapse in the value of the local currency means those financing houses have seen a huge rise in the peso values of their investments.

“If someone b ought a property for $120,000, they could sell that today for, say, $105,000 and they would still generate more than a 100% return in pesos,” says Peitiado. “Of course it’s unfortunate that they may be struggling with higher instalments, but if we view property [as an investment] as an accumulation of wages, then the crisis has created levels of equity that would have [otherwise] taken 10 years.”

Peitiado says Supervielle issues around 10% of all private-sector mortgages and he hopes that the current crisis does not lead to Argentina walking away from its latest experiment with such long-term funding for retail investors.

Argentina’s banks were interested in the emerging mortgage sector of the past few years for more than profits. They see them as a strategic way to lock in banking relationships that enable them to generate returns on other products â€" specifically deposits.

Today, retail deposits are king in Argentina. With the central bank issuing seven-day liquidity paper, Leliqs, to banks that generate real returns (compounded weekly interest rates) of over 100%, the more low-cost, retail deposits a bank has the better.

Central bank data show that peso-denominated deposits have been resilient (maintaining value in nominal terms although shrinking relatively as the dollar-denominated deposits rose in value on the peso’s fall).

Fierce competition

There has been fierce competition for corporate payroll business, which boosts retail deposits. Banks had also been investing in physical branches as Argentina remains one of the few emerging markets where gaining market share still requires a bricks-and-mortar investment, as well as digital services.

Peitiado also points to Supervielle’s acquisition of Investir, a fintech investments platform, as part of its strategy to compete for these deposits.

“Retail deposits will continue to be king for many years, and to get that retail business you need a very strong value proposition for the affluent segment,” he says.

Ivana Recalde, director of financial institutions at S&P Global Ratings, says: “The banks that will benefit most from this environment will have higher proportions of call deposits, rather than the institutional deposits.

“Banks are very much targeting the corporate payroll accounts so that they can benefit from a funding that is almost free. So the banks that have higher coverage there â€" the larger banks â€" will be in a much better position than those that have to get term deposits and pay higher interest rates.”

However, given the recession and the changing banking outlook, Supervielle has slowed its physical expansion.


Sergio Grinenco,
Banco Galicia

Galica is also being much more cautious on expenditures. Grinenco says the bank has halved its plans for 40 new branches this year.

He says the bank also has “intentions to reduce headcount, not dramatically, but we have to be more stringent.

“I would say that for Galicia, and for the system as a whole, we are clearly in a context where we have left the expansionary mode that we had at the beginning of the year into one of scaling back growth plans â€" in terms of projects and facili ties. Everything has been put on hold or at least reduced in terms of dynamics and, in terms of pesos, we certainly have less capacity than we had six or seven months ago.”

Galicia is also increasing the risk scoring for new credit and “is looking very carefully at new credit applications” as the only demand coming with interest rates above 70% is likely to come out of distressed financial conditions.

The good news is that most banks should come through the latest stress tests without any existential threat â€" the decline in most banks’ capital should be limited. However, profitability will be damaged as worsening asset quality leads to higher provisioning costs and there will be little new demand for credit.

Banks will try to boost fee income, but the main resilience for net interest margins will come from securities income. This income, however, will be restrained by the central bank’s large non-interest-bearing reserve requirements.

There has also been an increase in corporate term deposits â€" as the central bank stopped issuing its Lebac securities to entities other than banks â€" which will help banks’ revenues at the margins but will be limited as this funding is more expensive and less stable than retail deposits.


From an investment perspective, the situation is gloomy. Domingos Falavina, financial institutions equity analyst at JPMorgan in New York, says that, even on the broadest measures of stock attractiveness, the outlook for Argentine bank stocks is challenging.


Domingos Falavina,

“One of the most basic but important metrics is if a bank’s return on equity is above inflation. It’s a very simplistic approach, but banks have to at least be able to preserve shareholder value in real terms,” he says.

Even in the first half of this year, the banking sector failed on this measure. Moody’s calculates that the annualized return on equity in the first half of 2018 at a nominal 15.4% but -1.3% when adjusted for inflation. The outlook for the coming six months is much bleaker.

There are other broad metrics that Falavina cites as important to be positive for a bank stock, such as having loan growth and net income above inflation. But Argentina’s banks fail on these metrics too.

However, Falavina adds: “The business model of Argentina’s banks isn’t broken, it is just facing a short-term stress. There is still a general view that the trend for improvement â€" the view that was driving the banks in 2017 and the beginning of this year â€" is still valid should the macroeconomic and political environment return to be supportive.”

In other words, the development of Argentina’s banking sector was never going to be linear â€" it will rise and fall on the country’s economic progress, or lack thereof.

Or as Peitiado summarizes succinctly: “It’s just stop and go.”

Source: Google News Argentina | Netizen 24 Argentina

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