A tax amnesty on Argentine wealth held overseas is expected to prompt a dramatic increase in domestic bank deposits, which would enable the country’s banks to scale up lending and stimulate the lacklustre economy.
Mauricio Macri, the country’s market-friendly president who took office in December 2015 and represents the centre-right Republican Proposal political party, announced in May an amnesty on an estimated $500bn of unregistered Argentine money held abroad. Depending on the sum involved, the capital will be liable for tax of between 0% and 15% once it is repatriated. Economists estimate that this could lead to an inflow of up to $100bn.
The Argentine Bankers’ Association (ABA) says that if banks are able to secure between 10% and 20% of that total, the financial systems’ funds available – mostly deposits – would jump by between 150bn pesos ($10bn) and 300bn pesos, the equivalent of 12.5% to 25% of all private sector deposits.
“A growth in bank deposits by up to a quarter would enable an expansion in loans to the private sector, represent a major boost in the size of the financial system, and would benefit society,” says ABA president Claudio Cesario. “It would translate into a greater volume of credit at lower interest rates.”
Scope for growth
A quick look at neighbouring South American countries shows the huge scope for credit growth in Argentina. Total domestic credit against gross domestic product (GDP) stands at only 14.4% in the country, compared with 65% in Brazil and 110% in Chile, according to the World Bank. The stock of credit in Argentina amounted to a mere 690bn pesos in August 2015. Commercial loans accounted for 59% of the total and consumer loans the rest, according to the Argentine central bank.
Last December, the central bank, headed by the then newly appointed Federico Sturzenegger, removed the caps on the interest banks could charge on credit. The market expected this would lead to a major boost in lending.
“A lack of credit in Argentina has been a major issue for the past couple of years,” says Valeria Azconegui, a banks analyst for Argentina at rating agency Moody’s. “The government’s removal of interest rate caps should have enabled banks to expand lending, but an overhang of very high inflation has led to high interest rates, which has discouraged people from borrowing. People will not borrow with rates so high in the middle of a recession.”
Credit contraction
Over the past decade, a rapid expansion in credit has been one of the main factors behind the increasing bank profitability in Argentina. For example, between 2010 and 2015, credit growth was running at about 32% annually, according to Fitch Ratings.
This expansion took place when inflation was between 10% and 20%. This year credit has been growing at about 31% but, with inflation at a much higher annualised rate of 48% (based on Buenos Aires province figures, seen as representative of the country), in real terms a major contraction in credit has been under way.
However, economists are confident that credit could expand rapidly if economic growth picks up. Last year, the Argentine economy expanded by 2.3% but this year it is forecast to decline by 2%, according to London-based consultancy Capital Economics. Analysts vary widely in their predictions for growth for 2017, forecasting anything between 1.5% and 4.5%.
“Our ambition is to double the proportion of credit against GDP in the next five years,” says Enrique Cristofani, president of Santander Rio, Argentina’s biggest private sector bank with some 400 branches and 2.5 million clients. “Colombia and Brazil are examples of countries that show that this is possible. In the short term, the government is trying – with some success – to combat inflation. This is the first step to ensuring that the financial system grows, because a recuperation in the value of the currency would generate the necessary conditions, so that the system stops being only transactional and focuses more on the long-term savings of families and companies.
“At the same time, this should mean greater and better credit, reducing the cost of capital and benefiting the overall competitiveness of the Argentine economy.”
Mortgage hopes
Santander Rio forecasts that private lending could jump to 23% of GDP by 2018 if the number of deposits taken rises sharply, to outstrip levels last seen before the catastrophic 2001 to 2002 economic meltdown.
There is a yawning gap between lending volumes at public banks (which account for 44.1% of all bank deposits) and private banks (which make up 55.6% of deposits). For example, Banco de la Nación, Argentina’s largest bank, with a 24.7% share of all bank deposits, and Latin America’s ninth largest bank by Tier 1 capital, has a loan-to-deposit ratio of 45%, whereas the smaller BBVA Francés has one of 64.5% and Banco Galicia of 93%.
The Macri administration wants Banco de la Nación to play a much bigger role in stimulating economic growth, principally by increasing its mortgage lending. Argentina has a dismal track record with this type of credit. Mortgage loans amount to only 1.7% of GDP, compared with 18.7% in Chile, 7.7% in Brazil and 4.9% in Peru.
In June, Banco de la Nación launched a line of 20-year mortgages loans, with a fixed 14% rate for the first three years and an adjustment structure based on salaries during the rest of the period. The bank expects to write 21,000 new mortgages during the first year.
“For many years, Argentina has not had a long-term yield curve,” says Santiago Gallo, director of the financial institutions group in Latin America at Fitch Ratings. “This means there has been no long-term lending, no proper mortgage industry, and no major investment projects. If the Macri administration pursues more orthodox economic policies, lower inflation takes hold and greater foreign investment comes into the country, there could be space for a great deal more long-term lending.”
Entering the debt markets
In April, Argentina made a whopping $16.5bn global debt offering, the largest emerging market debt sale on record, which helped to create a long-term yield curve for the country. The sovereign sold bonds with maturities ranging from three to 30 years and with yields up to 8% for the longest maturity. Its new 10-year bonds yielded 7.5%.
