Report on Banks

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

Summary of the month

• In 2005, the financial system showed a significant normalization of its operations. On the one hand, there was an expansion of financing to the private sector and a decrease in exposure to the public sector, combined with a recovery in asset quality. Likewise, there was a significant and healthy decrease in liabilities (rediscounts) with the BCRA, while deposit funding was reinforced. For the first time since the crisis, the financial system made annual profits. The higher profitability together with the new capitalizations registered was reflected in an improvement in solvency indicators.
• The context of widespread losses that the financial system had been facing since the 2001-2002 crisis was reversed throughout 2005. Entities with annual profits in the year ended (68 out of 89) held 90% of total assets. In 2005, the improvement was due both to the recovery of the financial margin (closely linked to the increase in regular intermediation activity) and the growing trend in earnings for services, as well as to lower charges for uncollectibility due to the favourable macroeconomic context.
• In December, the financial system obtained profits of close to $232 million (1.3% of assets), thus ending 2005 with positive results of $1,958 million (ROA of 1%). Official entities earned almost $129 million in December (1.8% of assets), accumulating positive results of $1,092 million (1.3% of assets) in 2005. For their part, in the same month, private banks obtained profits of $93 million (0.9% of assets), a positive result that extends to $810 million (0.7% of assets) considering the accumulated figure for 2005.
• The profits recorded in December by private banks were mainly driven by the increase in results due to differences in quotation and in miscellaneous earnings. On the other hand, there was an expansion in the results by assets and in net income from services, movements that were able to offset the seasonal increase in the cost structure (charges for uncollectibility and administrative expenses).
• Throughout 2005, the financial system received capital injections of almost $2,275 million, including capitalizations of $530 million during the last month of the year. Capital contributions, added to annual profits, improved the solvency of the financial system: during 2005, the net worth of the consolidated financial system grew by 15.7%. In the year, capital integration in terms of assets weighted by credit risk increased 1.5 percentage points (p.p.) to a level of 15.5%.
• The balance sheet of the financial system’s obligations to the Central Bank showed a sustained downward trend throughout 2005 (a 40% drop), mainly reflecting the effect of payments made by financial institutions within the matching: for all concepts, the sum reached $9,400 million.
• The financial system’s exposure to the public sector fell slightly in December to 30.4% of total assets, accumulating a fall of 9.1 p.p. during 2005. In the particular case of private entities, there was a reduction of almost 13 p.p. in their exposure to 28% of total assets.
• The irregularity ratio fell by 1.4 p.p. in the last month of 2005, reaching a level of 7.6% of financing. Public banks showed a greater annual drop in their portfolio irregularity compared to private entities: they decreased 15.6 p.p. and 9 p.p., respectively. For its part, the financial system continues to allocate most of the resources obtained to finance those economic sectors with the best performance, which also register the lowest levels of irregularity.
• Beyond the changes in the composition of the balance sheet (substantially improving quality), during 2005 the levels of activity in the financial system followed an expansion path. In 2005, the balance of private loans and deposits increased by 39% and 21% respectively.