Report on Banks

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

Executive summary

• In September, solvency indicators for banks as a whole remained at high levels. Capital integration (RPC) reached 16.3% of risk-weighted assets (RWA), up 0.7 percentage points (p.p.) from August and 1.7 p.p. year-on-year (YoY). The ratio between the PRC and the capital requirement totaled 184%, 7.4 p.p. more than in August and 14.1 p.p. y.o.y. The leverage ratio that emerges from the international recommendations – the Basel Committee – reached 9.1% at the systemic level, comfortably exceeding the established minimum (3%).

• The liquidity ratios of the financial system remained high in September. In the month, the broad liquidity indicator stood at 57.6% of total deposits – 57.9% for items in pesos and 56.9% for items in foreign currency. In the last 12 months, this indicator grew 8.6 p.p. in deposits – a total of 10.8 p.p. considering the ratio in pesos and 4.1 p.p. for the corresponding one in foreign currency. As of September, the levels of the internationally recommended liquidity ratios (Basel Committee) far exceeded the regulatory minimums.

• Recently, within the framework of the programme regularly carried out by the Basel Committee to assess the degree of consistency of local prudential regulations with the internationally recommended standards (Regulatory Consistency Assessment Programme, RCAP), the Basel Committee analysed the local rules on “Large Exposures (LEXs) and on the Net Stable Funding Ratio (NSFR)”. In both cases, Argentina obtained the best possible score (“Compliant”), in terms of compliance.

• Private sector deposits in pesos decreased 2.8% in real terms in September (+2.9% nominal). This fall reflected a reduction in time deposits that was tempered by the increase in demand accounts. Private sector deposits in foreign currency fell 19.3% compared to August, softening the reduction towards the end of the month. In this context, total private sector deposits accounted for 59.2% of the total funding (liabilities plus net worth) of the financial system as of September.

• The balance of credit in pesos to the private sector decreased by 1.4% in real terms in September (+4.4% nominal) and loans in foreign currency fell by 12.7% in the currency of origin. Bank financing to the private sector accounted for 41.9% of total assets in the month, while credit to the public sector stood at 9.7% of total assets.

• The irregularity of financing to the private sector reached 4.8% of the portfolio, increasing 0.1 p.p. compared to the previous month (+2.5 p.p. y.o.y.). Non-performing loans to companies increased by 0.3 p.p. to represent 5% of this portfolio (+3.7 p.p. y.o.y.). For its part, the NPL ratio of loans to households decreased 0.2 p.p. to 4.6% (+0.9 p.p. y.o.y.). Mortgage loans to families maintained low levels of irregularity in the period: 0.46% for those denominated in UVA and 0.83% for the rest. In September, the total forecast of the loan portfolio remained high, reaching 99% of the irregular portfolio to the private sector – 77% when considering the net forecasts of the minimum regulations on the regular portfolio. It is estimated that in September the irregular portfolio not covered with forecasts represented 4.4% of the PRC.

• As of September, cumulative nominal gains in the last 12 months for the aggregate financial system represented 4.4% of assets (ROA) and 40.2% of equity (ROE).

I. Financial intermediation activity

Based on the changes observed in the balance sheet, it is estimated that in September the main sources of nominal resources in national currency for the financial system were represented by the increase in private sector deposits and the reduction in the balance of LELIQ (see Chart 1). For its part, the main applications of resources in pesos in the month were the increase in financing to the private sector and the decrease in public sector deposits. Considering the items in foreign currency, the decrease in the balances of liquid assets and credit to the private sector were the main sources of resources, which were applied to supply the withdrawal of deposits denominated in that currency.

As a result of these variations, in September the assets fell 9.9% in real terms (-4.6% nominal), accumulating a decrease of 20.7% real y.o.y. (+21.7% y.o.y. nominal). In the month, assets in foreign currency reached 29% of total assets, 4.1 p.p. less than in August (-1.5 p.p. y.a.), while liabilities in this denomination stood at 27.6% of total funding (liabilities and equity), 4.3 p.p. lower than in August (-2.1 p.p. y.o.y.).

The difference between foreign currency assets and liabilities – including forward purchases and sales – remained moderate at the end of the third quarter, reflecting the effects of the macroprudential regulations in force (see Chart 2).

