Report on Banks

Executive summary

• At the beginning of 2022, the aggregate financial system maintained its characteristic aspects in terms of strength, in a context of declining financial intermediation with the private sector, partly due to seasonal factors. The sector maintained limited exposures to risks intrinsic to its operations, as well as relatively high levels of coverage with liquidity and solvency. In particular, liquidity and solvency indicators remain above their averages of the last 15 years.

• In terms of payment service provision, under the impetus of the changes opportunely implemented by the BCRA, the use of electronic instruments is gradually consolidated. Within the framework of the Transfers 3.0 scheme and, based on the interoperability of operations initiated with QR code that has been in force since the end of last November, payments with transfers initiated through this modality increased significantly: +28.5% in real amounts and +42.2% in amounts when comparing the daily average of operations in February 2022 with that of December 2021.

• With regard to the solvency of all financial institutions, in January there was an increase in the level of their main indicators. The integration of regulatory capital (RPC) in terms of risk-weighted assets (RWA) totaled 26.4% for the aggregate of financial institutions (+0.8 p.p. compared to last December and +2.1 p.p. y.o.y.), while the surplus capital position (RPC minus regulatory requirements) represented 227.7% of the minimum requirement in the period (+11.4 p.p. in the month and +34.6 p.p. y.o.y.).

• In the month, the balance of liquid assets in the broad sense of the financial system was equivalent to 68.1% of deposits, slightly below the level of December (-0.6 p.p.), although higher than the figure for January 2021 (+3.7 p.p. y.o.y.). Within the framework of the redesign of the BCRA’s monetary policy instruments, the composition of the liquidity in pesos of the financial system began to change at the beginning of the year in favor of LELIQ holdings and to the detriment of the passes with this Institution.

• The balance of credit to the private sector in pesos fell 2.2% in real terms compared to the end of 2021 (+1.6% nominal), thus reaching a level similar to that of January last year expressed in homogeneous currency (-1% real y.o.y. or +49.2% nominal). The Financing Line for Productive Investment (LFIP) for MSMEs promoted by the BCRA continued to stand out at the beginning of the year and accumulated disbursements of $1.74 trillion between October 2020 (implementation date) and February 2022, reaching the credit needs of some 220,000 companies. Given the prominent role in channeling loans to the MSME sector, the BCRA recently extended the LFIP until 09/30/22.

• The non-performing ratio of credit to the private sector did not present significant changes compared to the end of 2021, remaining at 4.3% in January. In the period, there was a slight reduction in the indicator of delinquency in financing to families (to 4.1%) and a slight increase in that corresponding to credit to companies (to a total of 4.7%). In the month, the total forecasts of the financial system represented 4.9% of total credit to the private sector and 112.3% of the balance of credit in an irregular situation.

• In January, the balance of deposits in pesos in the private sector fell by 2.1% in real terms (+1.7% nominal). This performance was explained by the 6.5% real decrease in demand accounts (-2.8% nominal), while time deposits showed an increase of 3.1% in real terms (+7.2% nominal). The positive evolution of time deposits occurred within the framework of the increase in the minimum interest rate ordered by the BCRA in the first days of the month. Then, in February and recently in March, new increases in minimum interest rates were defined, reaching 43.5% TNA (equivalent to 53.3% TEA) for fixed terms in pesos of up to $10 million for individuals. For the rest of the private sector depositors, the minimum interest rate also increased to 41.5% TNA (50.4% TEA). These provisions are in line with the BCRA’s objectives and plans for 2022, which seek to tend towards positive real returns for investments in pesos. In year-on-year terms, the balance of deposits in pesos in the private sector grew 4.9% in real terms in January, with increases in demand accounts (6.3% y.o.y. in real terms) and time deposits (3.5% y.o.y. in real terms).

• In the last 12 months to January, the financial system accumulated a positive comprehensive total profit in homogeneous currency equivalent to 1.3% of assets (ROA) and 8.3% of equity (ROE). These levels were lower than those observed in the same period of the previous year.

