Report on Banks

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

Executive summary

• As of March 20, the activity of the financial system was carried out in an atypical framework, defined by the measure of “social, preventive and mandatory isolation” (ASPO) adopted in order to mitigate the spread and impact of the COVID-19 pandemic. Faced with this scenario, the BCRA promoted a set of measures to protect savers and boost credit, while ensuring the operation of the Payment System, seeking to preserve at all times the aggregate levels of liquidity coverage and solvency in force in the financial system.

• With the aim of channeling resources to the sectors affected in the current context, since March the BCRA has promoted credit to MSMEs and health service providers, with an interest rate of up to 24% per year, both for banked companies and, more recently, for those without access to credit (“Com. A 6937″, “Com. A 6943 and Com. A 7006“). Likewise, progress was made in the implementation of zero-rate credits for single-payers and self-employed workers (“Decree No. 332/2020″) and Com. A 6993″).

• The solvency indicators of the financial system increased in March. The system’s capital integration (RPC) stood at 21.8% of its risk-weighted assets (RWA), 0.3 p.p. more than last month. The regulatory capital position (RPC minus requirement) for the aggregate of entities reached 153% of the requirement in March, increasing 4.9 p.p. in the month.

• From high levels, compared to the last 10 years, the liquid assets of the financial system increased in March. Liquidity in the broad sense (availability, integration of minimum cash and BCRA instruments, in domestic and foreign currency) represented 64.6% of total deposits in the month (62% for the segment in pesos and 73% for items in foreign currency), 0.8 p.p. more than in February and 5.8 p.p. y.o.y. During the month, the balance of bank current accounts at the BCRA increased and LELIQ holdings fell.

• The balance of deposits in pesos in the private sector increased 5.8% in real terms in March (+9.4% nominal), due to the performance of demand accounts (+11.8% real, +15.6% nominal), while time deposits fell (-4.3% real, -1.1% nominal). This performance was influenced by the ASPO, based on a greater demand for liquidity, added to the impossibility of making deposits in person (part of the fixed-term maturities was reflected in an increase in immobilized balances). Private sector deposits in foreign currency fell 2.2% – in origin currency – in the month. The relative importance of private sector deposits in total funding reached 59.6%, increasing 0.9 p.p. compared to February.

• In March, the balance of bank financing to the private sector in pesos increased by 2.9% in real terms (+6.3% nominal), mainly due to the performance of advances and documents, given the greater liquidity needs of companies, and within the framework of the measures implemented by the BCRA aimed at improving the conditions of access to credit. On the other hand, loans in foreign currency decreased 5.6% – in source currency. The weighting of credit in the total assets of the system stood at 36.2%, down 3.2 p.p. compared to the previous month.

• The irregularity of financing to the private sector stood at 5.3% of the total portfolio in March, falling 0.8 p.p. compared to February (+1.1 p.p. y.o.y.), partly due to the modifications in the debtor classification parameters made by the BCRA within the framework of the plan implemented to mitigate the impact of the pandemic. In March, the NPL ratio for loans to households fell by 1.2 p.p. to 3.1% (-1.4 p.p. YoY), while the NPL ratio for corporate loans fell by 0.6 p.p. to 7.5% (+3.6 p.p. YoY). The irregularity of mortgage credit to families decreased in March (to 0.49% for those denominated in UVA). The coverage of the balance of financing in an irregular situation with accounting forecasts attributable to this portfolio is estimated at 80.8% (+10.4p.p. compared to February).

• In the first quarter of the year, the financial system accrued an annualized result – measured in homogeneous currency – equivalent to 2% of assets (ROA) and 13.5% of equity (ROE).

