Report on Banks

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

About the use of inclusive language in this publication

The use of language that does not discriminate and that makes all gender identities visible is an institutional commitment of the Central Bank of the Argentine Republic. This publication recognizes the influence of language on ideas, feelings, ways of thinking and evaluation schemes.

This document has sought to avoid sexist and binary language. However, for ease of reading, resources such as “@” or “x” are not included.

Executive summary

• Going through an unprecedented operational context marked by the COVID-19 pandemic, throughout 2020 the financial system increased its intermediation activity in national currency, while maintaining high liquidity and solvency coverage. This performance was underpinned by the measures adopted by the BCRA that helped to stimulate financing for companies and families, expand savings alternatives in pesos in the financial system, as well as preserve high levels of capital of the entities by suspending the distribution of dividends.

• In December, the balance of credit to the private sector in pesos did not show significant changes in real terms, accumulating a real year-on-year increase (YoY) of 10.3%. The declines observed in the previous two years (-18% in real terms in both 2019 and 2018) were reversed. This positive performance in 2020 was driven by the BCRA in conjunction with the National Executive Branch, with actions that contributed to tempering the procyclical behavior of credit. In particular, through the Financing for Productive Investment of MSMEs scheme, the financial system has disbursed loans for $295,939 million until the end of February (16% corresponds to investment projects), benefiting 80,870 companies.

• While the modification of the parameters for classifying debtors and the possibility of transferring unpaid installments at the end of the life of the credit remains in force, the delinquency of credit to the private sector decreased again in December to represent 3.9% of the total, 0.3 p.p. less than in November. The financial system ended the year with relatively high and increasing levels of forecasting (5.8% of total credit to the private sector and 151% of credit in an irregular situation).

• Influenced by seasonal factors, in December the real balance of deposits in pesos in the private sector increased by 2.6% compared to the previous month. The balance of deposits in national currency of the private sector accumulated an increase of 34% y.o.y. in real terms (reversing falls of 10.8% in real terms in 2019 and 4.7% in real terms in 2018), with growth in both demand accounts and term deposits.

• The ample liquidity of the financial system stood at 65% of total deposits by the end of the year, 1 p.p. above the level observed last month and 4.9 p.p. in a year-on-year comparison. The current level of the liquidity indicator exceeds the average of the last 10 years.

• In the last year, the use of electronic means of payment has increased in the context of COVID-19 and the measures taken by the BCRA to generate alternatives to cash. In particular, immediate transfers of funds expanded significantly (98% YoY in amounts and 44.6% YoY in real amounts as of January 2021), highlighting the dynamism of those made through mobile banking and internet banking. The BCRA played an active role in the performance of these payment instruments, adopting measures to promote digital technologies, such as the Payment by Transfer system.

• The aggregate financial system closed 2020 with high solvency margins. In December, capital integration (RPC) totaled 23.3% of risk-weighted assets (RWA) and the capital position (RPC net of regulatory requirement) was around 177% of regulatory requirement.

• In 2020, the financial system obtained comprehensive results in homogeneous currency equivalent to 2.2% of assets (ROA) and 15.1% of equity (ROE). In the last quarter of 2020, ROA was 1.5%y. and ROE 9.8%y. for the aggregate of entities, being the lowest quarterly records of the year, in line with the downward trend that began in the middle of the year.

I. Financial intermediation activity

The financial intermediation activity in pesos of all financial institutions with the private sector grew throughout 2020, reflected in increases in both financing (mainly in commercial lines) and deposits. In terms of the estimated monthly cash flow for December on the segment in national currency¹, the increase in deposits from the private sector and, to a lesser extent, those from the public sector were the main sources of funds for the aggregate of entities. These resources were mainly applied to increase liquidity in the broad sense². In relation to the estimate of the annual flow of funds for the financial system in pesos, the increase in private sector deposits was the most prominent source of funding. On the other hand, the expansion of ample liquidity (associated, in part, with the sterilization of monetary issuance carried out by the BCRA to meet the fiscal needs arising in the face of the health emergency) and financing to the public and private sectors, were the main applications of funds in the period.