I. Financial intermediation activity

In the first month of 2022, the financial intermediation of all entities with the private sector was reduced, partly due to the influence of seasonal factors. Taking into account the differences in balance sheet balances of the aggregate financial system – in homogeneous currency – for items in pesos,1 ^{in January liquidity in the broad sense and credit to the private sector decreased. These monthly movements had as a counterpart a reduction in the balance of deposits in pesos. In the segment of foreign currency items, a similar performance was evidenced in the month,2 with decreases in the balance of financing to the private sector and in liquidity, and a fall in private sector deposits.}

The balance of financing to the private sector in national currency fell by 2.2% in real terms in January (+1.6% nominal),³ with decreases in most credit assistance with the exception of advances, collateral loans, and assets under financial lease (see Chart 1). Thus, in January the balance of credit to the private sector in pesos expressed in homogeneous currency stood at a level similar to that recorded in the same period of 2021 (-1% real y.o.y. or +49.2% nominal).

At the beginning of 2022, the scope of the Financing Line for Productive Investment (LFIP) for MSMEs continued to deepen. ⁴ Through this instrument, since its implementation in October 2020 and until February 2022, $1.74 trillion has been granted (see Graph 2), reaching almost 220,000 companies. Of this total amount, 15.7% was allocated to investment projects. Given the prominent role of the LFIP in channeling loans to the MSME sector, the BCRA recently decided to extend it until 09/30/22. ⁵

In January, the balance of credit to the private sector in foreign currency decreased by 1.8% – in the currency of origin. Considering the total balance of financing to the private sector (in domestic and foreign currency), in the first month of the year there was a decrease of 2.3% in real terms compared to the end of 2021 (+1.5% nominal), thus accumulating a decrease of 5.4% real y.o.y. (+42.5% y.o.y. nominal).

On the funding side of the financial system, in January the balance of deposits in pesos of the private sector fell by 2.1% in real terms compared to the end of 2021 (+1.7% nominal). This monthly performance was explained by the 6.5% real decrease in demand accounts (-2.8% nominal), while time deposits showed an increase of 3.1% in real terms (+7.2% nominal). In particular, in January the increase in private sector time deposits in pesos was mainly explained by traditional fixed-rate placements (+3.9% in real terms) and, to a lesser extent, by the UVA segment (+1.9% in real terms). ⁶

In addition to the presence of seasonal factors, the positive performance of private sector time deposits in pesos at the beginning of 2022 occurred within the framework of the increase in their minimum interest rate ordered by the BCRA in the first days of the month. ⁷ Then, in February and recently in March, new increases in minimum interest rates were ^defined,8 reaching 43.5% TNA (equivalent to 53.3% TEA) in the case of fixed terms in pesos of up to $10 million for individuals. For the rest of the private sector depositors, the minimum interest rate also increased in January, February and March, to 41.5% TNA (50.4% TEA). With these modifications, at the beginning of 2022 there was an increase in the average interest rates per amount operated by time deposits in pesos (see Chart 3). These provisions are in line with the BCRA’s objectives and plans for 2022, which seek to tend towards positive real returns on investments in local currency.

In the first month of 2022, foreign currency deposits in the private sector fell by 2.8% – in source currency – mainly due to the performance of demand accounts. As a result, the balance of total private sector deposits (including domestic and foreign currency) in real terms fell 2.5% in January (+1.3% nominal).

In a year-on-year comparison, the balance of deposits in pesos of the private sector grew 4.9% in real terms (+58% nominal) in January (see Chart 4). This performance was explained by the increase in demand accounts (6.3% YoY in real terms or 60% YoY in nominal terms) and in time deposits (3.5% YoY in real terms or 55.9% YoY in nominal terms). The balance of public sector deposits in pesos also increased year-on-year at the beginning of 2022 (3.5% real y.o.y. or 55.8% y.o.y. nominal). Thus, the balance of total deposits in pesos (private and public sectors) grew 4.8% YoY in real terms (+57.8% YoY nominal). Considering total deposits (currencies and sectors), the real balance at the end of January 2022 did not show significant changes compared to that recorded 12 months ago (+0.1% real y.o.y. and +50.7% nominal y.o.y.)

