Informe Sobre Bancos

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

Executive summary

• In order to mitigate the social and economic effects of the adverse context deepened by the COVID-19 pandemic, the BCRA, together with the National Government, has been implementing a broad set of policy actions that seek, among other objectives, that the addition of financial institutions increases the flow of loans to the most vulnerable families and companies. while protecting their savings, while preserving the necessary conditions for the resilience of the financial system.

• It should be noted that, even before the shock of the pandemic, the BCRA implemented a set of policies with new priorities, seeking to address the recessionary process in which the Argentine economy has been since mid-2018. In particular, since the end of 2019, the BCRA has made successive reductions in the monetary policy interest rate – from 63% in December to 38% as of March 2020 – and implemented new tools that are expanding access to credit to the private sector under better financial conditions, with a focus on MSMEs. This action deepened since the end of the first quarter, significantly extending financing to interest rates below those observed in the market, reversing the usual procyclical dynamics of credit, while implementing minimum interest rates that protect the real value of time deposits.

• In May, the balance of financing in pesos from the financial system to the private sector increased by 2.6% in real terms (peak of the month). This positive evolution is verified for the third consecutive month, constituting an unprecedented dynamic in the last 2 years. Moreover, after 20 months, in May there was again a year-on-year increase in the real balance of credit to the private sector in pesos. This performance was influenced by the special line for MSMEs, which accumulated disbursements of $218,000 million as of May, totaling $325,000 million at the time of publication of this Report. In view of the positive results obtained, at the end of June the BCRA decided to expand its scope and incorporate financing to firms that are not MSMEs, to the extent that they use these funds for the acquisition of machines and equipment produced by local MSMEs. Likewise, at the beginning of May, the BCRA launched the so-called MSME Plus, which totaled disbursements of approximately $1,600 million at the end of July, including some 3,300 MSMEs for bank financing.

• Zero-rate loans for self-employed workers and single-payers totaled almost $57,000 million in the last days of July, of which nearly $44,000 million had been disbursed – representing more than 7% of credit card financing in pesos – through more than 472,000 loans on the same date. This new line promoted by the National Government in conjunction with the BCRA favored greater banking penetration, through the issuance of 154,000 new credit cards.

• With respect to measures aimed at protecting the savings of families and companies in pesos, since the beginning of May the BCRA has established a minimum interest rate for time deposits of individuals of up to $4 million (until April it was for deposits of less than $1 million), a regulation that in the middle of the month was extended to all time deposits in pesos in the private sector. No limit on the amount. The BCRA decided to increase these minimum rates both from the beginning of June, as well as more recently from August. Hence, the average interest rate on time deposits in pesos rose by about 7 p.p. compared to the April 2020 average. In this context, in May there was a remarkable dynamism in time placements, growing 7.3% in real terms, largely explaining the increase in the balance of total deposits in pesos in the private sector (+3.3% real).

• The financial system observes liquidity and solvency margins that are at levels significantly above what is required in local prudential regulation, which is in line with international standards. In May, the system’s regulatory capital integration stood at 22.9% of risk-weighted assets. The regulatory capital gap is underpinned by prudential measures aimed at setting the conditions to deal with potential negative effects resulting from the pandemic, based on requirements for additional capital conservation margins and the limitation, until the end of 2020, of the distribution of profits.

I. Financial intermediation activity

In May, the activity of all financial institutions continued to develop with the particularities of the measures adopted to face the COVID-19^{pandemic 1}. Within the framework of the measures that the BCRA has been taking in recent months to face the shock, thus mitigating its negative effects on families and companies, it should be noted that in May there were increases in time deposits in pesos and credit to the private sector in pesos – especially that channeled to MSMEs – (for more detail, see “Section II. Credit and portfolio quality”).

In this context, and based on the estimated monthly flow of funds for items in national^{currency 2}, in May the increase in deposits (from the public and private sectors) was the most prominent source of funds for the financial system (see Chart 1). These resources were applied to increase both the balance of the current accounts that the entities have with the BCRA and the credit balance (to the private and public sectors)³.

Within the framework of this flow of funds, in May the total assets of the financial system grew 3.1% in real terms (+4.6% nominal), mainly driven by the performance of public entities.