The balance of credit to the private sector in pesos in real terms did not show significant changes with respect to November (+0.1% real or +4.1% nominal) (see Graph 1)³. Credit card financing and collateral loans were the most dynamic in the period. As a result of the more flexible financial conditions existing in the different alternatives promoted by the BCRA, throughout 2020 the growth of documents stood out, reaching a real variation of 50% in December compared to the same month of the previous year. During the month, there was a heterogeneous behavior of financing by group of entities: real increases in public financial institutions and non-bank financial institutions (NBEFs) and decreases in private financial institutions⁴.

During 2020, the BCRA implemented a set of initiatives aimed at strengthening the channeling of credit to families and companies (mainly small and medium-sized enterprises), seeking to mitigate the impact of the pandemic scenario. Among them, it is worth mentioning the Financing scheme for Productive Investment of MSMEs⁵. From the entry into force of this scheme in November 2020, until the end of February 2021, $295,939 million have been disbursed (16% corresponds to investment projects), benefiting 80,870 companies (see Graph 2). Domestic private financial institutions continued to be the main promoters of these lines (accounting for 39% of the total disbursed), followed by public (with 32%) and foreign private (with 29%).

For its part, through the line of financing at subsidized interest rates for companies registered in the “Emergency Assistance Program for Work and Production” (ATP)⁶ , $14,192 million have been granted at the end of February 2021, reaching 603,454 workers.

On the side of people whose main sources of income are related to self-employed activities and/or who work as monotributistas, through the Zero Rate Credit Line⁷ , $66,475 million were granted until the end of February (99.8% already disbursed), through some 561,961 loans. Through these loans, 249,320 new credit cards were issued and more than 770 demand accounts were opened for implementation. At the same time, through the Cultura⁸ Zero-Rate Credit line, 2,914 loans have been granted for more than $304 million (of which 96.8% have already been credited).

In a year-on-year comparison, in December the balance of credit in pesos to the private sector accumulated an increase of 10.3% in real terms, reversing the negative variations observed in the last two years for the same period. Thus, financing in pesos to the private sector registered positive year-on-year rates of change for this segment since May 2020 (see Chart 1). This performance was driven mainly by private financial institutions, and to a lesser extent, by public ones.

In December, foreign currency financing to the private sector did not register significant changes compared to the previous month (-0.1% in foreign currency). Thus, the total credit balance (in domestic and foreign currency) to the private sector remained unchanged in magnitude in the period, accumulating a real fall equivalent to 2.8% compared to the same month of the previous year.

On the funding side of the financial institutions as a whole, in the context of seasonal effects, in December the balance of total deposits in pesos of the private sector increased by 2.6% in real terms (+6.7% nominal) (see Chart 3). In particular, the balance of demand accounts presented a similar performance, partly reflecting the effect of the payment of the half bonus and the liquidity needs characteristic of the end of the year. Meanwhile, time deposits in pesos increased 2.9% in real terms in the period (7% nominal), mainly explained by private financial institutions (see Chart 4). In the month, the growth of UVA fixed-term deposits in the private sector was especially noteworthy, which increased 19% in real terms for those with early repayment and 11.6% in real terms for traditional deposits.

It should be noted that during 2020 the BCRA promoted various measures aimed at harmonizing monetary policy interest rates and maintaining positive real returns on savings in pesos. Since April, the interest rate on passive passes for the BCRA (assets for financial institutions) has been gradually raised overnight. Starting in October, seven-day passive passes began to be offered to the BCRA, and the monetary policy interest rate was adjusted on several occasions (see Chart 5). At the same time, the minimum guaranteed interest rates on fixed-term deposits in traditional pesos were raised in order to ensure returns in line with inflation levels, in order to favor savings in national currency. In addition, in 2020, UVA fixed terms were launched that can be pre-canceled from 30 days (on a total term of at least 90 days), expanding the savings alternatives in pesos at a positive real rate.

