Report on Banks

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

Summary of the month

• In May, the pattern of progressive improvement in banks’ balance sheets was confirmed, with positive monthly results for the financial system as a whole for the third time this year. With better results and continuous capital contributions, in addition to a portfolio of assets with an increasing quality, the recomposition of the solvency of the financial system continues its progress. This forms a firm basis for the momentum that financial intermediation is taking, with greater deposit collection and significant expansion of credit to the private sector, while exposure to the public sector continues to be cut.
• The financial system recorded gains of approximately $103 million (0.6% annualized of assets) in May. Excluding the amortization of injunctions and the valuation adjustments of public sector assets, the adjusted profit amounts to $293 million (1.7%y). So far in 2005, the financial system has accumulated positive results of approximately $240 million (0.3% yr. of assets), a significant advance compared to the losses of $880 million (-1.1% yr. of assets) in the same period of 2004.
• More than half of the financial system’s profits were accounted for by private banks ($57 million or 0.6% of assets). However, the earnings of this group of entities showed a slight monthly drop, given a certain reduction in the financial margin, in addition to an increase in administrative expenses. However, there is an increase in traditional sources of income, such as interest and service earnings.
• The results of the month, added to a capitalization of $300 million, allowed the equity of private banks to grow 2.2% in May and the leverage ratio to decrease slightly. The capital integration ratio reached 16% of risk-weighted assets for private banks, while their total capital position increased to represent 161.5% of the requirement. · The system’s assets grew 0.2% in the month, with an expansion of 1.7% in loans to the private sector, which in 2005 accumulated an annualized increase of 30%. The monthly increase was balanced between commercial credit (up 2.8%) and consumer credit (up 4.1%). Secured credit only shows a slight positive variation once it is corrected for the transfer of mortgage loans to trusts.

• The irregularity of the portfolio destined for the private sector has been falling for almost two years, decreasing 0.8 p.p. in May to 11.4% for private banks (14.3% for the system as a whole). In private banks, the commercial portfolio improved by 0.7 p.p. (to 13.7% irregularity) but continues to show a greater deterioration than consumer financing (with non-performing loans close to 7%).
• When certain outstanding compensations (already accounted for on the balance sheet) were made effective with the delivery of securities and cash (for the portion already amortized), there was a 2.3 p.p. drop in the exposure to the public sector of private banks (up to 35.7% of assets). For the financial system, this exposure went from 37.1% to 36.1%.
• The balance of deposits grew 1.8% in the month for the financial system, driven by private sector placements, which increased 2%. There was a proportional increase between fixed terms (2.1%) and demand accounts (2.1%) of private sector deposits.
• Private bank funding in May was concentrated on the contraction of exposure to the public sector (almost $1.4 billion), private sector deposits ($1.37 billion) and those of the public sector ($550 million). The resources obtained were mainly applied to the expansion of the BCRA’s asset portfolio (almost $1,100 million), liquidity (another $1,100 million) and loans to the private sector (about $760 million). Smaller amounts were allocated to the payment of debts with the BCRA, the cancellation of bonds and foreign lines and the repayment of CEDROS.