Report on Banks

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

Summary of the month

• In 2007, the financial system consolidated the improvements seen in the last two years: deposit deposits were consolidated as the main source of funding and most of the resources were allocated to credit to the private sector, which showed a limited counterparty risk. Improved bank performance, together with capital injections, strengthen the solvency of the financial system.
• The new regulatory framework established by the BCRA allowed for a continuous increase in credit to the private sector, which increased by 3.7% (40% YoY) in May. Growth was broad-based, with the dynamism of financing through leasing, current account advances and credit cards standing out. In the month, the irregularity ratio fell by 0.1 p.p., to 4% of private financing, accumulating a fall of 0.5 p.p. in 2007. This annual movement was explained by the dynamics of the lines to companies.
• As a result of the incentives established by the BCRA, exposure to the public sector of banks continued to decline: 1.1 p.p. in May to 17.2% of total assets. The movement was led by the complete repayment of the principal of two secured loans and, to a lesser extent, by the sale of other kinds. In this way, banks continue to consolidate their independence from the financing needs of the public sector.
• In May, the increase in deposits (1.4% or 23.5% YoY) was the main source of funds for banks. Private deposits increased 1.2% (25.7% YoY) in the month, led by demand accounts. From a year-on-year comparison, the dynamism of savings constituted in time deposits exceeds that of transactional balances, verifying in May a growth of close to 28% y.o.y. and 25% y.o.y. respectively. Driven by the good performance of tax collections, public deposits grew 2.3% (19.8% YoY) in May.
• There is a growing dynamism of the banking sector in obtaining resources through the capital market. In particular, in May a private bank placed negotiable obligations in pesos for about $450 million, at a fixed rate maturing in 2010.
• As a result of the multiple mechanisms generated by the BCRA, rediscounts due to illiquidity are reduced rapidly and practically disappear from the balance sheet of the financial system. In fact, in addition to the payment of the matching fees, the only bank with outstanding debts due to illiquidity with the BCRA made early cancellations in June and July for a total of $1,600 million. Since the beginning of the matching scheme, almost 92% of the original debt has been canceled due to rediscounts due to illiquidity granted during the 2001-2002 crisis.
• Banks are reducing their exposure to real interest rate risk: during the first 5 months of 2007, the mismatch between CER-adjustable asset and liability items registered a fall of almost 13 p.p. in equity.
• Accounting profits reached 1.5% y/y of assets, 0.2 p.p. more than in April, accumulating an ROA of 1.9% y/y in the first five months of the year. During May, the adjustments accrued by CER, net income from services and miscellaneous results were recovered, movements partially offset by the lower results for financial assets. The normalization of the financial intermediation process achieved in recent years led to the fact that in May, for the first time, the results for services reached the values in relation to the assets recorded in pre-crisis.
• Net worth increased by 21.7% YoY in May. The positive results obtained in the month and the new cash capital contributions made by two financial institutions ($120 million) were partly offset by the allocation of dividends and an adjustment from previous years.