Report on Banks

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

Executive summary

•As of the presentation of the reporting regimes for January 2020, financial institutions must present their financial statements in homogeneous currency in accordance with International Accounting Standard (IAS) 29 and considering the provisions on impairment of financial assets contained in International Financial Reporting Standard (IFRS) 9.

• As of January 2020, the capital integration (RPC) of all financial institutions stood at 20.7% of risk-weighted assets (RWA), 3.3 p.p. above the level recorded with information as of December 2019. Within the framework of the entry into force of the new accounting recording provisions, the aggregate PRC of the financial system observed a greater increase than the increase in RWAs, mainly reflecting the effect of the expression of non-monetary assets in homogeneous currency. Thus, the capital position (RPC minus regulatory requirement) of the financial system reached 134% of the minimum capital requirement as of January 2020.

• At the beginning of 2020, the liquidity of the aggregate financial system increased. The broad liquidity indicator (availability, integration of minimum cash and BCRA instruments, in domestic and foreign currency) stood at 62.2% of total deposits in January (60.5% for items in pesos and 67.4% for the foreign currency segment), 2.1 p.p. above the end of 2019 and 5.7 p.p. in a year-on-year comparison (y.o.y.).

• In January, private sector deposits in pesos increased 6.8% in real terms (+9.2% nominal), due to growth in both time placements and demand accounts. The balance of private sector deposits in foreign currency decreased 3.8% in the month – in the currency of origin. The share of private sector deposits in the total funding (liabilities and net worth) of the financial system stood at 58.2% in January, increasing 0.7 p.p. y.o.y.

• The balance of financial system financing to the private sector in pesos decreased by 2.1% in real terms in January 2020 (without significant changes in nominal terms) and by 5% in foreign currency (in the currency of origin). The weighting of credit to the private sector in the total assets of the financial system stood at 37.5%, down 3.1 p.p. compared to the previous year’s record.

• The irregularity of credit to the private sector reached 6% of the total portfolio in the first month of the year, increasing 0.4 p.p. compared to last December and 2.5 p.p. y.o.y. The NPL ratio for loans to companies increased by 0.7 p.p. in the period (+4.7 p.p. y.o.y.) to 7.8%, while the non-performing loan ratio for loans to households remained unchanged both in the month and in the year-on-year composition, at 4.2%. In particular, the delinquency rate of mortgage loans to households remained at 0.6% for the UVA segment and at 0.9% for the rest.

• Within the framework of the changes adopted in terms of impairment on financial assets, the balance of total accounting forecasts represented 87.7% of loans to the private sector in an irregular situation in January. The estimated balance of the forecasts attributable to the non-performing portfolio (according to the criteria in force in the ordered text of Minimum Provisions for Risk of Uncollectibility) stood at 70.9% of said portfolio. According to this estimate, irregular financing not covered by forecasts represented only 5.4% of the PRC in January 2020.

I. Changes in accounting information

It should be considered that as of January 2020, financial institutions must present their financial statements in homogeneous currency1 (in accordance with International Accounting Standard (IAS) 29) and consider the provisions on impairment of financial^{assets 2} (contained in point 5.5 of the International Financial Reporting Standard (IFRS) 9).

Given the particularities of the information submitted by financial institutions as of January 2020 (still provisional), certain conceptual points for the reading of the data are clarified. With regard to the expression of balance sheets in homogeneous currency, the procedure considers the calculation of a “monetary result” based on the inflation recorded in accordance with the evolution of the CPI and the structure of the balance sheet of each entity, differentiating between “monetary” and “non-monetary” items. While the latter items are re-expressed, the monetary items are not re-expressed and generate the so-called “monetary result”³. This result is not linked to a cash flow.

In view of the changes, and given the information available, certain items (e.g. total assets) are not directly comparable between January 2020 and the previous months (not expressed in homogeneous currency). Only at the time when the financial institutions report the quarterly financial statements could such a comparison be made, as the “comparative information” will be available, also expressed in homogeneous currency.