The share of foreign currency items continued to lose weight in the total balance sheet of the financial system during May. Assets in foreign currency totaled 21% of total assets in the month, 1.4 p.p. less than in April. Liabilities in the same denomination stood at 19.8% of total funding (liabilities and equity), 1.3 p.p. lower than last month’s level. Including forward purchase and sale of foreign currency (off-balance sheet) transactions, in May the spread between assets and liabilities in that denomination totaled 10.6% of regulatory capital at the aggregate level, slightly below the April figure (see Chart 2).

Regarding the operations of the Payment System, as in April and May, in June (latest available information) the number and amount of immediate transfers grew significantly (see Graph 3). In particular, in June the daily average of transfers in pesos with instant credit grew 11.1% in real terms in terms of values and 9% in amounts compared to May. Among the different channels through which these transfers are made, the dynamism of mobile banking and internet banking stands out. On the other hand, in June the clearing of cheques increased (although the level is still below the annual average) and the ratio of rejection of documents due to lack of funds in terms of the total cleared was significantly reduced (see Graph 4). This ratio totaled 1.6% for amounts in June (-2 p.p. monthly) and 2% for amounts (-4 p.p. monthly).

II. Credit and portfolio quality

Within the framework of the measures taken by the BCRA throughout 2020, the balance of credit in pesos to the private sector increased by 2.6% in real terms (+4.2% nominal) during May in the aggregate of the financial system (see Chart 5)⁴. In this way, there is an expansion in real terms of credit in pesos for the third consecutive month, a performance that has not been observed since the beginning of 2018. Documents and credit cards mostly drove May’s performance.

In this sense, the special line for MSMEs with an interest rate of 24% (TNA) launched by this Institution at the end of March (with an interest rate below that observed in the market)⁵, accumulated disbursements of $218,000 million in May (equivalent to more than 10% of loans to companies). This amount totaled approximately $325,000 million at the time of publication of this Report at the end of July (almost $8,000 million correspond to firms providing health services, see Graph 6), with almost 200,000 operations carried out under this scheme. In addition, $11,100 million were approved that have not yet been disbursed, with additional requests in process for almost $10,500 million. Given the positive results of this initiative, at the end of June the BCRA decided to expand its scope by approximately $100,000 million, incorporating the possibility of financing firms that are not MSMEs, to the extent that they use these funds for the acquisition of machines and equipment produced by local MSMEs 6.

Moreover, at the beginning of May, the BCRA decided to launch a complementary line, called MSMEs Plus, seeking to channel financing at preferential interest rates to those companies that do not have access to bank^{credit 7}. This new tool totaled disbursements of approximately $1,600 million at the end of July, allowing some 3,300 MSMEs to be included in bank financing (of which just over 2,400 did so with a guarantee from FoGar). In addition, some $300 million have already been approved under this line, with its disbursement pending implementation.

For its part, the 0% credit line for self-employed workers and single-payers, another of the initiatives implemented by the National Government in conjunction with the BCRA to temper the economic effects of the pandemic, accumulated a total amount of almost $57,000 million by the end of July, of which almost $44,000 million had already been disbursed through some 472,000 operations (see Graph 7). This new line promoted by the National Government in conjunction with the BCRA allowed greater financial inclusion through the issuance of 154,000 credit cards for customers who did not have one with the granting entity.

These initiatives taken by the BCRA were reflected, in part, in the results of the second quarterly survey of 2020 of the “Credit Conditions Survey” – carried out at the end of June. Thus, the entities surveyed showed a reduction in spreads on the cost of funding and commissions in the second quarter of the year compared to the first, both in financing companies and families.

The sum of the disbursements made until the end of July within the framework of the set of official initiatives detailed above, which allow families and companies to access loans at interest rates much lower than those observed at the end of 2019, were equivalent to more than 16% of the total financing in pesos channeled by the financial system on the same date.

In year-on-year terms, the balance of credit in national currency to the private sector increased by 2.5% in real terms in May. It should be noted that it has been almost two (2) years since the lines in pesos have not observed real year-on-year growth, being partly due to the effect of the set of initiatives that the BCRA has been implementing since the beginning of the year, in line with the actions of the National Government. For its part, the balance of credit to the private sector in foreign currency fell by 6.2% in May and by 49.5% YoY (in the currency of origin).