For its part, the balance of deposits in foreign currency of the private sector increased 8.3%—in currency of origin—in December, influenced in part by the treatment of these placements in the calculation of the personal assets tax. As a result, the real balance of total private sector deposits (in domestic and foreign currency) increased by 3.6% compared to November.

In December, public sector deposits in pesos increased by 3.4% in real terms (7.5% nominal), leading to a 2.8% increase in total deposits in pesos (public and private sectors) in real terms (6.9% nominal).

In a year-on-year comparison, the balance of deposits in pesos of the private sector increased 34% in real terms (82.4% y.o.y. nominal), while public sector deposits in the same denomination grew 44.7% y.o.y. in real terms (97% y.o.y. nominal). Thus, the balance of total deposits (from the public and private sectors) in pesos accumulated an increase of 34.8% YoY (83.5% YoY nominal). On the other hand, considering both the segment in domestic and foreign currency, the real balance of total deposits of the private sector accumulated a real year-on-year increase equivalent to 19.6%.

II. Aggregate composition of the balance sheet

In December, the total assets of the aggregate financial system increased by 1.9% in real terms, with a greater relative increase in public financial institutions (see Chart 6). The sector’s assets showed a heterogeneous dynamism throughout 2020. On the one hand, relatively high real growth rates were recorded up to July, a performance mainly influenced by the increase in the holdings of BCRA instruments on the balance sheet of the entities and by the positive dynamics of credit in pesos to the private sector. As mentioned in the previous section, in the first months of 2020 the BCRA actively contributed to the National Executive Branch carrying out extraordinary programs to support companies and households in order to mitigate the economic impact of the context defined by the pandemic. Thus, part of this issuance of pesos was sterilized through passes and LELIQ. On the other hand, as of August, the total assets of the financial system reduced their dynamism, in accordance with the lower needs for monetary issuance (and consequently sterilization), in a context of gradual normalization of the activity of some economic sectors.

With regard to the composition of the total assets of the financial system, in December the weighting of the balance of current accounts in the BCRA in both foreign and domestic currency increased (totaling 12.4% and 7.7% respectively) (see Chart 7), within the framework of seasonal factors. At the same time, the relative importance of the holding of BCRA instruments in assets also increased during the month (to represent 25.8%) and of credit to the public sector. On the other hand, in December, financing to the private sector reduced its weight in assets in the period.

With regard to bank funding, in line with the performance of deposits (see previous section), in December private sector placements in both domestic currency (term and demand) and foreign currency increased their weighting in the total (see Chart 8). In particular, time deposits in pesos from the private sector increased their participation to represent 20.9%. Similar growth was evidenced in the demand accounts in the same denomination, which totaled 26%. For its part, deposits in foreign currency of the private sector accounted for 12.4% of funding at the end of the year, increasing 0.7 p.p. compared to the value of November. The rest of the items that make up the funding reduced their relative weight in the period.

In December, foreign currency assets accounted for 19.6% of the total assets of the system, increasing 0.5 p.p. compared to the previous month. Liabilities in the same denomination totaled 17.7% of total funding, 0.6 p.p. above the value of November. Despite this monthly increase, driven mainly by the aforementioned performance of private sector deposits (with counterparty in liquidity), in a year-on-year comparison, the relative importance of both assets and liabilities in foreign currency in the balance sheet of the financial system decreased (-6 p.p. with respect to assets and -6.9 p.p. in the case of liabilities). When including forward purchase/sale transactions of foreign currency – classified off-balance sheet – the spread between assets and liabilities in this denomination of the aggregate financial system represented 13.6% of regulatory capital in December, slightly reducing compared to November’s value (see Chart 9).

