Argentina's banking reforms aim to boost financial inclusion

After the adoption of more market-friendly policies, Argentina’s banking sector has gradually begun to show signs of a return to positive growth. Since 2015 the government has been undertaking a number of reforms aimed at boosting investor confidence in the sector, increasing financial intermediation and improving the overall health of the financial services industry. At the same time, banks have experienced strong loan portfolio increases within corporate and consumer segments, fees and procedures have been eased for users, and digital services are on the rise.

However, catching up to regional peers will be no easy feat. Scepticism over the financial services industry remains latent after the 2001 crash, which saw a run on banks and the freeze of nearly all accounts. Today, the credit-to-GDP ratio and banking penetration are still behind other South American countries and previous levels seen in the 1990s.

Run-up

After being barred from accessing international financing following its sovereign debt default in 2002, the government and its financial services industry saw its access to cross-border financing substantially deteriorate. In the years running up to 2015 the government primarily sought funding within its borders, and banks remained profitable by buying up government bonds and central bank bills (letras del banco central, LEBACS), which provided hefty liquidity ratios and substantial returns, especially under high rates of inflation. While the sector maintained its margins, it did not expand, with penetration levels stalling and access to financial services restricted to higher-income segments of the population.

Structure

The sector is comprised of 77 entities, with 13 public and 33 private Argentine banks, nine private foreign banks, seven subsidiaries of foreign banks, 14 specialised financial institutions and one credit cooperative, as of early 2018. In terms of total bank lending, the main players include publicly owned Banco Nación, holding the largest market share with 13.7% , followed by Santander Rio and Banco Provincia, which both have 10%, Banco Galicia (9.2%), Banco Macro (7.4%), BBVA Frances (7.3%) and HSBC (4%).

According to a report published by América Economía, when ranked by total assets, Banco Nación is Argentina’s only bank in the top 20 institutions in Latin America, in 19th place. Banco Provincia is the next closest local contender in 34th place.

Given the number of institutions operating within a relatively underdeveloped market, discussions on the need to consolidate the sector have been ongoing for a number of years. However, not much has been seen in terms of mergers and acquisitions, other than the sale of Deutsche Bank’s Argentine operations in 2015 and Citibank letting go of its retail branches in 2017 (see analysis). The market has actually seen new arrivals with the roll back of regulations barring investment banks from operating in the country, as well as with the accreditation of fully digital banks.

Regulatory Reforms

Since taking office in 2015, the administration of Mauricio Macri has made substantial regulatory reforms, including liberalising the exchange rate, which catalysed the devaluation of the peso against the dollar by 41.9% in 2015, thereby bringing the value of the local currency closer to the black market rate; eliminating capital controls to allow for the free float of the peso, which did not result in the massive capital flights that some had predicted; dropping the 2012 requirements which stipulated that institutions must lend part of their portfolio at below market rates to specific industries; and removing caps on interest rates, banking fees and minimum interests for deposits.

As part of reforms meant to strengthen the role of banks throughout the economy, the market regulator, the National Securities Commission (Comisión Nacional de Valores, BNV), passed legislation in May 2017 to allow for the establishment of foreign-owned investment banks. The first to capitalise on this law was BTG Pactual, the largest independent investment bank in Latin America, which was granted an operating licence in August 2017. A number of other investment banks, including Peru’s Credicorp, Invesco’s regional partner LarrainVial and Goldman Sachs Asset Management are also said to be seeking operating licences in the country.

Provisions

In an effort to strengthen the sector and better respond to international standards, in 2015 the Central Bank of Argentina (Banco Central de la Repùblica Argentina, BCRA) resolved to adapt its capital and information-sharing requirements in line with Basel III guidelines. These measures have been gradually introduced since January 2016 and are scheduled to come into full effect by the beginning of 2019. In January 2018 the mandate for institutions to submit balance sheets in accordance with the International Financial Reporting Standard 9 came into effect, which resulted in an increase in net book equity for the majority of institutions, generating an aggregate increase of approximately 10.4% in net assets over December 2017. “Most banks already adhere to Basel II guidelines and are well on their way to respond to Basel III, especially with regards to capital and liquidity ratios, risk provisions, stress tests and so on. Elements such as the liquidity coverage ratio are progressively being increased to meet these new guidelines as well,” Marcelo Iadarola, administrative director of Banco Patagonia, told OBG.

Balances

In line with robust credit growth, total assets in the banking system have increased significantly in recent years, growing from AR1.8trn ($93.2bn) in December 2015 to AR2.6trn ($135.6bn) in December 2016 and reaching AR3.5trn ($181.2bn) by the end of 2017, registering an increase of 87% over this three-year period. As of February 2018, total assets had risen to AR3.7bn ($191.6m). The total value of loans also grew substantially, rising from AR886bn ($45.9bn) in December 2015 to AR1.1trn ($57bn) and AR1.7bn ($88m) in 2016 and 2017, respectively, marking a 90% increase over this span. The figure rose to AR1.8trn ($93.2bn) in February 2018, with credit to the non-financial private sector accounting for 98% of the total, according to the BCRA.