Total financing to the private sector accounted for 35% of the total assets of the financial system at the end of May, slightly below last month (-0.7 p.p.). (see Graph 8). If financing in pesos is considered, it reached 28.5% in May, remaining stable so far this year.

In May, the non-performing loan ratio to the private sector stood at 5.2% of the total^{portfolio 8}, in line with the records of the previous two months (see Chart 9). With respect to April, this indicator did not observe significant changes when considering the different groups of financial institutions. It should be noted that since March, the modifications in the debtor classification parameters made by the BCRA have been in force, as part of measures implemented to mitigate the impact of the pandemic on the financial situation of families and companies⁹.

Among the dimensions of the financial system that provide resilience to challenging macroeconomic scenarios such as the current one, it can be noted that the balance of accounting forecasts (originated by both the regular and irregular portfolios) represented 112.4% of credit to the private sector in an irregular situation of the financial system in the month, increasing 6.7 p.p. compared to April (see Chart 10)¹⁰. For its part, the estimated balance of forecasts attributable to irregular^{portfolio 11} stood at 93% of said portfolio in the month, 6.6 p.p. above the value of April. It is estimated that non-covered financing with forecasts attributable to this portfolio only totaled 1% of the PRC in May (1.6% of excess regulatory capital).

In May, the exposure of the financial system to the public sector represented 9.7% of total assets, 0.6 p.p. more than in April, although slightly lower than the level of 12 months ago. The financial system’s exposure to this sector net of the balance of public sector deposits remained negative, equivalent to 2.5% of total assets in the month.

III. Deposits and liquidity

In May, private sector deposits in pesos grew 3.3% in real terms (4.9% nominal), with increases of 7.3% in those with time deposits (8.9% nominal, see Graph 11) and 1.9% in demand accounts (3.4% nominal). The boost in time deposits mainly reflected the effect of the measures adopted by the BCRA to protect the population’s savings in pesos. In particular, effective as of the beginning of May, the BCRA established a minimum interest rate for time deposits of individuals of up to $4 million (until the end of April it was in force for deposits of less than $1 million)^,12 a regulation that in the middle of the month was extended to all time deposits in pesos in the private sector. No limit on the amount. Moreover, the BCRA decided to increase these minimum rates both from the beginning of June, as well as from August¹³. The monthly performance of demand deposits was influenced by the collection of the Emergency Family Income (IFE)¹⁴, an effect to which was added a greater demand for precautionary types for more liquid assets in the face of the health emergency scenario (emergence of COVID-19). For its part, in May, private sector deposits in foreign currency decreased by 5% – in source currency. Total public sector deposits increased by 20.7% in real terms compared to April (22.6% nominal)^.15 Thus, the balance of total deposits increased 4.1% in real terms in the month (5.7% nominal).

In the last 12 months to May, the balance of private sector deposits in pesos increased 18.7% in real terms (70.2% YoY nominal), with an increase of 42.8% in demand accounts (104.8% YoY nominal) and a reduction of 3.9% in time deposits (+37.8% YoY nominal). For their part, private sector deposits in foreign currency accumulated a 44.7% drop – in source currency – compared to May 2019. Public sector deposits decreased by 4.7% YoY in real terms (+36.6% YoY in nominal terms). Thus, the total balance of deposits in the financial system fell by 4.3% in real terms in the last 12 months (+37.3% nominal YoY).

The relative importance of private sector deposits in pesos in the total funding (liabilities plus net worth) of the financial system increased in the month, accumulating an increase of 7.9 p.p. in the last year, reaching 46% in May. Moreover, as a result of the measures taken by the BCRA to encourage the population to save in local currency detailed above, in May the weighting of term placements by households and companies in the total funding of the financial system increased again.