III. Portfolio quality

The total credit balance to the private sector (including domestic and foreign currency) totaled 33.3% of the assets of the financial system in the last month of the year, showing a decrease of 0.6 p.p. compared to the previous month and 7.4 p.p. compared to the level of a year ago⁹. Considering only the balance of financing in pesos, the ratio stood at 28.8% in December, 0.5 p.p. below the previous month (-2.2 p.p. y.o.y.) (see Graph 10). On the other hand, credit to the private sector in foreign currency continued to decrease its weight in total credit.

While the modification of the parameters for classifying debtors and the possibility of transferring unpaid installments at the end of the life of the credit – accruing only compensatory interest¹⁰ – remains in force, the non-performing loan ratio to the private sector continued to decrease, until the end of the year by 3.9%, 0.3 p.p. less than in November (-1.9 p.p. y.a.) (see Graph 11). This drop was widespread among the different groups of financial institutions.

In December, the NPL indicator for loans to households stood at 1.9%, 0.3 p.p. below the previous month (-2.3 p.p. y.o.y.), while the ratio of irregularity in companies totaled 5.8% in the month, 0.1 p.p. less than in November (-1.6 p.p. y.o.y.). Throughout 2020, the decline in non-performing loans for loans to households was mainly driven by the performance of personal loans and cards. Meanwhile, the year-on-year decrease in the irregularity of loans to companies was mainly associated with loans instrumented via advances and documents (see Graph 12).

The financial system as a whole ended the year with comfortable levels of forecasting. The forecasts accounted for 5.8 per cent of total credit to the private sector, maintaining an upward trend. The balance of total accounting forecasts represented 151.1% of the balance of credit to the private sector in an irregular situation, 11.2 p.p. above the previous month and 54.5 p.p. y.o.y. (see Chart 13). On the other hand, the balance of regulatory forecasts attributable to the non-performing portfolio (following the criteria of the minimum regulatory forecasts for uncollectibility risk) totaled 125.2% of said portfolio in December, 9.4 p.p. and 46.1 p.p. more than in November and the end of 2019, respectively.

The relationship between regulatory capital and credit to the private sector net of forecasts provides a general idea of the level of resilience of the sector in the face of possible scenarios of counterparty risk materialization. As of December, this ratio stood at 40.3% at the systemic level, 0.1 p.p. less than in the previous month and 13.5 p.p. above the December 2019 record.

IV. Liquidity and solvency

The financial system closed the year with relatively high levels of liquidity. For perspective, traditional liquidity ratios are above the average of the last 10 years

In December, ample liquidity in the financial system¹¹ stood at 65% of total deposits (60.1% for items in pesos and 85% for the foreign currency segment), 1 p.p. above the level observed in November (+1.2 p.p. and -1.4 p.p. for items in local currency and foreign currency, respectively) (see Chart 14). Within the liquid assets in pesos, the share of net passes with the BCRA increased in the month and, to a lesser extent, the relevance of the current account balance that entities have in this Institution. Over the course of the year, the broad liquidity ratio increased by 4.9 p.p. of deposits, a performance explained to a greater extent by the foreign currency segment.

With respect to the indicators recommended by the Basel Committee – Liquidity Coverage Ratio (LCR)¹² and Stable Net Funding Ratio (NSFR)¹³ – as of December 2020, the group of entities belonging to Group^A14 presented levels that were practically double the minimum required locally (which are in line with what is recommended according to international standards).

In terms of the sector’s solvency, the capital integration ratio (CPR) over risk-weighted assets (RWA) increased slightly in the month, totalling 23.3% at the systemic level (+0.3 p.p. to 25.5% for private financial institutions and -0.3 p.p. to 19% for public financial institutions, see Chart 15). Similarly, the capital position (RPC minus regulatory requirements) of the aggregate of institutions increased slightly in the last month of the year to around 177% of the regulatory requirement in December (208% for private financial institutions and 122% for public financial institutions). It should be noted that part of the increase in solvency indicators verified by the sector in 2020 was driven by the macroprudential policies adopted by this Institution in a timely manner. In particular, the suspension on the possibility of distributing dividends is currently in force until the end of the first quarter.