At the same time, total liabilities rose from AR1.6trn ($83bn) at the end of 2015 to AR2.3trn ($119bn) a year later, reaching AR3trn ($155bn) by end-2017. In February 2018 this figure had reached AR3.2bn ($165.7m), 83% of which comprised client deposits.

Capital Adequacy Ratio

While the capital adequacy ratio had been experiencing an upward trend since 2015, the sudden increase in loans between December 2016 and the end of 2017 caused the capital adequacy ratio to decline by 0.7 percentage points to some 16% of risk-weighted assets. In the first month of 2018, the CAR rose to 16.3%, with 14.8% coming from Tier-1 capital, which was a comfortable 88% above requirements.

Profitability

Despite having spent a decade in isolation, Argentine banks remained very profitable by building their portfolios on government bonds and the BCRA’s LEBACs. These short-term instruments have been extremely profitable for banks, especially during high-inflationary periods, resulting in strong treasury gains. Recent regulatory reforms meant that banks would need to rely less on passive monetary instruments, and more on traditional financial intermediation, which was expected to have an impact on short-term gains. Indeed, profitability ratios across the financial sector for 2017 posted their lowest levels in five years, reaching a return on assets (ROA) of 3% and a return on equity (ROE) of 25.8%, down from the 2016 rates of 3.6% and 29.6%, respectively. However, top-tier banks maintained strong results, as exemplified by the country’s most profitable bank, Banco Patagonia, which reported an ROE of 36.1% and an ROA of 4.5% at the end of third quarter 2017. Despite the overall drop, Argentina’s sector still leads the region, followed by Nicaragua and Paraguay, with an average ROA of 2.35% and 2.06%, respectively, according to the Latin American Federation of Banks. “In 2016 the high profitability of banks was driven by their reliance on passive debt instruments, investing in products with low risk and high returns. In 2017 we began to unravel these cushions of liquidity to finance growth in credits, which was not being met by new deposits. In the short to medium term we are bound to see banks focus more on traditional financial intermediation than on passive investment techniques,” Iadarola told OBG.

In 2018 profitability ratios returned to 2016 levels. In January 2018 the financial margin of the entire sector represented 12.1% of assets, representing a 0.6-percentage-point increase since December 2017, driven primarily by gains in the value of securities .

Making Deals

With the industry expanding, banks have been positioning to profit from these gains, with almost all major institutions beginning to issue equity or debt. In 2016 confectioner Havanna held the first entirely local equity offering since 2013, raising $11.5m. In the same year Grupo Supervielle, the holding company for Banco Supervielle, raised $280m in new equity in an initial public offering held in both New York and Buenos Aires.

In 2017 BBVA Frances and Banco Galicia both issued new equity through follow-on public offers, raising $900m and $840m, respectively. In 2017 Banco Macro also had a $670m issuance and Banco Hipotecario announced its own $400m offering. Additionally, in early 2018 Moody’s assigned debt ratings for up to AR5bn ($258.9m) for an expected issuance by Banco Santander. Meanwhile Banco Nación, the country’s largest lender, has said it will seek outside financing in the second half of 2018 through local and foreign markets with the issuance of bonds denominated in dollar, pesos and the new inflation-adjusted acquisition value unit (Unidad de Valor Adquisitivo, UVA) during the second half of 2018.

Monetary Policy

In an effort to keep inflation levels in check, the BCRA has been increasing its monetary policy interest rate, which rose from around 24.75% in January 2017 to a peak of 28.75% at the end of the year. Given the government’s revaluation of its inflationary target for 2018 from between 8-12% to 15%, the central bank lowered its rate to 27.25% in January 2018. Some analysts believe that this reduction is hardly justified as previous goals fell short and inflationary pressures for the first two months of the year had reached a compound rate of over 4.2%.

In March 2017 the central bank lowered the reserves requirements for banks by two percentage points, after having increased them by four points a year earlier. The move put requirements for checking and savings accounts at 20% and those for fixed-term deposits at 14%. According to local media, this liberated an additional AR30bn ($1.6bn) across the financial system and would have made interest rates for long-term deposits attractive, thus encouraging savings in pesos. This came amidst the BCRA’s move to allow banks to deposit their surpluses directly into other banks, without needing to go through the BCRA, helping to reinvigorate the interbank lending market, lower costs and streamline the process.

Credit & Deposits

After experiencing a sluggish decade, with credit as a percentage of GDP oscillating between 10.6% in 2005 and 13.7% in 2016, 2017 marked the first year of strong growth. Loans to the private sector increased by 22% when adjusted for inflation, reaching 14.3% of GDP, the highest in 16 years. The mortgage lending segment was the most dynamic, expanding by 148% when adjusted for inflation, with nearly 58,500 new registered borrowers in 2017. Despite credit growth, the sector has been able to maintain a low rate of non-performing loans at 1.8% (see analysis). Deposits during 2017 edged up more moderately, with those in pesos increasing by 2.2% and foreign currency by 17.5%, which was relatively in line with inflation.

