Report on Banks

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

Executive summary

• In April, the financial system continued to carry out its activity in the context of the health emergency. In order to mitigate the effects of this atypical context, since the end of the first quarter of the year, the BCRA has been implementing a wide range of measures to stimulate credit to the most vulnerable sectors, mainly MSMEs and the self-employed. In particular, the new lines of financing implemented by the BCRA for this purpose showed rapid growth in the second quarter of the year, alleviating the situation of those sectors of the population most affected by the effects of the pandemic. Moreover, this Institution introduced actions to safeguard savings banked in pesos and alleviate the financial situation of the private sector. At the same time, it sought to preserve the levels of liquidity and solvency of the financial system.

• In April, the aggregate solvency indicators of the financial system remained high in relation to the level of recent years. Capital integration (RPC) reached 21.9% of risk-weighted assets (RWA) (+6.2 p.p. y/y/y). The regulatory capital position – excess integration – stood at 155% of the minimum requirement (+74 p.p. y.o.y.).

• The liquidity indicators of the financial system increased in April. The broad liquidity ratio reached 66% of total deposits (62.3% for items in pesos and 78.2% for the foreign currency segment), increasing 1.3 p.p. and 6 p.p. compared to last March and April 2019, respectively.

• Boosted by a set of measures adopted by the BCRA, the balance of financing in pesos to the private sector increased by 3.4% in real terms in April (4.9% nominal), with a greater relative dynamism of commercial lines. The special credit line for MSMEs launched by this institution at the end of March with an APR of 24% (Communication “A” 6937 and amendments) accumulated disbursements of almost $141 billion at the end of April, an amount that expanded to about $253 billion in mid-June. Total financing to the private sector in terms of the assets of the financial system fell 0.5 p.p. in the month, to 35.7%.

• In April, the balance of deposits in pesos in the private sector grew 5.7% in real terms (7.3% nominal), with increases of 9.1% in demand accounts (10.7% nominal) and 2.2% in time deposits (3.7% nominal). In order to encourage savings in pesos, since April 20 the BCRA ordered entities to pay a minimum interest rate for time deposits, currently 30% TNA (34.5% TEA). Private sector deposits in pesos represent 45.8% of the total funding of the system.

• As part of the measures to stimulate credit to families, in April the National Executive Branch and the BCRA implemented a line of loans at a 0% rate for single-payers and self-employed workers (Decree 376/20 and Communication “A” 6993). In the month, the BCRA again reduced the maximum interest rate for credit card financing to 43% (TNA), establishing that debts with unpaid cards as of 04/30 were automatically refinanced with a one-year term (Communication “A” 6949).

• In order to promote the proper functioning of means of payment in the current context of the pandemic, the BCRA extended the suspension until 09/30 of the collection of charges and commissions for ATM operations (Communication “A” 7044). The sharp increase in immediate electronic transfers in April and May (29.7% and 5.9% respectively, in real amounts) stands out.

• In the first four months of 2020, the financial system obtained annualized gains (a.) in homogeneous currency equivalent to 2.8% of assets (ROA) or 18.9% of equity (ROE). In April, ROA was 5.1%y. (ROE of 34.9%y.), thus exceeding the value of March, mainly due to the impact of the significant monthly recomposition on the quotations of public securities that financial institutions have in their portfolio.

I. Financial intermediation activity

During April, the financial system continued to operate within the framework of the Preventive and Mandatory Social Isolation (ASPO)¹. Considering the monthly flow of funds from all financial^{institutions 2} for items in national currency, the reduction in the balance of current accounts at the BCRA was the most prominent source of resources between the end of the month (see Graph 1), followed by the increase in private sector deposits. The increase in the balance of BCRA instruments (mostly 3 passes) was the main application of resources for the financial system in April. To a lesser extent, the funds were also used to increase the balance of credit to the private sector in pesos in the period. With respect to foreign currency items, the monthly reduction in financing to the private sector was the main source of resources for the entities. Foreign currency funds were mostly used to increase liquidity and to supply the decline in private sector deposits.

Based on the aforementioned variations, the assets of the financial system increased by 3.1% in real terms (+4.7% nominal) in April, an increase especially explained by private banks.

In this context, items in foreign currency reduced their participation in the aggregate of financial institutions in April. Assets in foreign currency totaled 22.5% of total assets (-0.2 p.p. monthly), while liabilities in this denomination reached 21.2% of total funding (-0.2 p.p. monthly). Including forward purchase and sale of foreign currency, the difference between assets and liabilities in this currency stood at 11% of the regulatory capital of the financial system in the period. This indicator increased slightly in the month, mainly explained by forward operations, although it was well below the values recorded years ago (see Chart 2).