I. Financial intermediation activity

In March, the activity of the financial system took place in an atypical framework, mainly from the measure of “social, preventive and mandatory isolation” (ASPO) ordered as of the 20th in the face of the effects of the COVID-19 pandemic. In this context, according to the estimated flow of funds for items in national^{currency 1}, between the end of the month, the reduction in the holdings of BCRA instruments and the increase in private sector deposits were the main sources of resources for the financial system (See Chart 1). These funds were mainly applied to increase the balance of the current accounts that banks have at the BCRA and, to a lesser extent, to increase credit to the private sector. These movements were verified in all groups of banks. For its part, in relation to items in foreign currency, the decrease in credit to the private sector was the most prominent source of funds in the month. The reduction in private sector deposits and the increase in liquidity were the main applications of resources in foreign currency during March. The dynamics of these items were reflected in all groups of banks.

In this context, total bank assets increased 2.3% in real terms compared to February, reflecting a similar performance by group of banks.

Given the aforementioned variations, in the month the foreign currency segment reduced its weighting within the total balance sheet of banks. Assets in foreign currency accounted for 22.7% of total assets in March (0.8 p.p. less than in February), while liabilities in the same denomination totaled 21.4% of total funding (-0.7 p.p. monthly). For its part, the difference between assets and liabilities in foreign currency – including forward operations – stood at around 10.2% of regulatory capital in March, 1.3 p.p. more than last month (see Chart 2). The lower position sold in the forward market mainly explained the monthly increase in this indicator.

Regarding operations carried out through the Payment System, in March the daily average of immediate transfers decreased slightly compared to February (-1.6% in amounts and -2.3% in real terms). However, compared to the same period last year, there was an increase in immediate transfers in both quantities and real values (16.7% and 9.4%, respectively). On the other hand, checks cleared during March continued to fall – both in values and amounts – and were below the annual average (see Graph 3). Within the framework of the ASPO, in the month the checks rejected due to lack of funds in relation to those cleared stood at 2.74% considering amounts (1.9 p.p. higher than the previous month) and at 2.19% considering amounts (1.5 p.p. higher than last February)².

II. Deposits and liquidity

In March, the performance of private sector deposits in pesos was influenced by the ASPO issued as of the 20th in the face of the effects of the COVID-19 pandemic. Between the end of the month, the balance of deposits in pesos in the private sector increased by 5.8% in real terms (+9.4% nominal), due to the performance of demand accounts (+11.8% real, +15.6% nominal), while time deposits fell (-4.3% real, -1.1% nominal). The increase in demand accounts and the reduction in time deposits occurred in the context of a greater precautionary demand for liquidity by families and companies from the new scenario. In addition, the performance of the demand accounts was influenced by the collection of the advance of the extraordinary subsidy for beneficiaries of social allowances and retirees³. The reduction in term placements was boosted by the impossibility of making deposits in person, which led to a part of them not being renewed, reflected in a growth in immobilized balances. For their part, private sector deposits in foreign currency fell 2.2% – in source currency – in the month. Public sector deposits grew 1.7% in real terms compared to February (+5.1% nominal). Thus, the balance of total deposits in the financial system increased 3.3% in real terms in March (+6.8% nominal).

In the last 12 months, private sector deposits in pesos increased by 7.3% in real terms (+59.1% YoY nominal), with an increase of 29.8% YoY in demand accounts (+92.5% YoY nominal) and a reduction of 14% YoY in time deposits (+26.2% YoY nominal). For their part, private sector deposits in foreign currency accumulated a year-on-year drop of 39% – in source currency. Total public sector deposits decreased in real terms compared to March 2019. Thus, the total balance of deposits fell by 13% YoY in real terms (+29% YoY nominal)

Based on this performance, in March the relative importance of private sector deposits in total funding – liabilities and net worth – reached 59.6%, increasing 0.9 p.p. compared to February and in a year-on-year comparison (see Graph 4).

In March, the liquid assets of the financial system increased. Broad sense liquidity⁴ represented 64.6% of total deposits in the month (62% for the segment in pesos and 73% for items in foreign currency), 0.8 p.p. more than in February (+0.4 p.p. more and 2.7 p.p. in the indicator in pesos and in foreign currency, respectively, see Chart 5). During the month, the balance of the current accounts of financial institutions at the BCRA increased and the holdings of the LELIQ were reduced. In a year-on-year comparison, the broad liquidity indicator increased by 5.8 p.p. (+2.3 p.p. YoY for items in local currency and +15.6 p.p. YoY for the segment in foreign currency).

