Report on Banks

Monthly report that analyzes the situation of the Argentine financial system.

Executive summary

• By the end of 2019, solvency ratios for the financial system remained at high levels. The capital integration (RPC) of the banks as a whole stood at 17.5% of risk-weighted assets (RWA) in December, unchanged in magnitude compared to November and 1.5 p.p. above the level at the end of 2018. In this way, the PRC of the financial system doubled the minimum regulatory requirement at the end of 2019. Tier 1 capital, with a greater capacity to face unexpected losses, accounted for almost 90% of the PRC. This component of the PRC accounted for 9.8% of the total exposures assumed by banks (considering unweighted assets and certain off-balance sheet items), increasing 0.6 p.p. and 1.2 p.p. compared to September 2019 and the end of 2018, respectively. Thus, this last ratio at the aggregate level comfortably exceeded the regulatory minimum (3%), established in line with the leverage ratio of international standards (Basel Committee).

• From high levels compared to the last 10 years, the liquidity indicators of all financial institutions increased at the end of 2019. Bank liquidity in the broad sense (availabilities, integration of minimum cash and BCRA instruments, in domestic and foreign currency) represented 60.1% of total deposits in December (58.1% for the segment in pesos and 65.6% for items in foreign currency), 2.8 p.p. above the previous month’s record and 3.5 p.p. in a year-on-year comparison (y.o.y.).

• In December, the balance of deposits in pesos of the private sector increased 5.6% in real terms (+9.5% nominal), a variation driven by demand accounts in the context of seasonal factors. Private sector deposits in foreign currency grew 5.4% in the month – in the currency of origin – after four consecutive months of reductions. Throughout 2019, private sector deposits decreased: 10.8% real (+37.2% nominal y.o.y.) in the peso segment and 32.7% in the foreign currency segment (in the currency of origin). Thus, the relative importance of private sector deposits in the total funding (liabilities and net worth) of the banks as a whole stood at 59.3% at the end of 2019, increasing 2.1 p.p. compared to December 2018.

• In December, credit to the private sector in pesos increased by 0.6% in real terms (+4.4% nominal) and in foreign currency it fell by 5.4% (in original currency). Bank financing represented 40.7% of total bank assets, 0.5 p.p. below the value of December 2018.

• The non-compliance ratio of financing to the private sector stood at 5.6%, increasing 0.6 p.p. in the month (mainly in public banks due to the change in the credit situation of a major company) and 2.5 p.p. y.o.y. Non-performing loans to companies reached 7.1%, increasing by 1.4 p.p. in the period (+4.6 p.p. y.o.y.); while that of families stood at 4.2%, down 0.2 p.p. compared to the previous month (+0.1 p.p. y.o.y.). The default rate on mortgage loans to households continued at limited values: 0.6% of the portfolio for those denominated in UVA and 0.9% for the rest. The balance of forecasts stood at 98% of the irregular portfolio to the private sector in the period, while the balance attributable to irregular loans totaled 80% of said portfolio in December.

• In 2019, the aggregate of the financial system obtained nominal gains equivalent to 5.1% of assets (ROA) and 44.4% of net worth (ROE).

I. Financial intermediation activity

Based on the estimated monthly cash flow for items in national currency¹, in December the increase in private sector deposits was the most prominent source of funds for the banks as a whole (see Chart 1). These resources were mainly used to increase the net holding of LELIQ and, to a lesser extent, to increase the balance of financing to the private sector and of the current accounts that banks have in the BCRA. On the other hand, according to the estimated flow of funds for items in foreign currency, in December the increase in private sector deposits and the reduction in credit to this sector were the main sources of funding at the aggregate level. These resources were mainly applied to increase liquidity in foreign currency.

In relation to the estimate of the annual flow of funds for the financial system, in 2019 the increase in private sector deposits was the main source of funding in national currency (see Chart 2). These resources were mainly channeled to increase the holdings of LELIQ, the balance of financing to the private sector and the balance in the current accounts at the BCRA. For its part, the financial system’s foreign currency balance sheet was reduced during the year. The decrease in liquidity and credit to the private sector in foreign currency were the most prominent sources of resources, while the reduction in private sector deposits in this denomination was the most relevant use of funds in the period.

In December, total bank assets grew 2.5% in real terms, mainly due to the performance of private banks. However, the assets of the financial system decreased by 20.6% y.o.y. in real terms (-25.3% for public banks and -17.4% for private banks).

Foreign currency assets represented 25.6% of total assets and liabilities 24.6% of total funding at the end of 2019. These levels were lower than those of last month and the end of 2018: -1.1 p.p. monthly and -3.1 p.p. y.o.y. for assets, and -0.7 p.p. monthly and -2.8 p.p. y.o.y. for liabilities. In this context, the spread between assets and liabilities in foreign currency – including forward purchase and sale transactions – stood at around 9.3% of regulatory capital in the month, 2.6 p.p. less than in November and unchanged compared to the end of 2018 (see Chart 3).