II. Financial intermediation activity

According to the estimated flow of funds for the financial ^system,4 in January the resources in national currency derived from the increase in private sector deposits and, to a lesser extent, from the reduction in the current account balance at the BCRA were mainly channeled to increase the holdings of monetary regulation instruments (see Chart 1). The increase in deposits and monetary regulation instruments was verified in all groups of banks. On the other hand, considering the items in foreign currency, in the month the decrease in credit and deposits from the private sector were the main sources and uses of funds by banks, respectively. These movements in foreign currency items were reflected in all groups of banks.

In this context, the foreign currency segment lost weight in the aggregate balance sheet of banks at the beginning of 2020. Assets in foreign currency represented 23.6% of total assets and liabilities 22.3% of total funding (liabilities and equity), falling compared to the end of 2019 and in a year-on-year comparison. The spread between bank assets and liabilities in foreign currency – considering forward foreign currency purchase and sale operations – totaled 9% of regulatory capital in January (see Chart 2).

Considering the operations carried out through the National Payment System, in January the daily average of immediate transfers decreased, partly associated with seasonal factors. Average daily operations in quantities and in real amounts decreased 13.7% and 8.7% compared to December 2019, respectively. Compared to the same month of the previous year, immediate transfers registered increases of 26.3% and 12.8% for amounts and real amounts, respectively. For its part, in January the clearing of checks continued to decline, in line with the trend of recent years (see Graph 3). In the month, the amount and amount of rejection due to lack of funds in terms of the total compensated decreased compared to the previous month (0.93% in amounts and 0.72% in amounts, -0.05 p.p. and -0.07 p.p. compared to December) and in a year-on-year comparison (-0.56 p.p. and -0.30 p.p., respectively). Thus, the rate of rejection of checks due to lack of funds was below the average level of the last 5 years.

III. Deposits and liquidity

Private sector deposits in pesos increased 6.8% in real terms in January (+9.2% nominal, see Chart 4), mainly due to the increase in time placements (+11.1% real, +13.6% nominal). The private sector’s demand accounts increased above normal for this part of the year, 4.1% real (+6.5% nominal) between the end of the month. ⁵. The balance of private sector deposits in foreign currency decreased by 3.8% in January —in source currency—. For their part, public sector deposits grew 2% in real terms (+4.3% nominal) in the period. Thus, the balance of total deposits in the financial system increased by 3.2% in real terms (+5.5% nominal).

In a year-on-year comparison, private sector deposits in pesos fell by 4.1% in real terms (+46.6% YoY nominal), with a 16.3% YoY drop in term placements (+28% YoY nominal) and a 10.1% YoY increase in demand balances (+68.2% YoY nominal). For their part, private sector deposits in foreign currency fell 36.6% – in source currency – in the last 12 months. The balance of total deposits in the public sector also fell in real terms in the same period. In this context, the balance of total deposits fell by 18.7% YoY in real terms (+24.3% YoY in nominal terms) compared to the beginning of 2019.

In January, the share of private sector deposits in the total funding (liabilities and net worth) of the financial system fell by 1.2 p.p. (+0.7 p.p. y.o.y.), standing at 58.2%.

At the beginning of the year, bank liquidity increased again. The broad liquidity^{ratio 6} stood at 62.2% of total deposits in January (60.5% for items in pesos and 67.4% for the foreign currency segment), 2.1 p.p. above December 2019 (see Chart 5). In the month, there was also a change in the composition of liquid assets, with a fall in the current accounts of financial institutions at the BCRA and an increase in liquidity bills (decrease in passes and increase in LELIQ per holding)⁷. In the last 12 months to January, ample liquidity grew by 5.7 p.p. (+4.1 p.p. y.o.y. for the segment in local currency and +10.5 p.p. y.o. for items in foreign currency).