III. Credit and Portfolio Quality

In March, the balance of bank financing in pesos to the private sector increased by 2.9% in real terms (+6.3% nominal), mainly due to the performance of advances and documents. The increase in these lines of credit partly reflected the greater need for liquid resources by companies given the ASPO. In this context, since March the BCRA has promoted a line of bank financing for MSMEs and health providers, at an interest rate of 24% per year⁵. Moreover, since the beginning of May, it was decided to incorporate a similar line for MSMEs that do not currently have access to credit⁶. Banks must mandatorily manage these loans for those MSMEs that have a public guarantee from the Argentine Guarantee Fund (FOGAR). Additionally, in April, a “Zero Rate Credit” line was launched for single-payers and self-employed^{workers 7}. For its part, the credit balance in foreign currency fell by 5.6% in the month – in the currency of origin – (see Chart 6).

In a year-on-year comparison, credit in national currency to the private sector accumulated a fall of 8.1% in real terms, while the balance of loans in foreign currency fell 42.6% – in the currency of origin.

Compared to February, financing to companies (in national and foreign currency) increased 3.6% in real terms (+7% nominal). In year-on-year terms, loans to companies fell by 23.7% in real terms. In turn, loans to families (in domestic and foreign currency) fell by 2.1% in real terms (+1.2% nominal) in the month, which was widespread among the different types of assistance. In a year-on-year comparison, loans to households decreased by 14.4% in real terms.

The weighting of the balance of credit to the private sector in the total assets of the aggregate financial system stood at 36.2% in March, down 0.5 p.p. compared to last month’s value and 3.2 p.p. compared to the previous year’s record.

In March, the irregularity of financing to the private sector stood at 5.3% of the total portfolio, falling 0.8 p.p. compared to last month (+1.1 p.p. y.o.y.). This performance was partly linked to the modifications in the debtor classification parameters made by the BCRA in March within the framework of the plan implemented to mitigate the impact of the pandemic on families and companies ⁸. This monthly evolution was generalized among the different groups of banks (see Graph 7). The NPL ratio for loans to companies fell by 0.6 p.p. in the month (+3.6 p.p. y.a.) to 7.5%, while the non-performing loan ratio to households fell by 1.2 p.p. to 3.1% (-1.4 p.p. y.o.y.). There was also a slight reduction in the default of mortgage lines to families to reach the following values: 0.49% for the UVA segment (-0.2 p.p.) and 0.63% for the rest (-0.3 p.p.).

In March, the balance of total accounting forecasts (regular and irregular portfolio) represented 99.5% of loans to the private sector in an irregular situation in the financial system, increasing 12.8 p.p. compared to last month. This movement was mainly led by the effect of the reduction in the denominator of the indicator in the context of the modifications in the debtor classification parameters mentioned in the previous paragraph (see Chart 8). For its part, the estimated balance of forecasts attributable to the irregular portfolio stood at 80.8% of said portfolio.

IV. Solvency

The levels of the main solvency indicators of the aggregate financial system grew in March. Capital integration (RPC) totaled 21.8% of risk-weighted assets (RWA) in the month for banks as a whole, 0.3 p.p. more than in February. Tier 1 capital continued to account for 90% of the PRC (see Figure 9)9. In the month, the aggregate capital position (RPC minus minimum regulatory requirement) represented 153% of the requirement, growing 4.9 p.p. compared to February.

In the month, the financial system accrued a result – measured in homogeneous currency – equivalent to -0.3% yr. of assets (ROA) and -1.9% yra. of net worth (ROE) (see Chart 10). In March, private banks recorded an ROA of 0.8%y. (ROE of 4.7%y), while the ROA of public banks totaled -2%y. (ROE of -17.1%y.)¹⁰. Thus, the aggregate of financial institutions closed the first quarter of the year with accounting profits in real terms in the order of 2% of assets or 13.5% of equity¹¹. So far this year, public banks recorded an ROA of 0.5%y. (ROE of 4.5%y.) and private banks of 2.9%y. (ROE of 17.8%y).