UVA

In March 2016 the BCRA released the UVA, which is similar to the Chile’s unit of account aimed at developing mortgages. Given the historic weight played by inflation in the country, UVA loans were welcomed by creditors and debtors alike. Since their creation in April 2016 to January 2018, UVA denominated loans have amounted to $104.8bn, with mortgages accounting for 72% of the total. While initially designed for mortgages, public banks embraced the use of UVA denominated loans, by extending it to other consumer lending products such as cars or motorcycles. “UVA loans are a double-edged sword. They provide a certain level of transparency and flexibility in periods of disinflation, but they may present a serious risk if inflation edges up again and relative prices – especially real wages – become more volatile,” Ricardo Bebczuk, research director of Banco de Inversión y Comercio Exterior, told OBG.

Plastic

The number of credit and debit cards in circulation have increased by 15% and 11%, respectively, between December 2015 and September 2017. In January 2018 the BCRA reduced the cap on commissions that banks can charge to card holders for credit cards and debit cards from 3% and 1.5% to 2.35% and 1.1%, respectively, in order to incentivise their use. According to the Chamber of Credit and Debit Cards of Argentina, the number of credit card transactions in 2017 increased by 30.4%, while the number of debit card transactions grew by 39.9%.

Footprint

As of November 2017, the banking network comprised of 14,600 ATMs, 4520 branches and 117 mobile branches, with the bulk concentrated in large urban centres. In past years local media has reported an endemic lack of funds at cash machines, which could in part be caused by a tendency of locals to withdraw funds all at once, the existence of small denominated currency and a lack of cash machines in certain areas. Several reforms aimed at providing solutions to the ongoing issue are being considered, with the government moving to replace the five peso banknote denomination with a coin. In addition, banknotes in higher denominations of 200, 500 and 1000 pesos were released in 2016 and 2017.

The BCRA has also made it easier for banks to open subsidiaries across the country, with a view to enabling banks to provide services in less populous areas. Non-banking establishments such as supermarkets and pharmacies are now also able to install ATMs within their businesses. In the 12 months prior to January 2018 the evolution of the financial system’s infrastructure was primarily marked by a 7% year-on-year increase in the number of ATMs, with virtually no change to the number of subsidiaries.

Inclusion

Argentina’s banking penetration stood at 49.8% in 2015, according to the latest data available from the World Bank, which was lower than the global average of 61.5% and also behind some regional peers, including Chile at 63% and Brazil at 68%. However, a number of reforms since 2015 have also paved the way towards a more inclusive financial sector. The elimination of fees to open savings accounts and receive credit cards, the creation of a mobile payment platform and deregulation in the sector have all contributed to facilitating and incentivising access to financial services. In late 2017 the government, the BCRA and the Inter-American Development Bank announced the National Strategy for Financial Inclusion, funded in part by a $20bn loan. The strategy aims to boost the availability of digital financial services and foster lending to small and medium-sized enterprises (SMEs) on sustainable terms. Due to the trust in banks being significantly eroded by the 2001 economic crash and its aftermath, the sector faces an uphill battle as it tries to rebuild a positive perception of the industry.

On par with the government’s overarching digitalisation policies, the BCRA has been seeking to incentivise the use and integration of new technologies as a means of boosting financial inclusion partly by deregulating certain processes and establishing a number of service requirements. Since 2016 the BCRA has allowed the use of digital and electronic signatures, the issuance of digital documents and the opening of savings accounts online, as well as the acceptance of cheques via the internet. Financial service providers are required to offer a certain amount of basic services digitally, such as money transfer and access to information.

In 2017 the number of electronic fund transfers increased by 7.4 percentage points to reach 16.4% of total transactions made in December 2017. Additionally, immediate transfers grew against deferred ones to reach 91% of all transactions.

Moreover, two fully digital banks, Wanap and TSA Banking, received their banking licences in 2017. The former began operations in Argentina in March 2017, providing consumer banking products and utilising the ATM network, Red Link. In early 2018 Mercado Libre, an e-commerce and online auction platform, also launched its Mercado Credito platform, enabling sellers that already perform transactions through their portal to have access to financing.

Outlook

While reforms engendered since 2015 are assumed to be paying off, the financial services industry and the entire Argentine economy are still enduring a period of structural reforms. While industry experts do not expect inflation levels to increase in the foreseeable future, the speed of disinflation remains at odds with the government’s goals, representing a threat to the stability of the country. Simultaneously, socio-political challenges provide little scope for the current administration to implement quick fixes for the economy.

However, continued economic growth in the medium term, coupled with low penetration levels, means that there is still substantial room for improvement, although perhaps at more moderate rates. Moreover, through the system’s adherence to international norms and the progressive implementation of Basel III guidelines, together with the improving quality of portfolios, the sector is being built upon solid foundations, allowing for sustainable growth. Nevertheless, increasing access to more households and SMEs remains a challenge as the banking sector seeks to hold an important position in the economy.