The slow pace of Argentina’s fiscal reform programme finally caught up with its government last week and, compounded by an error in monetary strategy at the end of last year and a deteriorating risk environment for emerging markets, the country is firmly into emergency reaction mode.
Meanwhile, the banks that had been changing their funding mix and business strategy to anticipate economic growth and credit demand face tough operational questions: do they continue with their path to normalization or hunker down and see how long and fierce the storm will prove to be – and what damage it will do?
There are three main impacts to the banking sector from the recent economic drama in Argentina, which saw the central bank intervene three times and increase its policy rate by 1,250 basis points in three inter-meeting decisions to 40%. This was an attempt to stop a run on its currency – the peso fell by 12% last week – and prevent the central bank burning through billions of dollars of FX reserves to fight the peso’s depreciation – followed by the politically risky decision to negotiate a line of credit from the IMF.
The first impact is short term, mixed and related to the new reality of the financial system. The banks should benefit from the higher interest rates through higher net interest margins (NIMs), according to UBS financial analyst Frederic de Mariz. He thinks the recent fallout to Argentine banks’ valuations – Argentine bank ADRs have suffered – leads to a buying opportunity as “higher rates will impact NIMs positively, via higher securities income.
“We currently expect NIM to compress from 10.7% in 2017 to 10.6% in 2018, and now we see upside risk to 2018.” De Mariz estimates that every 50bp increase in NIM would translate into about 9% in earnings per share.
The Argentine central bank (BCRA) also moved to cut the permitted level of foreign currency held as part of banks’ tier-1 capital, from 30% to 10%. However, despite the short deadline for compliance (May 7), a report from BTG Pactual said that the impact on the private banks would be minimal.
“According to February data, only public banks were close to the 30% limit (at 29%) as private banks were around 2%,” it states, although that low figure could have increased if banks had increased their hard currency positions since March.
Rating agency Moody’s believes the main financial impact will be negative, with higher interest rates hurting the system’s delinquency ratios.
“The rate of non-performing loans was a low 1.6% of gross loans as of year-end 2017,” it states. “However, with interest payments on variable-rate loans [which on average constitute roughly one third of banks’ portfolios] set to increase by nearly 50%, we expect impaired loans to increase.”
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