The liquidity of all financial institutions remained at high levels. In May, the broad liquidity^{indicator 16} represented 65.8% of total deposits (62% in the peso segment and 79.8% for foreign currency items), 0.1 p.p. more than in April (unchanged in the peso indicator and +1.6 p.p. in the foreign currency indicator)¹⁰. In the context of the health emergency, movements in the different components of liquid assets occurred throughout the month, with effects on the composition of liquidity in the broad^{sense 17}. Between the end of the month, there was an increase in the relative importance of the current accounts that financial institutions have with the BCRA and of the holdings of LELIQ, offset by a lower weighting of net passes with the BCRA (see Graph 12). In the last twelve months, the broad liquidity ratio increased by 6 p.p. of deposits (+2.3 p.p. y.o.y. for the segment in pesos and +20 p.p. y.a. for foreign currency items).

IV. Solvency

In May, the solvency ratios of the financial system increased. The aggregate integration of regulatory capital (RPC) reached 22.9% of risk-weighted assets (RWA) (up 0.9 p.p. compared to April and 7 p.p. y.o.y.), with a surplus capital position that increased to 167% of the minimum regulatory requirement. This performance is partly sustained by the implementation of local macroprudential regulations that limit, from last March until the end of 2020, the distribution of results through the payment of dividends¹⁸. This action by the BCRA seeks to ensure that financial institutions continue to supply credit to the economy and temper the procyclical nature that all financial systems generally have, being in line with the measures taken by other Central Banks and Regulatory Bodies in the context of the COVID-19^shock.

Regarding the composition of capital, almost 92% of its total integration was explained by the Tier 1 segment, with a greater capacity to absorb potential^{losses 20}. Moreover, the capital slack in relation to regulatory requirements was maintained in all groups of financial institutions (see Chart 13). In addition, the verification of the capital conservation margin continued to be extensive and widespread among institutions (including the additional margin for systemic institutions).

In May, the financial system accrued a positive comprehensive result in homogeneous currency, accumulating in the first five months of 2020 a result equivalent to 2.9% of its assets (19.4% y. in terms of its net worth). All groups of financial institutions recorded positive profitability indicators for the year to date.

In this regard, it is worth mentioning that the performance that the solvency and profitability of the financial system has been observing during 2020 occurs in a different context than that observed in the previous year. During 2019, although the system proved to be resilient in terms of liquidity and solvency to different episodes of financial and exchange rate stress, it did so in a context of a significant decrease in real credit in pesos (-18% between the end of the year) and private sector deposits in pesos (-11% in the same period, especially those in time that fell -19%). In contrast, within the framework of the BCRA’s new policy guidelines, in 2020 there was a real recovery in credit and a sustained increase in deposits in local currency, with constant efforts to financially include a large group of families and small businesses that did not constitute credit subjects in the financial system. These developments are reversing the usual procyclical behavior of the system, contributing positively to the conditions of financial stability.

The financial margin of the entities as a whole represented 11.2% y/y of assets in May (0.2 p.p. less than in April), making it stand at 11.8% y/y of assets in the first 5 months of 2020. In general terms, in recent months there has been a reduction in interest income in pesos in terms of assets at the level of the financial system, which totaled 9.4% in the accumulated of the year. This performance reflects, in part, the effects of the monetary and financial policy guidelines that the BCRA has been implementing since the end of 2019 (marked reduction in policy interest rates, new incentives and tools to improve the conditions of access to financing, among others). For its part, the results by securities represented, so far in 2020, a relevant source of net income for the entities. These are partly explained by the accrual of returns and changes in the prices of public securities (particularly in April and May), by income derived from holdings in the BCRA’s portfolio of instruments, as well as by the operations of passes with this Institution²¹. The evolution of these last two income items is also influenced by the management of the monetary and financial policy of this Institution (see sections II and III for further development).

On the side of interest outflows of the financial system in terms of assets, although in May there is some reduction compared to April, this decrease was much lower than the significant decrease observed during the previous month. In this regard, it should be noted that since mid-April the BCRA began to implement a policy of minimum interest rates for depositors, seeking to generate a context that avoids a deterioration in the relative performance of their savings²². In May, the effects of these measures on this line of expenditure of the entities began to be verified, and it is expected that they will be fully reflected from the middle of the year (see Section III for further development). In this context, in the accumulated of 2020, interest expenditures of the financial system stood at 8.7% of its total assets.

The results for services of the financial system represented 1.8% of assets in May, leading this source of income for the sector to reach 1.9% of assets in the first five months of 2020.