The leverage ratio, defined based on the guidelines established by the Basel Committee (ratio between the highest quality regulatory capital and a broad measure of exposures), reached 11.9% in December for the aggregate of entities, comfortably exceeding the minimum of 3%¹⁵. The level of this indicator did not fluctuate greatly throughout the year, remaining among the highest records since the regulatory requirement began to apply at the local level in 2018.

In terms of profitability indicators, throughout 2020 the financial system accumulated a total comprehensive result in homogeneous currency equivalent to 2.2% of assets (ROA) and 15.1% of equity (ROE). In particular, in the fourth quarter of 2020, the financial system recorded an ROA of 1.5%y. and an ROE of 9.8%y.y., continuing the downward trend recorded after the second quarter of the year (see Table 1). The decrease in profitability in the fourth quarter of 2020 compared to the previous quarter was related to the effect that inflation had on monetary items and the increase in nominal interest outflows (it is estimated that the implicit funding cost for deposits in pesos increased in the period)¹⁶.

In 2020, the financial margin of the entities was around 11% of assets. Throughout the year, interest income was the most relevant component of the financial margin (8.5% of assets). In second place were income from the public securities portfolio (8% of assets). On the other hand, interest on deposits was the main outflow of the financial margin (9% of assets). Among non-financial items, in the year the results for services (1.9% of assets) stood out as a source of income, while administrative expenses (6.6% of assets) and charges for uncollectibility (1.6% of assets) were the main expenses.

The estimation of implicit interest rates¹⁷ and their differential are instruments that contribute to giving a general idea of the behavior of the main sources of income and expenditure in national currency in the profitability table of the entities. In this regard, it is estimated that in the last two months of the year, the nominal implicit lending interest rate for operations in national currency for the aggregate of entities increased less than the funding cost for deposits in the same denomination (see Chart 16). As a result, the estimated differential between the two concepts narrowed in the last two months¹⁸. When isolating the effect of inflation (relatively higher than the last months of the year), it is estimated that the reduction in the implied interest rate differential would have been even greater, in line with the lower profitability in real terms that the sector has been showing in recent months.

V. Payment system

The use of electronic means of payment alternative to cash continued to gain share in 2020 given the pandemic scenario and the consequent health measures of isolation and social distancing taken to mitigate its effects (which were gradually relaxed at the margin). It should be noted that throughout 2020 the BCRA was promoting actions that sought to minimize the risks of contagion of the population in the face of the circulation of the COVID-19 virus.

In line with what is expected for the beginning of the year, total immediate transfers made during January 2021 (latest available information) decreased compared to the previous month. Despite this monthly performance, immediate transfers expanded markedly in a year-on-year comparison: 98.1% in number and 44.6% in real amounts (see Chart 17). In the last year, this outstanding dynamism of transfers was reflected in the greater weight they had in the usual transactions of the economy. In the last three months to January 2021, it is estimated that the amount traded (annualized) through immediate transfers was equivalent to almost 33.2% of GDP, growing 13.3 p.p. in a year-on-year comparison¹⁹. Operations carried out through mobile banking and internet banking were the channels with the best relative performance in the last 12 months.

During December (latest available information), and given the seasonality of the end of the month, total debit card transactions increased compared to the previous month (see Chart 18), both for operations through e-commerce and for face-to-face operations. The volume traded in December in both channels was well above the average that was verified for all of 2020. Compared to the same month of the previous year, total debit card transactions increased 27.5% in amounts and 38.9% in real amounts. In the year-on-year comparison, both the face-to-face and electronic channels increased their operations, the latter presenting a notable relative increase (+234.4% in quantities to concentrate 24.8% of the total operations and +303.7% in real amounts to cover 25% of the total amount). Thus, in the fourth quarter of 2020, the annualized amount of debit card transactions represented 8.4% of GDP, increasing its 2.9 p.p. compared to the same quarter of 2019²⁰.