The effects of the ASPO were also reflected in the operation of the Payment System. In particular, April and May saw a sharp increase in immediate transfers. The value and quantity of transfers under this modality increased by 29.7% in real terms and 42.9%, respectively, in April (5.9% in real terms and 11% in May)⁴). Transactions carried out through home banking and mobile banking were the ones that grew the most in relative terms (see Graph 3). On the other hand, the clearing of checks continued to decrease, falling below the annual average in values (real) and amounts, respectively. The amount of check rejection due to lack of funds in terms of the total compensated increased 5.6 p.p. in April, totaling 7.8% and then decreased 4.2 p.p. in May, to 3.7%.

II. Deposits and liquidity

In April, the evolution of deposits was influenced by the context marked by the health emergency. In the month, the balance of deposits in pesos in the private sector grew 5.7% in real terms (7.3% nominal), with increases of 9.1% in real terms in demand accounts (10.7% nominal) and 2.2% in real terms in time deposits (3.7% nominal). The greater relative increase in demand accounts reflects the effect of the liquidity preference of companies and families, as well as the collection of the Emergency Family Income (IFE)⁵ and the extraordinary subsidy for ANSES^{beneficiaries6}. The positive performance of fixed-term deposits in the month – after verifying a contraction in March – reflected the gradual normalization of service in bank^{branches 7} that made it possible to regularize the practice of making deposits in person, to which was added the implementation by the BCRA of a minimum interest rate since 04/20/20 in order to encourage savings in pesos in the financial^{system 8}. For its part, in April, private sector deposits in foreign currency decreased by 1.9% – in source currency. Total public sector deposits fell 2.8% in real terms compared to March (-1.4% nominal). Taking into account all these monthly movements, the balance of total deposits increased 3% in real terms in the month (4.6% nominal).

In a year-on-year comparison, the balance of private sector deposits in pesos increased by 15.5% in real terms (68.2% YoY nominal), with an expansion of 41.4% in demand accounts (105.8% YoY nominal) and a decrease of 9.3% in time deposits (+32.0% YoY nominal). For their part, private sector deposits in foreign currency fell 41% – in source currency – compared to April 2019. Public sector deposits fell by 22.8% YoY in real terms (+12.3% YoY in nominal terms). Thus, the total balance of deposits in the financial system decreased by 8% YoY in real terms (+33.9% YoY nominal).

In terms of the total funding structure (liabilities plus net worth) of the financial system, total private sector deposits accounted for 60.2% of the total as of April 2020, slightly increasing their relevance compared to the levels of last March and April 2019. If only private sector deposits denominated in pesos are taken into account, the weighting reached 45.8% of total funding, increasing its relative importance, mainly due to the behavior of the demand segment (see Graph 4).

The liquidity indicators of the financial system remained high compared to the levels observed in the last 10 years. In April, the broad^{liquidity ratio9} reached 66% (62.3% for items in pesos and 78.2% for the foreign currency segment), 1.3 p.p. more than in March (+0.3 p.p. and +5.2 p.p. in the indicator in pesos and in foreign currency, respectively, see Chart 5)¹⁰. In the month, there was a change in the composition of the liquid assets in pesos of the set of financial institutions. The relevance of current account liquidity in the BCRA and in LELIQ holdings was reduced, and the relative importance of passes with the BCRA increased. These changes occur within the framework of the regulatory changes implemented¹¹. Compared to April 2019, broad liquidity increased by 6 p.p. in deposits (+1.5 p.p. y.o.y. for the segment in pesos and +19.8 p.p. y.o.y. for foreign currency items).

III. Credit and Portfolio Quality

In April, the balance of bank financing in pesos to the private sector increased by 3.4% in real terms (+4.9% nominal) (see Chart 6)¹². Within this segment, commercial lines of credit – documents and advances – showed greater relative dynamism in the month, partly due to the companies’ need for funds to meet the payment of salaries and maintain working capital in the context of the ASPO. This performance was favored by the measures adopted by the BCRA aimed at tempering the economic effect of the pandemic, with a special focus on MSMEs. In particular, the special credit line for MSMEs launched by this institution at the end of March¹³ accumulated disbursements of almost $141 billion at the end of April, an amount that expanded to almost $253 billion in mid-June. This line has been mostly used to finance the payment of salaries of the aforementioned firms, the coverage of checks and for other working capital needs of MSMEs¹⁴.

Moreover, in April the PEN and the BCRA implemented a line of loans without costs for single-payers and self-employed workers, aimed at mitigating the impact of the new scenario on households¹⁵. This line has a maximum amount of $150,000 per individual (with 7 months before starting to make the 12 interest-free payments), with financial institutions being obliged to credit this line to those who request it (who meet the established requirements). Through it, in mid-June, loans granted for $46 billion (approximately $20 billion credited) to 376 thousand people were accumulated.