Bad debt charges for all financial institutions increased by 0.6 p.p. of assets in the month, to 2.5% y.a. of assets. In this way, these expenditures totaled 1.9% of the assets in the accumulated between January and May 2020 for the financial system. On the other hand, administrative expenses fell slightly in May compared to April, totaling 6.7% of assets in the cumulative figure for 2020.

The ORI of the financial system was positive in May, although lower than in April (when it had been extraordinarily high²³). In the cumulative five months of 2020, the financial system accrued a negative ORI, in the order of 0.3% of assets.

References

¹ It should be noted that during May, changes to the Preventive and Mandatory Social Isolation (ASPO) were implemented, with a greater number of productive branches partially resuming their activity. For more details see “Decree 459/2020”

² Prepared with differences in balance sheet balances expressed in homogeneous currency.

³ Considering the monthly variations of the foreign currency items in the aggregate balance sheet, the decrease in credit to the private sector and liquidity were the main sources of funding for financial institutions in May. Foreign currency resources were mainly used to supply the monthly decline in private sector deposits.

⁴ Includes principal adjustments and accrued interest.

⁵ See “Communication “A” 6937″ and amendments.

⁶ See “Communication “A” 7054″. In addition, it was established that financial institutions must mandatorily grant this credit assistance to MSMEs that have guarantees from FOGAR and, in the case of MSMEs that have already obtained this loan, they will be able to access again for the amount of their employee wage bill.

⁷ See “Communication “A” 7006″.

⁸ Provisional information.

⁹ See “Communication “A” 6938″.

¹⁰ Provisional information.

¹¹ Following the criteria of the minimum provisions for uncollectibility risk (IFRS criteria for A entities are not used).

¹² For more details, see “Communication “A” 7000″.

¹³ For more details, see “Communication “A” 7018″. In May, the minimum interest rate was set at 26.6% TNA (30% TEA) (equivalent to 70% of the LELIQ interest rate). Then, as of June, the minimum rate for fixed-term deposits in pesos collected by Group A entities and GSIBs not belonging to this group was set at 30.02% TNA (34.5% TEA) (79% of the LELIQ rate, see “Communication “A” 7027″), except for customers who are debtors of the special credit lines defined by the BCRA; the other financial institutions can choose to pay that interest rate to depositors. As of August, the minimum rate on fixed-term deposits made by individuals for up to $1,000,000, received by Group A entities and GSIBs not belonging to this group, was set at 33.06% TNA (38.5% TEA) (87% of the LELIQ rate, see “Communication “A” 7078″).

¹⁴ For more details, see “Decree 310/2020”.

¹⁵ Performance explained, in part, by transfers from the BCRA to the National Treasury (transitory advances and profits) in the context of the health emergency.

¹⁶ Considers availability, integration of minimum cash and BCRA instruments, in national and foreign currency, in terms of total deposits.

¹⁷ A set of measures was put in place throughout the month. Since the end of April, the integration of minimum cash for demand deposits of Money Market Mutual Funds has been eliminated (see “Communication “A” 6992″). At the beginning of May, a new minimum cash franchise was incorporated for 40% of the financing granted to MSMEs at a rate of up to 24% as long as they are not reported in the “Central of Debtors of the Financial System” (see “Communication “A” 7006″). Finally, modifications were ordered related to the holding of LELIQ (either that used to integrate minimum cash or surplus). Regarding this last point, on the one hand, it was established that from the middle of the month financial institutions can integrate with LELIQ the entire minimum cash requirement in pesos for time deposits and investments (see “Communication “A” 7018″). On the other hand, it was established that as of May 11, entities must reduce their surplus position of LELIQ by an additional 1% with respect to their position as of March 19.

¹⁸ Communications “A”, “6939” and “7035”.

¹⁹ For further development, see “COVID-19 Pandemic: Financial Stability Implications and Policy Measures Taken”, FSB, July 2020.

²⁰ Composed primarily of common stock and earnings.

²¹ These latter operations are reflected in premiums for passes in the income statement of financial institutions.

²²” Communication “6980”, Communication “A” “7000” and Communication “A” “7018”. Communication “A” “7027” will begin to take effect from June 2020.

²³ For more details, see “Report on Banks for the month of April 2020”.