Report on Banks

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

Summary of the month

• So far in 2006, the financial system continues to strengthen the favorable trends evidenced during the previous year: traditional financial intermediation in sustained expansion, normalization of the balance sheet (decreasing exposure to the public sector, lower private delinquencies, accelerated pre-cancellation of liabilities with the BCRA), consolidation of profitability and strengthening of the solvency position.
• Exposure to the public sector of the financial system continued to decline in February to represent 28.6% of total assets (25.6% for private banks), with a cut of almost 9 percentage points (p.p.) in the last 12 months (13p.p. for private banks). · The normalization of the liabilities of financial institutions with the BCRA within the framework of the matching scheme continues to accelerate. In March and April, the banks made payments of $2.644 billion and $586 million, respectively, accumulating expenditures of $5.580 billion in the first four months of 2006. Thus, there are only 3 entities (2 private) with these outstanding liabilities with the BCRA, reaching, at the beginning of April, a balance owed for capital of $6,140 million.
• In February, the financial system obtained profits of $314 million or 1.8% annualized (a) of its assets. Public and private entities obtained positive results of close to $152 million and $154 million, respectively, with monthly ROAs of 2.1%a. and 1.5%y. for each group of banks. The profitability of the financial system in the first two months of 2006 reached 2.2% y/y of assets ($784 million), significantly exceeding the ROA of 0.4% y/y ($150 million) of the same period of the previous year.
• The monthly variation in the profitability of private banks was mainly driven by certain intrinsically volatile items: gains from financial assets, differences in share prices and miscellaneous results. For its part, the core of the financial margin (interest income and CER adjustments) remained stable in the month, although net interest income showed slight growth.
• The sustained profitability of the financial system led to continued improvements in solvency indicators during February. Thus, the net worth of banks increased 1% in February (accumulating an expansion of almost 15% in the last 12 months), exhibiting a slight monthly decrease in leverage.
• During February, total deposits in the financial system grew by almost 0.9 per cent, consolidating the positive trend that began in mid-2002. Almost two-thirds of the monthly increase was explained by private sector placements (they grew 0.8%). In particular, fixed-term deposits grew for the third consecutive month in February (2.4%), consistent with an increase in the confidence of private agents in the financial system.
• Loans to the private sector grew 2.8% in February. Unlike what was recorded last month, commercial loans grew (4.8%) above lines destined for consumption (2.1%). On the other hand, mortgage credit grew 0.8%, expanding for the third consecutive quarter.
• The irregularity of portfolios destined for the private sector of the financial system continued to accentuate its downward trend in February. In fact, this month the irregularity ratio of the financial system fell 0.4 p.p., reaching a level of 7.1%. In public banks, the level of non-performing loans fell by 0.7 p.p. (to 10.2%), while in private entities the irregularity ratio fell by 0.2 p.p. (to 6%).
• The reduction in exposure to the public sector accounted for a large part ($2,100 million) of private banks’ sources of funds in February, with the rest mainly explained by the reduction in liquid assets ($910 million). The funds raised were mainly used to finance the private sector ($1,190 million) and the increase in the holding of LEBAC and NOBAC ($730 million). Another considerable application was the payment of rediscounts made to the BCRA ($440 million), largely as a pre-cancellation of matching fees, which allows further progress in the normalization of the funding structure of the banks.