In relation to the operations of the Payment System, the daily average of transfers of funds with immediate credit maintained a year-on-year growth – both in terms of the amount (32.6%) and the value traded (18% in real terms) by this means of payment – although it registered a drop when compared to the previous month (see Graph 3). For its part, the monthly clearing of checks was below the annual average, both in number of operations and in values. In this context, the rejection of checks due to lack of funds in terms of the total compensated did not present changes in magnitude with respect to August, standing at 1.1% for amounts and 1% for amounts. These levels were similar to those of the end of 2017 and lower than the peaks of mid-2018 (see Graph 4).

II. Deposits and liquidity

In September, private sector deposits in pesos fell 2.8% in real terms (+2.9% nominal). The monthly performance was mainly explained by the fall in time deposits, an effect partially offset by the increase in demand accounts. On the other hand, private sector deposits in foreign currency decreased by 19.3% compared to August (in the currency of origin)¹, reducing their share of total bank funding (liabilities plus net worth) by 4.2 p.p. (see Chart 5). The weighting of total private sector deposits in total funding as of September stood at 59.2%, 1.3 p.p. less than in August.

In the last 12 months to September, the balance of private sector deposits in pesos fell 6.8% in real terms (+43.1% YoY nominal), with a fall of 9.4% YoY in demand accounts (+39.2% YoY nominal) and 3.9% YoY in term placements (+47.5% YoY nominal). Public sector deposits in national currency also fell in real terms in the same period. As a result, the balance of total deposits in pesos fell by 18.9% YoY in real terms (+24.5% YoY in nominal terms). Foreign currency deposits of the private sector decreased by 20.8% YoY (in source currency).

Liquid asset deposit coverage remained high. The broad liquidity ratio² stood at 57.6% of total deposits in September (57.9% for items in pesos and 56.9% in the foreign currency segment), 1 p.p. below the previous month’s figure and 8.6 p.p. above the level of September 2018 (see Chart 6). In relation to the composition of liquidity, in September the share of LELIQs not linked to pass operations increased. The year-on-year increase in the broad liquidity indicator was verified both in the segment in pesos (+10.8 p.p. y.a.) and in foreign currency (+4.1 p.p. y.o.y.).

III. Credit and Portfolio Quality

The balance of credit in pesos to the private sector decreased by 1.4% in real terms in September (+4.4% nominal)³. Within this segment, in the month there were increases in both loans with a mainly commercial purpose (advances, documents and leasing) and in financing through cards, and falls in the rest of the lines. On the other hand, loans in foreign currency fell 12.7% compared to August (in the currency of origin) (see Graph 7), driven mainly by pre-financing for exports and documents.

In the last 12 months, the balance of credit in national currency to the private sector decreased by 27.7% in real terms (+11% nominal), while the balance of financing in foreign currency fell by 15.1% YoY (in the currency of origin).

Total financing to companies (in domestic and foreign currency) fell by 10.7% in real terms compared to August (-5.4% nominal), a performance driven mainly by loans to industry and primary production⁴. In year-on-year terms, total loans to companies fell 28.6% in real terms. On the other hand, total financing to households (in domestic and foreign currency) fell 3.9% in real terms in September (+1.8% nominal), reaching a year-on-year decrease of 22% in real terms, with a greater relative drop in personal and pledge loans.

Credit to the private sector accounted for 41.9% of the total assets of the aggregate financial system in September, increasing 1 p.p. compared to last month’s value. In the last year, this indicator accumulated a fall of 3 p.p., mainly explained by national private banks.

In September, the irregularity of financing to the private sector reached 4.8% of the portfolio, increasing 0.1 p.p. in the month and 2.5 p.p. y.o.y. (see Graph 8). The NPL ratio for loans to companies increased by 0.3 p.p. in the month to 5% (+3.7 p.p. y.o.y.). For its part, the NPL ratio of loans to households decreased 0.2 p.p. to 4.6% (+0.9 p.p. y.o.y.). Mortgage loans to families maintained low levels of delinquency in the period: 0.46% for those denominated in UVA and 0.83% for the remaining⁵.