II. Aggregate evolution and composition of the balance sheet

In January, the total assets of all financial institutions fell by 3.3% in real terms compared to the end of 2021, with a decrease in all groups of financial institutions. In a year-on-year comparison, total assets did not show significant changes in real terms (+0.8% YoY or +51.8% YoY nominal) (see Chart 5).

With regard to the structure of the total assets of the financial system, at the beginning of the year the weighting of credit to the public sector and the private sector in pesos increased slightly (see Chart 6), while the relative weight of the BCRA’s instruments decreased. With respect to the composition of the total funding of all financial institutions, in January the relative importance of private sector net worth and time deposits in pesos increased slightly, while the relevance of private sector demand accounts in pesos and public sector deposits in pesos decreased (see Chart 6).

In the context of the macroprudential regulations in force, the foreign currency mismatch faced by all institutions and their debtors remained at low levels at the beginning of the year. In January, the positive spread between assets and liabilities in foreign currency⁹ of the financial system totaled 12.3% of regulatory capital (see Chart 7), 0.4 p.p. less than last December and in line with the record for the same month in 2021 (-0.1 p.p. y.o.y.).

III. Portfolio quality

The financial system’s gross exposure to the private sector (including domestic and foreign currency) stood at 31.2% of total assets in the ^month,10 0.3 p.p. above December (-2 p.p. y.o.y.). This increase was mainly driven by national and public private financial institutions. When considering only financing in pesos, this indicator stood at 28.4%, 0.3 p.p. more than in the previous month (-0.5 p.p. y.o.y.) (see Graph 8). The weighting of credit to the private sector in foreign currency in total assets remained unchanged compared to the end of 2021, at 2.8% (-1.5 p.p. y.o.y.), reaching the lowest values within the last 6 years.

After the decline observed in the previous 5 months, the non-performing ratio of credit to the private sector for the aggregate financial system did not show significant changes compared to the end of the previous year, standing at around 4.3% (+0.5 p.p. y.o.y.) (see Graph 9). The dynamics of credit quality occur in the context of the targeting of the financial relief measures opportunely implemented during the course of the pandemic. ¹¹

In January, the irregularity of financing to households stood at 4.1% of the total balance of loans for this segment (see Graph 10), slightly below the level of the previous month (-0.1 p.p. compared to December and +2.3 p.p. y.o.y.). The monthly performance was mainly explained by the decrease in the delinquency of consumer loans (credit and personal cards). For its part, the non-performing loan indicator for companies stood at 4.7% in the period, slightly above the December figure (+0.1 p.p. monthly and -1 p.p. y.o.y.). This increase compared to the previous month was due to an increase in the ratio of the construction sector.

In January, the forecasts of the aggregate financial system represented 4.9% of total credit to the private sector, slightly lower than the December figure and 1 p.p. below the record of a year ago. Forecasts continued to outperform the portfolio of irregular loans at the beginning of 2022 (see Chart 11), with a ratio that stood at 112.3% in the month at the systemic level (-1.7 p.p. monthly and -39.4 p.p. y.o.y.). In January, the balance of regulatory forecasts attributable to the non-performing portfolio (following the criteria of the minimum regulatory forecasts for uncollectibility risk) represented 88.9% of said portfolio for the aggregate of entities.