IV. Credit and Portfolio Quality

In January, the balance of bank financing in pesos to the private sector decreased by 2.1% in real terms (without significant changes in nominal terms). Within this segment, commercial lines – advances, documents and leasing – showed greater monthly declines. Meanwhile, the balance of credit to the private sector in foreign currency fell by 5% in the month – in the currency of origin – (see Graph 6).

In a year-on-year comparison, credit in national currency to the private sector accumulated a 17% real fall in January, while the balance of loans in foreign currency fell 37.2% – in the currency of origin.

Financing to companies (in national and foreign currency) decreased 4.8% in real terms (-2.7% nominal) compared to December, which was widespread among the different productive activities except for construction (+0.3% in real terms). In year-on-year terms, total loans to companies fell by 23.4% in real terms (see Chart 7)⁸. On the other hand, loans to households (in domestic and foreign currency) fell by 0.7% in real terms (+1.5% nominal) in the month. Within this segment, pledges and personal loans showed the largest relative falls, which were attenuated by mortgages (+0.6% in real terms). In a year-on-year comparison, loans to households decreased by 17.3% in real terms.

The weighting of credit to the private sector in the total assets of the aggregate financial system stood at 37.5% in January, down 3.3 p.p. from last month’s value and 3.1 p.p. compared to the previous year’s record.

In January, the irregularity of financing to the private sector reached 6% of the total portfolio, increasing 0.4 p.p. compared to the end of 2019 and 2.5 p.p. y.o.y. (see Graph 8). The NPL ratio for loans to companies increased by 0.7 p.p. in the period (+4.7 p.p. y.a.) to 7.8%, while the non-performing loan ratio for households remained unchanged both in the month and in the year-on-year comparison, standing at 4.2%. Mortgage loans to households maintained their NPL ratio unchanged in the month: 0.6% in the UVA segment and 0.9% for the rest⁹.

In January, the balance of total accounting forecasts (regular and irregular portfolio) represented 87.6% of loans to the private sector in an irregular situation in the financial system, 9.1 p.p. less than in December (see Chart 9), in the context of changes in the impairment of financial assets (see Section 1)¹⁰. This fall was mostly reflected in domestic private banks and public banks, while an increase in this ratio was recorded in foreign private banks. Meanwhile, the estimated balance of forecasts attributable to irregular^{portfolio 11} stood at 70.8% of said portfolio. On the other hand, it is estimated that financing in an irregular situation not covered with forecasts attributable to this portfolio totaled 5.4% of the PRC in January (9.3% of excess regulatory capital)¹².

In the period, the exposure of the financial system to the public sector represented 9.7% of total assets, 0.3 p.p. less than last December and 0.9 p.p. below the level of a year ago. Both falls were explained by the public banks. The financial system’s exposure to this sector, net of the balance of public sector deposits, stood at -1.1% of total assets in the month.

V. Solvency¹³

The capital integration (RPC) of the banks as a whole stood at 20.7% of risk-weighted assets (RWA) in January, 3.3 p.p. above the level recorded with information as of December 2019 and 4.5 p.p. higher than the level verified with information as of January 2019 (see Chart 10). Within the framework of the entry into force of the new accounting recording provisions, the aggregate PRC of the financial system observed a greater increase than the increase in RWAs, mainly reflecting the effect of the re-expression of non-monetary assets in homogeneous^{currency 14}. In January, capital level ^1.15 with the greatest capacity to face unexpected losses, accounted for 91% of the PRC of the financial system. Thus, the capital position (RPC minus regulatory requirement) of the financial system represented 134% of the regulatory requirement in the first month of 2020.

With provisional data, as of January 2020, the banks as a whole obtained profits equivalent to 5.2% of assets (ROA) and 35.7% of equity (ROE)¹⁶. It should be considered that, as of 2020, this accounting result reported by the entities incorporates the “monetary result”, derived from considering the effect of inflation for the month on the “monetary items”. The adjustment of “monetary items” is, in general, negative for banks in an inflationary context because they register more monetary assets than monetary liabilities. In January, the monetary result for the financial system was negative and equivalent to 0.9% of assets (see Graph 11).

