Argentine banking sector ripe for further mergers and acquisitions

The Argentine financial sector has gone through extensive structural change in the last decades in response to a variety of factors, including financial crises, debt defaults, privatisations and regulatory reforms. As in other emerging markets, the number of financial institutions in operation has declined significantly from 723 in 1977 to 110 in 2000. The 2001 economic crisis and subsequent intervention measures resulted in a number of entities – including large multinational groups such as France-based Société Général as well as South Africa’s Standard Bank – filing for bankruptcy or withdrawing their operations. Between 2001 and 2010 the number of financial service providers was further reduced from 108 to 80, with state-owned banks gaining a larger portion of market share.

Gains

The financial sector can thus be described as fragmented, with 77 entities sharing a limited market as of 2018. According to the latest data available from the World Bank, the credit-to-GDP ratio was 16.1% in 2017, below those of regional peers as well as the country’s credit-to-GDP levels prior to the crisis.

Despite most industry specialists considering the sector ripe for a new wave of consolidation, mergers and acquisitions activity has remained relatively subdued. The first noteworthy deal since the 2015 general election was the wholesale of Deutsche Bank Argentina to local bank El Comafi for $45m in 2016. This was followed by Citibank agreeing to sell its $1.4bn worth of retail banking assets to Santander Rio for an undisclosed amount. However, Citibank maintained its corporate and investment portfolios. Both of these sales were accredited to internal strategies, rather than to local market pressures. It is worth noting that Deutsche Bank retreated from five countries in the Latin American region, while Citibank sold all of its retail operations in the region.

In 2016 Banco Do Brasil, one of Brazil’s largest public banks, began negotiations to sell its Argentine stakes in Banco Patagonia, which is 11th in terms of asset size, but first in terms of profitability. However, discussions fell through when Banco Do Brasil posted stronger than expected results in 2017 as Brazil’s economy started showing signs of revival. Rumours have also surfaced regarding the sale of HSBC’s Argentine operations, though there had been no public announcement as of mid-2018. Most recently, Banco Galicia took over the assets of local bank Banco Finansur after the central bank suspended the latter’s licence in November 2017 due to its inability to meet capital requirements of approximately AR10m ($517,000).

Potential

Despite the limited size of the industry, the credit-to-GDP ratio has increased by approximately two percentage points in the two years leading up to 2017 and is expected to continue growing in the foreseeable future. Reforms have also allowed for foreign investment banks to operate in the country, after being barred from doing so during the previous administration. Likewise, two new digital banks were granted licences to provide basic services in 2017. Damián Wilson, an economist at the Argentine Association of Banks, told OBG, “As the sector expands, I doubt we will be seeing a structural consolidation of the industry, but instead, entities will seek to strengthen their positions within specific segments. We are not aware of specific deals under negotiations, but are seeing a lot of interest from new players seeking to enter the market.”

Top-tier banks still account for the lion’s share of the market, with the six largest banks holding nearly 60% of all assets and loans, and over 60% of deposits. Banco Nación is the only bank that holds more than 11% of the market share. In the last few years, a number of smaller banks, such as Banco Patagonia and Banco Supervielle, have also gained ground within specific segments or regions. As the industry expands, the focus will need to be on improving efficiency through developing economies of scale. While there is likely to be mergers and acquisitions in the future, there is also room in the industry for smaller banks to tap into niche markets.