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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.
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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.
Argentine banks are trading at the highest multiples in Latin America – Banco Galicia has increased in value by 80% in dollar terms already this year – and this heat might be preventing deals.
There is also unlikely to be much international interest – especially at these high valuations – until there is greater clarity on the country’s financial sector regulations, new capital control rules and a normalization of the macro-economic environment.
“Banks are trading above 3.5x price-to-book value, and at those levels these become long-term investments – with the upside based on GDP growth potential post-normalization of the economy,” says Ricardo Cavanagh, head of equity research at Itaú BBA for Argentina and Andean region.
“I am positive that this will be the case, but the time horizon that investors would need to be willing to accept is over one year and there will be volatility in that time – so there may be a better opportunity to get into Argentine banks.”
Marcelo Dupont, head of financial institutions at ICBC in Buenos Aires, agrees that conceptually the financial system is likely to see some consolidation or attrition in the medium term, but thinks there will continue to be plurality of successful business models.
“There are many banks that are in a niche that the big banks will never move into,” he says. “Maybe we will have greater competition on the corporate side – this is where the very big banks are competing. But I don’t see potential sellers wanting to sell. There is huge opportunity facing Argentina’s financial institutions and all the banks are well capitalized and solvent.”