IV. Liquidity and solvency

From high levels compared to the average of the last 15 years, ample liquidity¹² of the group of entities fell slightly at the beginning of the year. The broad liquidity indicator stood at 68.1% of deposits at the aggregate level in the month (64.1% for items in pesos and 89.5% for the foreign currency segment, see Chart 12), 0.6 p.p. less than at the end of the previous year (-0.7 p.p. for the segment in pesos and +0.4 p.p. for items in foreign currency). The composition of liquidity in pesos began to change at the beginning of the year within the framework of the redesign of monetary policy ^{instruments,13} which is in line with the BCRA’s Objectives and Plans for 2022. Thus, in the month the weighting of LELIQs increased, while the relevance of net passes with the BCRA decreased. ^{14 15} In the last 12 months to January, broad liquid assets (in domestic and foreign currency) increased by 3.4 p.p. from deposits at the systemic level.

With regard to the solvency of the sector, in January all groups of institutions increased their regulatory capital integration ratios. Capital integration (CPR) of the sector aggregate increased 0.8 p.p. of risk-weighted assets (RWA) compared to December, reaching 26.4% (+2.1 p.p. y.o.y., see Chart 13). Tier 1 capital, with greater capacity to face potential losses, continued to account for more than 94% of total regulatory capital. The surplus capital position (difference between RPC and the minimum regulatory capital requirement) increased by 11.4 p.p. of the regulatory requirement in the month to a total of 227.7% for all entities (+34.6 p.p. y.o.y.).

One way to illustrate the high degree of coverage of the aggregate financial system against assumed credit risk is, for example, by looking at the ratio between the excess regulatory capital position and the credit to the private sector net of forecasts. In January, this indicator stood at 33% for the sector as a whole, 4.4 p.p. more than the record at the beginning of 2021 and well above the average of the last 10 years —14.9%—.

With regard to the sector’s internal capital generation, in the first month of the year the financial system registered positive profitability indicators, slightly higher than those at the end of 2021. Thus, in the cumulative period of 12 months to January, total comprehensive income in homogeneous currency totaled 1.3% of assets (ROA) and 8.3% of equity (ROE), falling 0.6 p.p. and 4.7 p.p. respectively in a year-on-year comparison (see Table 1). The main factors that influenced the aforementioned year-on-year performance were: increases in the cost of funding for deposits, higher monetary losses (effect of inflation on the balance sheet of the financial system) and reduction in interest income from loans. For its part, this dynamic was partially offset by higher income from pass premiums and lower charges for uncollectibility, among others.

V. Payment system

In line with the seasonality of the period, in February immediate transfers (TI) decreased compared to the previous month in quantities (-0.4%) and in real amounts (-5.8%). However, in year-on-year terms, these operations maintain significant dynamism: IT expanded 75.7% YoY in quantities and 31.8% YoY in real terms. This year-on-year behavior was explained by the increases in transactions between accounts opened in financial institutions via CBU (+47% YoY in amounts and +23.9% YoY in real amounts) and in operations involving accounts in payment service providers (PSPs) from and/or to CVU (+133.2% YoY in amounts and +89.9% YoY in real amounts). Thus, operations involving a CVU increased their relative share among IT to 44.3% in quantities (+10.9 p.p. y.o.y.) and 17.4% in amounts (+5.3 p.p. y.o.y.). It is estimated that in February IT accounted for 46.2% of GDP¹⁶ (+12.9 p.p. compared to the same month of the previous year, see Graph 14). ¹⁷

Within the framework of the Transfers 3.0 scheme and based on the boost received from the BCRA regulations that provided for the interoperability of transactions initiated with QR ^codes,18 during February the daily average of transfer payments initiated through this modality increased significantly compared to last December’s level: 28.5% in real amounts and 42.2% in quantities (see Graph 15). From November 29, 2021 (start of the full QR interoperability scheme) and February 28, the number of accumulated operations reached 4.3 million, equivalent to $7,450 million (resulting in an average of $1,721 per transaction).