As for cash withdrawals through the use of ATMs, in December (latest available information) there was an increase compared to last month (see Graph 19), also associated with seasonal factors. Compared to the same month of the previous year, withdrawals decreased in quantities (-5.4%) and increased in real amounts (24.3%), increasing the average amount of each withdrawal measured in constant currency (+$279, to almost $5,372 per withdrawal at December 2020 prices). This year-on-year performance partly reflects the effect of the measures promoted in a timely manner by the BCRA. In particular, it sought to reduce the risks of COVID-19 contagion, seeking to limit the frequency of use of ATMs by families while increasing withdrawal amounts.

In relation to transactions by checks, during January (latest available information) the total compensation decreased compared to the previous month (see Graph 20). Compared to the same month of the previous year, the clearing of checks also decreased in amounts (-33.5%) and in real amounts (-21.8%). As has been observed in recent years, the weighting of the use of the cheque as a means of payment is gradually reduced. In particular, it is estimated that the amount of checks cleared in the last three months to January 2021 (annualized) was equivalent to 25.5% of GDP, falling 2.1 p.p. in a year-on-year comparison²¹. In this context, it should be noted that the performance of check clearing differs when considering the physical or electronic version. Since its implementation, the Echeqs have gradually gained participation until they concentrate about 34% of the total amount compensated during January.

The rejection of checks due to lack of funds in terms of the total compensated decreased in January 2021 compared to the previous month and in a year-on-year comparison, to total 0.63% and 0.43% for amounts and amounts respectively (see Chart 21).

References

¹ Differences in balance sheet balances expressed in homogeneous currency.

² Considering the segment of foreign currency items – in the currency of origin – for all of 2020, the reduction in financing to the private sector was the most important source of resources in the financial system. Meanwhile, the decrease in private sector deposits was the most prominent application of funds in the period.

³ Includes principal adjustments and accrued interest.

⁴ Throughout the Report, when reference is made to groups of private (national and/or foreign) and public financial institutions, it corresponds to banking entities. Non-bank entities will be referred to as “EFNBs”.

⁵ See Communication “A” “7140” and amendments.

⁶ See communication “A” “7082” and communication “A” “7102”.

⁷ See Communication “A” “6993”.

⁸ See communication “A” “7082”.

⁹ However, the ratio is 2 p.p. lower when the forecasts for the balance of credit to the private sector are netted.

¹⁰ Communication “A” “6938”, Communication “A” “7107”, Communication “A” “7181” 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)”.

¹¹ Considers availability, integration of minimum cash and BCRA instruments, in national and foreign currency.

¹² The LCR considers the liquidity available to deal with a potential outflow of funds in the event of a possible stress scenario in the short term. See Ordered Text —TO— “Liquidity Coverage Ratio”.

¹³ The NSFR takes into account the availability of stable funding of the entities, in line with the deadlines of the businesses to which it applies. See TO “Stable Net Funding Ratio”.

¹⁴ Set of entities obliged to comply with the LCR and NSFR.

¹⁵ For more methodological details, see the OT of the “Leverage Ratio”.

¹⁶ In general terms, monetary items are made up of cash availability, as well as assets and liabilities that are to be received or paid through a fixed or determinable amount of monetary units.

¹⁷ For the construction of implicit interest rates, concepts such as administrative expenses, tax expenditures, cost of capital or other components associated with risks assumed by entities are not included.

¹⁸ Implied interest rates are estimated by accumulating flows over the last 2 months and annualized, for more detail see previous editions of the Bank Report.

¹⁹ Considering the last 12 months to January 2021, it is estimated that immediate transfers of funds represented 29.5% of GDP, increasing 11.1 p.p. in a year-on-year comparison.

²⁰ For all of 2020, total debit card transactions totaled 7% of GDP, 2.1 p.p. higher in a year-on-year comparison.

²¹ When looking at the last 12 months to January 2021, it is estimated that check clearing stood at around 23.2% of GDP, falling by 3.4 p.p.i.a.