In September, the balance of the total accounting forecasts⁶ represented 99% of the financial system’s financing to the private sector in an irregular situation – 77% if the regulatory forecasts for the regular portfolio are excluded (see Chart 9). This value far exceeds the minimum forecast in force for the irregular portfolio (49%). The non-forecasted non-hedged non-performing portfolio is estimated to have accounted for 4.4% of the PRC in September – 9.5% of excess regulatory capital – 0.7 p.p. below the value in August

The financial system’s exposure to the public sector stood at 9.7% of total assets in September, increasing 0.3 p.p. compared to the previous month (-1.3 p.p. y.o.y.). When considering public sector deposits, this sector maintained a net credit position vis-à-vis the aggregate financial system, equivalent to 1.7% of the total assets of all financial institutions⁷.

IV. Solvency

In September, the solvency ratios of the financial system remained at high levels. Capital integration (RPC) accounted for 16.3% of risk-weighted assets (RWA) in the month, 0.7 p.p. above the August figure and 1.7 p.p. more in a year-on-year comparison (see Chart 10). 88% of the PRC is accounted for by Tier 1⁸ capital. In the period, the ratio between the PRC and the minimum regulatory capital requirement reached 184% for the financial system, 7.4 p.p. more than in August and 14.1 more compared to September 2018.

The local financial system exhibits a low level of leverage, below the values observed at the international level⁹. In terms of the regulatory recommendation issued by the Basel Committee – which defines the leverage ratio as the ratio between the capital with the greatest capacity to absorb losses and a large measure of exposures – the local financial system continues to present a relatively robust situation. As of September, this regulatory ratio totaled 9.1% for the aggregate of entities (exceeding the regulatory minimum of 3%), 0.4 p.p. and 0.6 p.p. more than the figure for last quarter and September 2018, respectively.

In September, the financial system accrued nominal gains equivalent to 7.9% of assets (ROA) and 65.8% of net worth (ROE). In the 12 months to September, the financial system recorded a nominal ROA of 4.4% and a nominal ROE of 40.2% (see Chart 11)¹⁰.

The financial margin of the banks as a whole stood at 16.9% of assets in the month, 3.6 p.p. more than in August. Higher earnings on securities and interest on loans explained the monthly increase. The increase in interest expenses and the fall in earnings due to exchange rate differences tempered the increase in the financial margin. In the 12-month cumulative period, the financial margin represented 12.5% of assets, 1.9 p.p. more in a year-on-year comparison.

Net income from services in the financial system increased 0.4 p.p. of assets compared to last month, to 2.2%a. In the accumulated in the last 12 months, results for services totaled 2.1% of assets, falling 0.3 p.p. y.o.y.

In the month, administrative expenses of the financial system totaled 7.5% of assets, 0.8 p.p. higher than in August, mainly due to items related to personnel expenses. Taking into account the accumulated 12 months to September, these expenditures were equivalent to 6.5% of assets, with no changes in magnitude in a year-on-year comparison. For its part, in September the charges for uncollectibility stood at around 1.7% yr. of assets, 0.2 p.p. less than in August. The accumulated flow in the last twelve months of uncollectibility charges reached 1.7% of assets, 0.4 p.p. more than in the same period a year ago.

In September, banks as a whole accrued losses in ORI equivalent to 1.4%y. of assets (+1.7 p.p. in the month)¹¹. In the last 12 months, the ORI represented 0.1% of assets.

References

¹ See “Section 4 of the Financial Stability Report for the Second Half of 2019 (IEF II-19)”. There is more detail on the recent performance of this type of operation, as well as on its effect on the balance sheet of the financial system.

² Availability, integration of minimum cash and BCRA instruments, in national and foreign currency.

³ Includes principal adjustments and accrued interest.

⁴ Information extracted from the Central Debtors (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.

⁵ As of September, out of a total of 102,681 mortgage loans 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), 635 were in an irregular situation.

⁶ The total accounting forecasts of the regular and irregular portfolio are considered.

⁷ See “Section 1 of the IEF II-19” for further development on the evolution of banks’ exposure to the public sector.

⁸ Tier 1 capital is the capital with the greatest capacity to face unexpected losses, composed mainly of common shares and earnings.

⁹ For more detail, see “IEF II-19 Section 3.3.1”

¹⁰ The results consider the other comprehensive results (ORI) item.

¹¹ Mainly by financial instruments at fair value with changes in ORI.