Partly associated with seasonal factors, in February the clearing of checks decreased compared to the previous month (-15% in quantities and -16.3% in real terms). However, compared to the same month of the previous year, the clearing of checks accumulated an increase of 2.2% in amounts and 8.2% in real terms in amounts issued, an increase explained entirely by the electronic format (+85.4% in amounts and +49.5% in real amounts). Thus, during February the ECHEQs continued to increase their weighting in total compensation, to represent 25% in quantities (+11.2 p.p. y.o.y.) and 49.4% in real amounts (+13.7 p.p. y.o.y., see Graph 16). It is estimated that the amount of checks cleared in terms of GDP totaled 27.2% in February (+4.3 p.p. y.o.y.).

In February, the ratio of rejection of checks due to lack of funds in terms of the total cleared¹⁹ continued at limited levels, without significant changes with respect to January (+0.01 p.p. to 0.6% in amounts and -0.03 p.p. to 0.4% in amounts, see Chart 17).

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References

¹Differences in balance sheet balances expressed in homogeneous currency. Information extracted from the Monthly Accounting Information Regime of Balance Sheet (January 2022 latest information available at the time of publication of this Report).

²Expressed in currency of origin.

³Includes principal adjustments and accrued interest.

⁴For more details, see Ordered text “Financing line for productive investment in MSMEs”.

⁵For more details, see Press and Communication Release “A” 7475.

⁶On the other hand, term investments in pesos decreased 2% in real terms compared to December.

⁷See Communication “A” 7432.

⁸See Communications “A” 7459 and “A” 7474.

⁹Includes forward purchase and sale transactions of foreign currency classified off-balance sheet.

¹⁰29.6% of net the accounting balance of forecasts.

¹¹See Communication “A” 6938, Communication “A” 7107, Communication “A” 7181, Communication “A” 7245 and Point 2.1.1. of the Ordered Text “Financial Services in the Framework of the Health Emergency Provided for by Decree No. 260/2020 CORONAVIRUS (COVID-19)”.

¹²It considers availability, assets admitted for the integration of minimum cash and BCRA instruments, in national and foreign currency.

¹³First, three increases were established (in January, February and March) in the interest rate of the LELIQ with a 28-day term (it will continue to be the reference indicator with respect to the monetary policy stance). It was also decided to expand the maximum limit for holding Liquidity Bills (LELIQ) to 28 days for up to an amount proportional to the balance of private sector time deposits of each financial institution. A new LELIQ was created with a 180-day term. Auctions of bills were held twice a week in the case of the 28-day LELIQ, and once a week for those with a 180-day term. These modifications seek to initiate a process of migration from monetary sterilization to longer maturity periods, as well as to extend the BCRA’s reference rate curve. As for the shorter-term instruments, the 7-day passive passes are progressively eliminated, while the 1-day passes remain in force. In line with the rise in the monetary policy interest rate, in order to promote its full transmission to the return of term placements in pesos, the BCRA raised the minimum limits of interest rates on fixed terms (see Section I. Financial intermediation activity). For more details, see Monetary Policy Report (IPOM) of March 2022 and press releases of 06/01/22, 17/02/22 and 22/03/22.

¹⁴These changes in the composition of liquidity continued in February.

¹⁵In terms of minimum cash, as of January, the balances of the deposit accounts of Payment Service Providers (PSPs) that offer payment accounts in which their customers’ funds are deposited are subject to a reserve rate of 100% (see Communication “A” 7429). In addition, during the month, the percentages of the minimum cash deduction associated with financing to MSMEs were increased and the percentage admitted to be deducted for new financing of investment projects within the framework of the “Financing Line for the productive investment of MSMEs” was increased to 30% (see Communication “A” 7432).

¹⁶When considering annualized amounts of the last three months.

¹⁷Within the framework of the positive performance of IT, with a growing relevance of the segment where accounts in payment service providers are involved (from and/or to CVU), the BCRA reinforced measures to improve the security of digital wallets (Press release 24-Feb-22).

¹⁸See Press release of 22-01-2022.

¹⁹Consider physical checks as well as electronic checks.