Informe de Estabilidad Financiera

This semi-annual report presents recent developments and prospects for financial stability in Argentina.

Executive summary

The financial system maintains the features of strength indicated in the previous edition of the Financial Stability Report (FSR)1. The intrinsic risks of the activity are limited, the levels of liquidity and solvency are comfortable and the supervisory and prudential regulation framework is in line with international standards. This configuration provides the financial system with a good starting point for it to face a process of sustained expansion of its intermediation activity, and thus gradually approach the depth observed by the same sector in the countries of the region and other emerging countries. In this regard, in recent months there have been signs of a rebound in local intermediation activity, such as the moderate growth in real terms of loans and deposits in the third quarter. For this to be consolidated and for the savings of Argentines to be channeled through the financial system, it is essential to comply with the BCRA’s purpose of maintaining positive real interest rates for depositors, in a stable environment. The local banking system is going through a context of transition, with opportunities and challenges. On the one hand, the fall in the level of economic activity seems to have been tempered. Inflation expectations decreased after the BCRA launched an inflation targeting scheme. Nominal interest rates are falling – along with disinflation – a yield curve in pesos has begun to be built – thanks to the placement of sovereign bonds in recent months – and positive real expected returns for savings instruments are beginning to be observed. On the other hand, banks are beginning to be subject to pressure on their profitability as they lose the extraordinary profits derived from inflation. In particular, the entities fund part of their loans – on which they charge a high nominal interest rate – with resources from demand deposits that have practically no financial cost. In this sense, disinflation and the maintenance of positive real rates for savers generate downward pressure on the interest margins obtained by banks. Added to this is an environment of greater competition and innovation that also influences the profitability of the business as it has been developing. This situation imposes the challenge of increasing operational efficiency through improvements in productivity (including the incorporation of technology) as well as taking advantage of economies of scale. A comparison between local entities or between them and their peers in other jurisdictions shows that there is room for significant efficiency improvements. In addition, international experience confirms the expectation that the levels of financial intermediation in terms of GDP should expand strongly as a result of the disinflation process, facilitating the achievement of economies of scale. The BCRA has been accompanying the challenge of adapting entities to the new context and promoting growth with inclusion. The regulatory changes of recent months encourage the expansion of financial intermediation, taking care of the value of debts both due to lower levels of inflation and through the incorporation of new savings and credit instruments (adjustable by UVI and UVA2, among others). The BCRA’s policies also promote cost reduction, promoting digital technologies and the reduction of regulatory bureaucracy. For example, the simplification in the process of opening subsidiaries allowed 70 more branches to operate in 9 months of 2016.

In recent weeks, the results of the elections in the United States opened a front of uncertainty in the external context. Although it is still too early to estimate the medium- and long-term consequences of this new situation, financial markets are showing expectations of changes in global growth, differentiated impacts on commodity prices, exchange rates, and sector profitability, as well as modified perspectives regarding monetary policy in developed countries and movements in yield curves. Argentina is in a relatively favorable situation with respect to the two channels through which it could be impacted, the real channel and the financial channel. Foreign trade is not very concentrated in terms of recipients and products and represents a smaller share of output, compared to other emerging countries. Exposure to a capital outflow scenario is also relatively low due to the moderate debt levels of the national government and companies and the very low portfolio positions in Argentine assets of volatile funds. On the contrary, the positive effect of the expected recovery in Brazil forecast from the fourth quarter of the year, the good outlook for local activity and the policy changes of recent months created a relatively favorable framework for Argentina. Notwithstanding this assessment, the external developments of recent weeks will require greater monitoring that contemplates the possibility of a negative scenario (still of low probability) with a decrease in risk appetite, possible capital outflows from emerging economy assets and some tension in international financial markets. As mentioned, Argentina would show a relative position of low vulnerability to this scenario. In conclusion, the greatest challenges for local entities are associated with obtaining profitability. These would be addressed fundamentally based on expected growth, since the sources of systemic vulnerability continue to be relatively limited. The interconnection between institutions is limited, the concentration of risk factors is low and there is ample scope for the development of the credit market. Banks maintain high levels of liquidity – in a broad sense, liquid assets are equivalent to 47% of total deposits. Credit risk remains limited, with moderate exposure on bank balance sheets, low and stable non-performing loans (below 2% of the total) and high forecasting (greater than 136% of the non-performing portfolio). The levels of indebtedness and financial burden of families and companies remain moderate. The degree of resilience of banks in the face of an extreme materialisation of an unlikely stress scenario remains significant. Finally, exposures to the rest of the risks intrinsic to activity (currency, interest rate and market) remained at low levels, with no substantial variations compared to the last IEF.