The financial margin of the banks as a whole reached 15.4% y/y of assets in January, without significant changes compared to December (only +0.1 p.p.). Slight monthly increases in premiums for passes and securities, together with a decrease in interest outflows (for deposits), were practically offset by lower interest income (from loans), a reduction in gains due to exchange rate differences, and a reversal of other financial results (mainly due to lower gains linked to adjustments for foreign currency forward operations). Considering the different groups of banks, in January the financial margin increased in public banks and decreased in private banks.

Net income from services in the financial system represented 2.4% y/y of assets in January, 0.2 p.p. more than in December. This concept of the income statement was increased in both private and public banks.

In the first month of the year, charges for uncollectibility of the financial system stood at 1.3% of assets, falling 3.7 p.p. compared to December¹⁷. On the other hand, the administrative expenses of the banks as a whole fell by 0.8 p.p. of assets on a monthly basis to 7.4%a.

References

¹Communication “A 6651”.

²Communication “A 6430” and A 6847″. Group “B” entities may prorate the impact generated by the application of point 5.5 of IFRS 9 over 5 years. On the other hand, the use of a special measurement criterion has been provided for debt instruments of the Non-Financial Public Sector (it implies temporarily excluding these instruments from the scope of application of IFRS 9).

³For more details, see Communication “A 6849”.

⁴Considering differences in the balance of monetary items.

⁵ The monthly performance of private sector deposits in pesos occurred within the framework of the BCRA’s provision to gradually reduce the interest rate on the transfers it made with Mutual Funds (FCI) as of January 10 (Communication “A 6861”). This provision resulted in a transfer of FCI funds from the BCRA to deposits in financial institutions.

⁶Availability, integration of minimum cash and BCRA instruments, in national and foreign currency.

⁷ For the purposes of the integration of Minimum Cash in pesos, December 2019 and January 2020 formed a joint calculation period. Given that financial institutions ended December with a partial surplus in integration, in January they were able to compensate for it with lower integration.

⁸Information extracted from the Debtors’ Central (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 channeled to individuals. On the other hand, loans to families are considered to be those granted to individuals, unless they are for commercial purposes.

⁹As of January, out of a total of 104,170 – estimated data – 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), 859 were in an irregular situation.

¹⁰In September 2019, within the framework of the convergences to IFRS, a modification was made to the accounting record of the forecasts. For the purposes of applying the changes, institutions should use their internal models to measure the impairment of financial assets. Group “B” entities may choose to prorate the impact generated by these changes over 5 years, while as of January 2020 Group “A” entities must consider the “expected credit losses” according to IFRS with counterparty in existing “provision for uncollectibility risk” accounts. Within the framework of these changes, in January there was a decrease in the total balance of forecasts registered for the aggregate of the financial system.

¹¹Considering an estimate of the forecasts attributable to the non-performing portfolio according to the criteria in force in the ordered text of Minimum Provisions for Risk of Uncollectibility and not the new IFRS criteria.

¹²Same as previous article.

¹³Special emphasis is placed on the fact that the information for January 2020 is provisional and subject to rectification.

¹⁴For more details, see Section I of this Report. In addition to the effect of the restatement in homogeneous currency, financial institutions must deduct from their CPR the positive difference between the “regulatory” forecast calculated according to the rules on “Minimum provisions for risk of uncollectibility” (or the corresponding accounting forecast in November 2019 – whichever is greater), and the new accounting forecast computed in accordance with point 5.5. of IFRS 9. Communication “A 6847” and Communication “A 6851”.

¹⁵Composed primarily of common stock and earnings.

¹⁶The results consider the other comprehensive results (ORI) item.

¹⁷December’s performance was associated with a one-off operation in a large public bank.