Report on Banks

This report analyzes the situation of the Argentine financial system on a monthly basis.

Summary of the month

• In the last 12 months, the outlook has changed substantially for the sector, with notable progress being made in terms of revitalizing financial intermediation, improving asset quality and normalizing the liabilities of the financial system, in addition to a recovery in its profitability and solvency. The normalization of the financial system is, however, a process that is still under way.
• The increase in the balance of loans to the private sector in August (3%, accumulating a variation of 36% y/y for 2005) led to an increase of 0.3% (4.1% yr) in the assets of the consolidated financial system. · The quality of the financial system’s private financing portfolio continues to improve. Non-performing loans reached a level of 11.6% (0.7 p.p. below the previous month and 7 p.p. lower than in December 2004), while coverage with forecasts rose to 113%.
• The financial system’s exposure to the public sector fell by 1.1 p.p. in August to 33.3% of assets, a decrease of more than 6 p.p. during 2005. This movement was led in the month by private banks, which reduced their exposure by almost 2 p.p. (to 31.1% of assets).
• In August, the balance sheet of total deposits in the consolidated financial system increased by 0.8% (10.1%y). Unlike the previous month, this expansion was particularly driven by private sector loans (up 0.9% or 12%y), driven by fixed-term deposits (up 2.7% or 37.4%yr.).
• During August, progress continued in the normalization of the liabilities of the financial system, as the dynamics of contraction of the obligations of financial institutions with the BCRA due to rediscounts granted during the last crisis continued. This month a large private financial institution canceled all its obligations with this institution early, while 3 others significantly reduced their indebtedness through the same modality. In this way, only 10 banks remain with outstanding obligations. This trend is expected to continue in the coming months, as several entities (both private and public) have made significant pre-cancellations in September and October.
• The main source of funds for the aggregate of private banks in the month was the reduction of exposure to the public sector ($2,330 million). An increase in private and public deposits provided additional funds. Almost 40% of the resources obtained in the month were allocated to new loans to the private sector ($1,420 million). The rest was mainly applied to increase the holding of liquid assets ($790 million) and the position of LEBAC and NOBAC ($680 million).
• In August, the financial system posted a profit of $273 million, or 1.6% of assets, accumulating a profit of $890 million, or 0.7% of assets, so far in 2005. While public banks earned monthly profits of $153 million or 2.3% y/a of assets (accumulating profits of $610 million or 1.1% y/y in 2005), private banks earned $141 million or 1.4% y/y of their assets (accumulating results of $280 million or 0.3%y).
• The monthly increase in profitability of private banks reflected a certain drop in administrative expenses and charges for uncollectibility, higher interest results and positive exchange rate differences, allowing more than to offset the reduction computed in the results by assets. There were also various greater gains (disallocation of pensions, portfolio recovery, etc.).
• The solvency of private banks continued to strengthen in August, driven by profits and new capital injections: two domestic private entities received capital contributions totaling $270 million. This led to a 1.4% increase in the aggregate net worth of private banks, accumulating growth of 8.3% so far in 2005. The capital integration of private entities increased 0.4 p.p. in the month, to 16.7% of their risk-weighted assets.