Among the operations carried out through the National Payment System, in December the daily average of immediate transfers increased and registered one of the highest levels of the year, partly associated with seasonal factors. The amount processed (in real terms) in this type of transfers grew 10.3% in the month and 17.2% y.o.y., while the amount traded was 12.8% higher than in November and 32.9% in a year-on-year comparison. In line with the trend of recent years, check clearing continued to decline (see Chart 4). In December, the checks that were cleared were below the average for the year, both in values and amounts. In the month, the rejection of checks due to lack of funds in terms of the total compensated decreased considering amounts and remained practically stable in relation to the values traded. Thus, the check rejection ratio fell in a year-on-year comparison, thus standing at values similar to the average of the last 5 years.

II. Deposits and liquidity

In December, the balance of deposits in pesos in the private sector increased by 5.6% in real terms (+9.5% nominal, see Graph 5), mainly due to the increase in demand accounts (+10.5% real, +14.6% nominal), in the context of the payment of the half bonus and other items². On the other hand, private sector term placements in pesos decreased 0.4% in real terms (+3.3% nominal) between the end of the month. Private sector deposits in foreign currency increased 5.4% in December – in source currency – after four consecutive months of reductions. For their part, public sector deposits fell by 1.7% in real terms (+2% nominal) in the month. Thus, the balance of total deposits in the financial system increased 3.1% in real terms (+6.9% nominal).

Throughout 2019, private sector deposits in pesos fell by 10.8% in real terms (+37.2% YoY in nominal terms), with a fall of 18.9% YoY in term placements (+24.8% YoY nominal) and 3.4% YoY in demand balances (+48.5% YoY nominal). For their part, private sector deposits in foreign currency fell 32.7% – in source currency – in the last 12 months. Total public sector deposits also fell in real terms compared to December 2018. In this context, the balance of total deposits fell by 23% YoY in real terms (+18.4% YoY nominal) in 2019.

In December, the relative importance of private sector deposits in the total funding (liabilities and net worth) of the banks as a whole stood at 59.3%, 1.1 p.p. more than in November and 2.1 p.p. more than at the end of 2018.

Bank liquidity closed the year at high levels. Broad liquidity indicator³ accounted for 60.1% of total deposits in December (58.1% for the segment in pesos and 65.6% for foreign currency items), 2.8 p.p. above the previous month’s figure (see Chart 6). The monthly increase in liquidity was mainly due to the higher pass operations with the BCRA. In year-on-year terms, ample liquidity grew by 3.5 p.p. (+4.4 p.p. y.o.y. for items in local currency and +2.3 p.p. y.o.y. for the foreign currency segment).

III. Credit and Portfolio Quality

In December, the balance of loans in pesos to the private sector increased by 0.6% in real terms compared to the previous month (+4.4% nominal)⁴. The monthly performance was mostly explained by credit cards and documents. For its part, the credit balance in foreign currency fell by 5.4% in the last month of 2019 (in currency of origin, see Chart 7).

Compared to December 2018, the balance of loans in pesos to the private sector fell 18.3% in real terms, mainly explained by lines with real guarantee and personal loans. Financing in foreign currency decreased 32.6% in all of 2019 (in source currency).

In December, the total credit balance to companies (in domestic and foreign currency) fell by 3.4% in real terms compared to the previous month (+0.2% nominal) and by 24.3% in real terms compared to December 2018⁵. Loans to industry and commerce showed the largest relative year-on-year reductions in the period. The balance of financing to households (in domestic and foreign currency) decreased 0.5% in real terms in the month (+3.2% nominal) and 17.4% real y.o.y., with a greater relative drop in pledge and personal lines.

At the end of the year, bank financing to the private sector represented 40.7% of total bank assets, 0.5 p.p. below the value at the end of 2018 (see Chart 8). The fall in this indicator was mainly explained by private banks and by the foreign currency segment.

In December, the non-performing ratio of financing to the private sector stood at 5.6% of the total portfolio, increasing 0.6 p.p. in the month (mainly in public banks due to the change in the credit situation of a major company) and 2.5 p.p. y.o.y. (see Graph 9). Non-performing loans to companies increased by 1.4 p.p. in the period (+4.6 p.p. y.o.y.) to 7.1%, while the non-performing loan coefficient for households decreased by 0.2 p.p. (+0.1 p.p. y.a.) to 4.2%. Non-performing loans on mortgage loans to households continued at limited values: 0.6% of the portfolio for those denominated in UVA and 0.9% for the rest⁶.