In addition, in order to shore up the financial capacity of families, in April the BCRA again reduced the maximum rate of financing through credit cards to 43% nominal annual¹⁶, while establishing that unpaid credit card debts as of April 30 were automatically refinanced with a one-year term. In addition, the BCRA determined the elimination of punitive interest on unpaid installments of loans until 09/30/20 (considering all types of debtors), as well as the possibility of requesting the entity to defer payment of the same¹⁷.

In April, the balance of credit to the private sector in foreign currency fell by 7.1% compared to March – in the currency of origin.

In a year-on-year comparison, credit in national currency to the private sector accumulated a fall of 2.6% in real terms in April, while the balance of loans in foreign currency fell 47.2% – in the currency of origin.

Financing to the private sector in terms of the assets of the financial system fell 0.5 p.p. in the month, to 35.7% (see Chart 7). In the last twelve months, this indicator accumulated a fall of 3.4 p.p., mainly due to the performance of foreign private banks and the foreign currency segment.

As of March¹⁸¹⁸ (information published in the previous edition of the Report on Banks), the irregularity ratio of credit to the private sector reached 5.3% (see Graph 8). The delinquency of loans to companies stood at 7.5%, with a monthly fall mainly led by firms in industry and commerce. The non-performing loan ratio for households totalled 3.1%, with a monthly decline mainly led by personal loans. On the other hand, as of March, the total forecast (attributable to the portfolio in a regular and irregular situation) was equivalent to the balance of the irregular portfolio (81% when considering only the estimated forecasts for the irregular portfolio).

The gross exposure of the financial system to the public sector represented 9.1% of total assets in April, slightly lower than last month’s figure (0.3 p.p. below the level of a year ago). When considering the deposits of all public sector jurisdictions, the financial system becomes a net debtor of this sector at the consolidated level, for the equivalent of 1.2% of the total assets of all financial institutions in the month.

IV. Solvency

The aggregate solvency indicators of the financial system remained at high levels in April. In particular, capital integration (CPR) remained at 21.9% of risk-weighted assets (RWA) in the month, unchanged from March (+6.2 p.p. y.o.y., see Chart 9). The capital with the greatest capacity to absorb eventual losses – Tier 1 – totaled 20% of RWAs on April¹⁹. For its part, the sector’s aggregate capital regulatory position – excess integration – stood at 155% of the minimum regulatory requirement, a figure similar to that of last March (+74 p.p. y.o.y.). All groups of financial institutions continued to verify a normative position of surplus capital 20.

In April, the financial system obtained annualized gains (a.) equivalent to 5.1% of assets (ROA) and 34.9% of equity (ROE), reversing the performance recorded in March. This was mainly explained by the change in the sign of the heading “other comprehensive income” (ORI), within the framework of the improvement in the prices of public securities in the portfolio, and by the increase in the financial margin. Considering the cumulative figure for the first four months of 2020, the sector’s ROA totaled 2.8%a and ROE stood at 18.9%a (see Chart 10)²¹. All groups of financial institutions obtained positive results in homogeneous currency in the first four months of 2020.

In April, the financial margin of the entities as a whole reached 11.7% y/y. of assets, 1.7 p.p. more than in March. This increase was mainly explained by the reduction in the flow of interest outflows on deposits in pesos (given the lower passive interest rates operated on average²² and the reduction in the share of term placements in total deposits²³) and, to a lesser extent, by the increase in the positive results obtained in terms of premiums^{for passes 24}, of the net income from CER adjustment and contribution differences. With a lesser relative effect on the financial margin of the financial system, a decrease in interest income from loans in pesos (gradual reduction in lending rates, with a mixed performance between credit lines) and a certain reduction in the flow of results from securities (reflecting the effect of the decrease in the average balance of LELIQ holdings) was observed. The accumulated financial margin between January and April 2020 reached 12% of the sector’s assets.

In April, the results for services of the financial system stood at 1.8% of assets, slightly reduced compared to last month. In the first four months of the year, these results totaled 2% of assets.

Charges for uncollectibility of the financial system remained at 1.8% y. of assets in the month, reaching 1.7% yr. of assets so far in 2020. On the other hand, the administrative expenses of all financial institutions fell slightly in the month, to 6.5% y/y of assets. In the accumulated four months of the year, these expenditures totaled 6.8% of the assets.

In April, the sector’s monetary result was positive, in the order of 0.7% of assets²⁵. Between January and April, the financial institutions as a whole accrued practically zero monetary result.

