Report on Banks

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

Summary of the month

• The financial system began 2006 sustaining the positive trends of 2005: growing financial intermediation, reorganization of balance sheets (declining exposure to the public sector, less portfolio irregularity, fall in the weighting of BCRA financing in liabilities), improvement in profitability and gradual recovery of solvency.
• In response to the incentive policy implemented by the BCRA (entry into force of capital limits, consolidation of the valuation process at market prices and normalization of capital requirements), exposure to the public sector of the financial system continued to decrease, representing less than 30% of total assets in January (26.8% for private banks). with a cut of more than 8p.p. in the last 12 months (12.2p.p. for private banks).
• The behavior of private credit has been reflecting the regulatory changes generated by the BCRA in the last year, mainly: promotion of guarantees from Reciprocal Guarantee Companies, raising the maximum to classify a commercial line as a consumer line, adaptation of requirements for consumer loans of less than $15 thousand, elimination of capacity, extension of the term of coverage of guarantees, the possibility of a greater relationship between financing and equity, a longer repayment period of amparos against the granting of productive credit in the medium and long term, an extension of the range of application of deposits in foreign currency to the financing of production and investment, preferential guarantee treatment for construction trusts, and the exclusion of fixed assets from guarantees constituted for the import of capital goods.
• The net assets of the financial system grew 1.5% in January (0.7% for private banks). In this month, there was a monthly increase of 1.9% (25% in annualized terms) in the balance of loans from the financial system to the private sector. In the last year and a half, there has been a significant dynamism in leasing operations, which in January reached a stock of close to $1,500 million for the entire financial system (more than double the balance recorded a year ago). The growth of this area was strongly explained by financing in strata of amount with strong gravitation of SMEs.
• The irregularity of the portfolio destined to the private sector decreased in January to 7.5% for the financial system, accumulating a decrease of more than 10 p.p. compared to the same month of the previous year. In public banks, irregularity fell in January by 0.3 p.p. (up 10.9%), while in private banks it fell 0.1p.p. (up to 6.2%). The regulatory changes of the BCRA, the favorable macroeconomic performance and the improvements in the risk assessment by the entities are driving this progress in the quality of private sector assets.
• The normalization of the liabilities of financial institutions with the BCRA, within the matching scheme, accelerated during the first quarter of 2006, with payments of almost $5,000 million, and accumulating a total of $14,500 million since the beginning of 2005. This process, which was mainly driven by the quota advance mechanism implemented by the BCRA in early 2005, also resulted in a significant reduction in the number of entities with rediscount obligations: from 23 at the beginning of 2005 to only 3 at the end of March 2006.
• In January, the financial system obtained profits of about $470 million or 2.7% annualized of its assets, with a ROA that exceeds that of the same month of the previous year (when losses were recorded) and that of all of 2005 (0.9%). A similar trend is observed in private banks, which recorded a profit of $275 million this month (ROA of 2.7%y).
• The monthly improvement in the profitability of private banks was largely explained by seasonal factors (decrease in administrative expenses, lower adjustments than those observed in December due to the end of the year), and by a significant increase in earnings by assets. In addition, there was an increase in the core of the financial margin (interest income and CER adjustments), partially offset by lower price differences.
• Higher profitability allowed solvency indicators to continue improving, with a 1.7% increase in the net worth of the financial system and a slight drop in leverage. The regulatory integration of capital in terms of risk-weighted assets grew for the system as a whole to 15.6% (18.2% in the specific case of private banks).