The balance of total accounting forecasts (both for the regular and irregular portfolios) stood at 98% of the irregular portfolio to the private sector in the period. It is estimated that the balance of forecasts attributable to loans in an irregular situation totaled 80% of this portfolio in December (see Graph 10), comfortably exceeding the minimum required (estimated at 52% of the irregular portfolio). It is estimated that the irregular portfolio not covered by forecasts was equivalent to 4.3% of the Computable Patrimonial Liability (CPR) in December (8.5% of the excess regulatory capital), increasing 0.3 p.p. compared to November and 0.8 p.p. y.o.y.

Financing to the public sector of the banks as a whole represented 9.9% of total assets in December, 0.2 p.p. less than last month and 0.5 p.p. below the level of a year ago. For its part, the financial system’s exposure to this sector net of the balance of public sector deposits continued to be negative (equivalent to 1.3% of total assets in the month).

IV. Solvency

The aggregate solvency ratios for the financial system closed 2019 at high levels. The capital integration (RPC) of the banks as a whole stood at 17.5% of risk-weighted assets (RWA) in December, unchanged from November and 1.5 p.p. above the level at the end of 2018 (see Chart 11). The PRC of the financial system doubled the regulatory minimum capital requirement at the end of 2019, 1.7 p.p. less than in November and 15.5 p.p. more than in the same period of 2018.

In December, level 1⁷ capital, with a greater capacity to face unexpected losses, accounted for almost 90% of the financial system’s PRC. This component of regulatory capital represented 9.8% of the total exposures assumed by banks (considering unweighted assets and certain off-balance sheet items), increasing 0.6 p.p. and 1.2 p.p. compared to September 2019 and the end of 2018, respectively. In this way, this last ratio comfortably exceeded the regulatory minimums (3%) established in line with the leverage ratio of international standards (Basel Committee).

In December, the banks as a whole obtained nominal profits equivalent to 8.7% of assets (ROA) and 67.4% of equity (ROE)⁸. The financial system closed 2019 with a cumulative nominal ROA of 5.1% and a nominal ROE of 44.4%.

The nominal earnings accrued by the financial system in December were higher than those of last November, mainly due to the performance of the “other comprehensive income” (ORI) item, which increased 4.1 p.p. of assets to 5.2%a. (see Chart 12)⁹. Considering the whole of 2019, the ORI totaled 0.2% of assets, 0.6 p.p. less than in 2018.

In another order of magnitude, the monthly increase in the financial margin of the banks as a whole (+1.2 p.p. of assets to 15.1% y/y in December) also explained part of the increase in nominal profits (see Chart 12). Lower interest outflows and higher transfer premium earnings drove the increase in this margin. On the other hand, lower results from securities and CER adjustments partially offset this performance. In 2019, the financial margin stood at 13.7% of assets, 2.9 p.p. more than in 2018.

Net income from services of the aggregate of banks totaled 2.2% y/y of assets in December, with no significant changes compared to the previous month. In 2019, these revenues reached 2.1% of assets, similar to that recorded in 2018.

In the last month of the year, charges for uncollectibility of the financial system increased 3.2 p.p. of assets to 4.6% to¹⁰. In line with the evolution of the quality of the loan portfolio, in 2019 these outflows increased by 0.7 p.p. of assets to a total of 2%. On the other hand, the administrative expenses of the banks as a whole were reduced monthly by 0.5 p.p. of assets to 8%a. Thus, in 2019 these expenditures stood at 7.1% of assets, 0.8 p.p. more than in 2018.

References

¹ Considering differences in balance sheet balances

² In addition, in the last days of 2019, an extraordinary subsidy was paid to retirees and pensioners with minimum income and to beneficiaries of the Universal Child Allowance (AUH), accentuating the seasonal factor. This subsidy was implemented through “Decree 73/2019”

³ Availability, integration of minimum cash and BCRA instruments, in national and foreign currency.

⁴ Includes principal adjustments and accrued interest.

⁵ Information extracted from the Central Debtors (national and foreign currency). Loans to residents abroad are not included. Adjustments in principal and accrued interest are considered. Business financing is defined here as that granted to legal entities and commercial financing granted to individuals. On the other hand, loans to families are considered to be those granted to individuals, unless they are for commercial purposes.

⁶ As of December, out of a total of 104,043 mortgage financing in UVA granted to individuals in the financial system (73% generated by public banks, 16% by national private banks and 11% by foreign private banks), 833 were in an irregular situation.

⁷ Comprised primarily of common stock and earnings.

⁸ The results consider the other comprehensive results (ORI) item.

⁹ This monthly increase in the ORI was mainly explained by gains on financial instruments at fair value and by revaluation of property, plant and equipment and intangibles. The effect on the latter concept usually occurs at the end of each financial year.

¹⁰ Performance largely associated with a one-off operation in a public bank of magnitude.