After surviving 2001 financial crisis, the worst crisis that the Argentine financial sector has ever had, the system has had a great recovery. In the year 2001, the flight of deposits from banks obliged the government to establish the “corralito”, which implied that the savings from the public could not be withdrawn from the banks. Subsequently, the government made an offer in order to change the deposits for bonds with due dates in the years 2005, 2008 and 2012. The massive acceptance of the offer, and the subsequent exchange of bonds in default for new bonds, was instrumental for the recovery of the financial sector.

Banks’ Assets

Since the February 2005 exchange of debt in default, banks’ assets have had an important revaluation. The assets of all the financial entities grew 3% in the last year. Moreover, the recovery of the Argentinean economic situation has enhanced the quality of the portfolio and reduced the part that is irrecoverable.

The fall in the debtors’ irregularity in the public banks was greater relative to the private banks. Among public banks, the fall in 2005 was 15,6%, whereas the fall was 9% among private banks. The financial system continues to finance those sectors that have a better performance with the new economic model, such as exports, which has less irregularity levels.

There has also been an increase in the level of financial activity, which has meant more deposits and a greater utilization of the lending capacity of the system. Even though there is still some resistance from the public to make deposits in the banks after the crisis that confiscated their savings, slowly the public have returned to the banks. In the year 2005, the deposits grew 21%, while loans grew 39%.

Liabilities

There has been an important reduction of the liabilities of the financial system. Most of them are related to the loans the Central Bank gave to the banks to get through the 2001 crisis. Last year the matching system created to cancel these debts generated transfers to the Central Bank for Ar$ 9.400 million (U$S 3.133 million), and the number of entities that have debts for this concept have been reduced from 20 to 5.

Profitability of banks and origin of income

The recovery of the financial system’s profitability started in 2003. Slowly, the banks increased the results they obtained for commissions of their alternative services. They left behind their first activity, which was to receive and lend money. This allowed them to reduce the negative results year after year. The ROE of the 10 first private banks rose from -21,46% in 2003 to -9,27% in 2004. This recovery, despite the fact that they continued in red numbers, was linked to the margin of 2% over the assets the banks obtained from services, while the margin of financial intermediation was just 1,91% over assets.

In spite of the recovery of margins, the system registered as a whole losses for Ar$ 530 million (U$S 176 million) in 2004. They were related mainly to the deferred results from the 2001 crisis (those results include the amortization of judicial sentences against banks and adjust from the valuation of public bonds. The operative recovery can be seen in the fact that without those deferred results the whole system would have obtained profits of Ar$ 1.700 million (U$S 566 million) in 2004.

However, the financial sector had to wait until 2005 to return to the black numbers. As a whole, banks showed profits for Ar$ 1.958 million (U$S 652 million which means a ROA of 1%) in 2005. The public banks obtained results for Ar$ 129 million (U$S 43 million), while private banks made profits of Ar$ 810 million (U$S 270 million). These results are explained by the increase in the financial intermediation margins as well as the services margins. For the 10 first private banks, the spread between rates increased from 7% to 9% in 2005, whereas the equilibrium spread only grew from 3% to 4%. This generated an increase in the margin of financial intermediation activity to 3,04% over assets.

Solvency of the system

The increase in the results added to the injections of capital the banks received during the last year, enhancing the solvency of the system. Throughout the year, the sector received capitalizations for Ar$ 2.275 million (U$S 758 million). In this way, the equity of the entities as a whole grew 15,7% during 2005.

Market performance

In the market, the listed banks had a selective is variable a more appropriate word? performance. The IOL Financial Services Index, which includes Banco Francés, Banco Bansud y Grupo Financiero Galicia, grew 4,47% in 2005. This performance is below the market as a whole, whose more representative index is the Merval, which grew 12,69% in 2005. However, some papers had a better performance than the index. For example. Banco Bansud was able to adapt to the changes faster and better due to its reduced size. Its’ market cap grew 47,21% during 2005.

Outlooks and challenges…

Looking into the future, the Argentine financial system has many challenges of a different nature. First, it must reduce the gap between the maturity of demands of credits and deposits. Nowadays, the market asks for credit at a fixed rate and with a maturity of 10 years, whereas the lack of confidence in the financial system makes the placements to be concentrated in short periods of, on average, between 40 and 60 days.

One of the factors that obstruct the long periods placements is inflation. Even though the rate structure is steady, it pays negative yields because of the loss of purchase power of the currency. This also prevents the banks from being able to lend at long periods with a fixed rate without having a mismatch between active and passive rates. One solution to this drawback, which stops the local industry development from getting credit, could be the utilization of variable rates and the development of the local capital market. In the local stock market a new index of small enterprises is being developed and is expected to have its first listings soon. 

Finally, the exposure to the public sector should continue its reduction tendency. That exposure fell from levels of 50% of assets in 2002 to 40% currently. This could imply a greater amount of funds available for private investment, which could permit a sustainable development of the country.