The monthly result of the financial system was influenced, in particular, by the behavior of securities in the aggregate balance sheet of the sector. This effect was partly reflected in the lower yield of the species in the portfolio – mainly due to the monthly reduction in monetary policy interest rates and positions in LELIQ – and by the general fall in the prices of public securities (for the part accounted for at market value). In accounting terms, this effect was reflected in the heading “Income from securities” which is part of the financial margin and in the heading “Other comprehensive income” (ORI).

The financial margin of the banks as a whole represented 9.4% of assets in March, 2.1 p.p. less than last month. The monthly reduction was mainly explained by the lower result for securities mentioned and, to a lesser extent, by a decrease in income from CER adjustments and interest on loans. These effects were partially offset by lower interest outflows on deposits. The cumulative financial margin in the first quarter of the year reached 11.9% of assets. Net income from services in the financial system totaled 1.9% of assets in March, remaining stable compared to last month’s level. In the first 3 months, these results were around 2% of assets.

In March, the bad debt charges of the banks as a whole decreased slightly in terms of assets to 1.7%a. The monthly aggregate performance reflected the effect of a fall in public banks and an increase in private banks. So far this year, these expenditures represented 1.6% of assets at the systemic level. On the other hand, the administrative expenses of the financial system decreased monthly by 0.5 p.p. of assets to 6.5%a. In the first quarter of the year, these expenditures reached 6.9% of assets.

As last month, in March financial institutions recorded losses in ORI. In the month, these expenditures were equivalent to 2.4% of assets (a level similar to that of February) and were mainly explained by the aforementioned results by securities recorded in the accounts at market value. In the first three months of 2020, banks recorded losses in ORI in the order of 1.4% of assets. Finally, in March the financial system accrued positive monetary results equivalent to 0.7% of assets¹². Notwithstanding this performance, in the first quarter as a whole, the banks as a whole recorded losses of 0.1% of assets.

References

¹ Considering differences between March and February of balance sheet balances expressed in homogeneous currency.

² It is worth mentioning that in March the check clearing operation was affected in part by the provisions adopted within the framework of the health emergency. Through “Com. A 6942″ and “Com. A 6944″ the BCRA established, among other measures, that for the period between March 20 and 25, the electronic check clearing sessions would be temporarily interrupted.

³ “Decree 309/2020.”

⁴ Availability, integration of minimum cash and BCRA instruments, in national and foreign currency.

⁵ The minimum cash requirement in pesos was reduced by the equivalent of 40% of the financing channeled to these destinations. See “Com. A 6937″, “Com. A 6943” and Press Release “New BCRA measures to alleviate the impact of the crisis”. Assistance to MSMEs is mainly channeled to working capital financing, salary payment and deferred check coverage. “Com. A 6946” established that financing to MSMEs for the payment of salaries should be computed at 130% for the purposes of this franchise. The most recent data on the amounts granted through this line can be found in the following Press Release “More than 91,000 MSMEs accessed loans at a subsidized rate”.

⁶ The minimum cash requirement in pesos was reduced by the equivalent of 40% of the financing for this purpose. See “Com. A 7006.”

⁷ “Decree No. 332/2020”. The minimum cash requirement in pesos was reduced by the amount equivalent to 60% of the financing for this purpose (“Com. A 6993″).

⁸See (“Com. A 6938“).

⁹ Composed primarily of common stock and earnings.

¹⁰ In contrast to the changes in the accounting criteria introduced at the beginning of 2020, certain concepts, such as the profitability ratios mentioned above, are not directly comparable with those of previous periods (not expressed in homogeneous currency). When financial institutions present their quarterly financial statements, a comparison could be made, as there will be items expressed in homogeneous currency.

¹¹The numerator of the ROA and ROE for the first quarter of 2020 considers the accumulated results to March, expressed at prices of that month. To construct the denominator of both indicators, the average of assets and net worth respectively is taken, both at March prices.

¹²This movement is mainly explained by two banks of magnitude.