The auction was four times oversubscribed and part of the proceeds settled Argentina’s complicated legal disputes with ‘holdout’ investors over unpaid debt, stemming from the country’s record $100bn default in 2002, and which came to a conclusion only days before the issuance.
“We are expecting a high demand for credit during the next few years,” says Fabián Kon, CEO of Banco Galicia. “An expected pick up in GDP should lead to a lot of new business for us. The question is how do we fund it? High international demand for bond issuances by banks such as ours is good news for us.
“Furthermore, the local peso-denominated market has been growing rapidly as pension funds and insurance company funds have expanded. These are also a potential pool of major investors.”
In July, Banco Galicia issued a $250m bond internationally, with a 10-year maturity and a yield of 8.25%. It was five times oversubscribed, underlining the growing international interest in Argentine assets.
The bank believes one way in which it could raise capital in the future is by issuing stock on the international or local markets, but it has no immediate plans to do so.
Liquidity levels
However, analysts point out that Argentine banks are flush with liquidity and really do not need to issue debt to fund greater long-term lending.
“The banking industry is one of the few sectors that was a success story under the Kirchner administrations,” says Mr Gallo, referring to the governments of the populist Peronist presidents the late Néstor Kirchner (who held office between May 2003 and December 2007) and his wife Cristina (December 2007 until December 2015). “All the banks have a high level of liquidity; deposits have been growing faster than loans.”
The country’s banks are in a healthy state and their profitability is in line with that of the Latin America region. The banks’ average return on assets – adjusted for inflation – ranges from 1.5% to 2.5%, while that of Latin America excluding Argentina is about 1.4%, according to Buenos Aires-based brokerage Puente. Banks’ adjusted returns on equity in Argentina are in the 12% to 15% bracket, while those in the region excluding Argentina average 15%.
One major difference between Argentine banks and the rest of the region is that they have less leverage than their Latin American peers. The average assets-to-equity ratio in Argentina is eight times for Banco Galicia, Macro and BBVA Francés, whereas the average for the region’s publicly traded banks excluding Argentina’s is 11 times.
“For us, what is most important is that the Argentine financial system is solid, liquid, with a low level of delinquency, and does not suffer from shortages of foreign currency,” says Mr Cristofani. “Looking ahead, the challenge is to ensure that it becomes a lot bigger.”
Another advantage of the country’s system is that only 2.2% of loans for longer than 90 days are non-performing, demonstrating the high quality of banks’ credit portfolios.
Consolidation possibilities
Many analysts believe Argentina has too many banking groups and that they are ripe for consolidation. At the end of 2015, the country's financial system was made up of 78 financial institutions (62 banks and 16 non-bank entities). The top 10 banks in the system held 76% of deposit market share and 71% of loans.
Among the banks, 13 are federal or state owned and 49 are private (32 are domestically owned and 17 are foreign owned). Consolidation has already taken place (the number of institutions has fallen from 214 in 1991) but more mergers and acquisitions look to be on the cards.
“As nominal interest rates drop and banks look to ramp up lending, they will seek greater economies of scale,” says Juan Vasquez, head of equity research at Puente. “I think this could lead to a wave of consolidation among the smaller banks.”
Citigroup has already indicated that it wants to exit the Argentine retail banking space, so that it can simplify the company's portfolio, cut costs and boost returns.
Now ranked 12th in the country by deposits, according to the ABA, Citigroup’s Argentina unit opened in 1914 and was the bank’s first non-US subsidiary. It has more than 2700 employees, 71 branches and 44.6bn pesos in assets. Citigroup also plans to exit retail banking and credit card operations in Brazil and Colombia. A buyer for the Argentine business has not yet been announced.
In August, Citigroup created a $3.5bn line of credit for corporate and institutional clients in the country, as Mr Macri sought the backing of international companies to revive the weak economy.
HSBC was also expected to sell its Argentine retail banking business, as it cuts back on its exposure to emerging markets. However, analysts now say this is unlikely as the bank's head office has realised just how profitable the Argentine business is.
Common sense
A majority of experts remain confident that the Macri administration will be able to turn the economy around. His party does not have a majority in either the lower or upper houses of Congress, which is obstructing his political agenda. Fresh legislative elections are expected to be held in October next year, but it is not clear if he is likely to win either house.
“This is the first time in my life that we have a government that is demonstrating common sense,” says 52-year-old Claudio Porcel, chief executive officer at Buenos Aires-based brokerage Balanz Capital. “Previously, government budgets have been ruined by populist measures. There is now an important opportunity for a new model.”
One of the key economic challenges for the country is to bring down the fiscal deficit, which stood at -5.4% of GDP in 2015 and is forecast to be -4.8% this year and -4.2% next year, according to Capital Economics. For international investors, this will be a big test of Argentina’s willingness to pursue a more orthodox economic path.
“It is fundamental for the government to maintain clear rules of play and to respect them constantly, allowing economic players to develop under a framework of rule of law and economic stability,” says the ABA’s Mr Cesario.