The flow of results per ORI of the financial system went from a negative level in March (-2.5% y/y of assets) to a positive one in April (0.9%y/y). As mentioned, this movement was mainly influenced by the general improvement in the prices of public securities in the portfolio of financial institutions and its effect on the portion accounted for at market value (in ORI). Despite April’s performance, in the cumulative four months of 2020 the financial system recorded a negative ORI of 0.8% y/y of assets.

References

¹ Decrees “325/2020”, “355/2020” and “408/2020”

² Based on differences between March and February of balance sheet balances expressed in homogeneous currency.

³ For more details, see the Deposits and Liquidity section of this Report.

⁴ Considering daily averages for each month.

⁵ For more detail, see “Decree 310/2020”

⁶ For more details, see “Decree 309/2020”

⁷ Since mid-April, branches have been serving in person from shifts previously arranged with customers. For more detail, see “Communication “A” 6958″.

⁸ As of 04/20/2020, the minimum rate for deposits of individuals under $1 million was established at 26.6% nominal annual rate for 30 days (70% of the LELIQ rate, see “Communication “A” 6980″). As of 05/01/20 the limit was extended for deposits of individuals of less than $4 million (“Communication “A” 7000″), now covering all deposits of the private sector as of 05/18/20 (regardless of the amount of the deposit and the type of depositor —individuals/legal entities—) (see “Communication “A” 7018″). More recently, as of 06/01/20, the minimum rate of deposits collected by Group A financial institutions and GSIBs not belonging to this group was set at 30.02% nominal annual (34.5% effective annually, equivalent to 79% of the LELIQ rate, see (“Communication “A” 7027″)), except for those customers who are debtors of financing from special credit lines defined by the BCRA (for more details, see Credit and Portfolio Quality Section); For the rest of the entities, this last minimum interest rate is optional.

⁹ Considers availability, integration of minimum cash and BCRA instruments, in national and foreign currency, in terms of total deposits.

¹⁰ All groups of banks increased their broad liquidity indicator in the month.

¹¹ To increase their lending capacity, in March it was established that financial institutions reduce their position in LELIQ (corresponding to unused holdings to meet minimum cash requirements). In addition, the minimum cash requirement in pesos for financial institutions that provide financing to MSMEs under favorable conditions (see Credit and Portfolio Quality Section of this Report) was reduced by up to 40% of them. See “Communication “A” 6937″, “Communication “A” 6943″ and “Communication “A” 7006″.

¹² Includes principal adjustments and accrued interest.

¹³ “Communication “A” 6937″ and amendments. Includes principal adjustments and accrued interest.

¹⁴ For more details on the measures adopted by the BCRA and their impact, see Section 4 of the “Financial Stability Report of June 2020”.

¹⁵ “Decree 376/20” and “Communication “A” 6993″.

¹⁶ “Communication “A” 6964″.

¹⁷ “Communication “A” 6947″ and “Communication “A” 7044″.

¹⁸ In the context of the social isolation measures taken to face the COVID-19 pandemic, the deadlines for submission and processing of the different Information Regimes that financial institutions provide to the BCRA were extended. As a result, at the time of publication of this Report, irregularity data for April 2020 were not yet available. This information will be updated and included over the next few days in the Excel of the “Annex to the Report on Banks” available on the BCRA website.

¹⁹ Composed primarily of common stock and earnings.

²⁰ For more details on the sector’s solvency ratios, see the “Financial Stability Report of June 2020”.

²¹ Both the numerator and denominator of these indicators are considered to be expressed at April 2020 prices. The profitability ratios obtained so far in 2020 (expressed in homogeneous currency) are not comparable with those of previous years (for more detail, see Section 5 of the “Financial Stability Report of June 2020”).

²² It should be considered that it was not until April 20 that a minimum rate of 26.6% nominal annual rate (70% of the LELIQ rate) came into force for 30-day fixed-term deposits of less than $1 million (“Communication “A” 6980″), a limit that was extended to $4 million at the end of the month (“Communication “A” 7000″). For more details, see the deposits and liquidity section.

²³ See section II of this report. Within the framework of the ASPO, there was a greater demand for precautionary liquidity by the private sector, which boosted the increase in the share of demand bank accounts to the detriment of those with term accounts. Between the end of March and the beginning of April, the performance of time deposits was also influenced by the difficulties in operating normally in person, which led to part of them not being renewed, reflected in the evolution of immobilized balances. These effects have been tempered since mid-April.

²⁴ See section II of this report.

²⁵ The “monetary result” reflects the effect of inflation (as measured by the evolution of the CPI) on the “monetary items” on the balance sheet. For more details on the methodology for presenting financial statements in homogeneous currency, see Section 5 of the “Financial Stability Report of June 2020”.