Report on Banks

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

Summary of the month

• The financial system began 2005 maintaining the progressive recovery guidelines established during the previous year. Financial intermediation continues to grow, with sustained credit expansion and greater deposit taking, confirming the growing confidence in the local financial system. The best business prospects are revealed by the banks themselves, by committing capitalization programs and expanding staffing. In this context, and with portfolio quality clearly improving, banks continue to show gradual progress in their profitability, although significant volatility persists in final results. Going forward, the resolution of the sovereign debt swap eliminates a significant factor of uncertainty, reinforcing the positive expectations of the sector.
• The public sector continues to lose its share of the assets of financial institutions. For private banks, in January credit to the public sector represented 42% of assets, when two years ago their participation was 50%. For its part, given the bidding scheme for advance payments of matching installments put in place, in the coming months there will be a decrease in funding through assistance from the BCRA.
• In January, the financial system achieved an adjusted profit – excluding the amortization of injunctions and valuation adjustments – of $142 million (0.8%y). The unadjusted result was a loss of $15 million (-0.1% y/y. of assets), well below that of the same month in 2004 (-$470 million or -3%y). Private banks, although they lost $55 million in January (-0.5% y/y), reached an adjusted profit of $45 million (0.4%y).
• The monthly improvement in profitability at private banks was led by a seasonal drop in administrative expenses and bad debt charges. There were also higher results for assets and lower charges for impairment of loans, facilitating an improvement in the financial margin. In this way, it was possible to compensate for the drop in miscellaneous results and the seasonal decrease in results by services. · The coverage of expenditure with current income of private banks increased from 81% to 116%, maintaining some year-on-year stability in expenditure terms in terms of assets, in a context of increase in the number of personnel employed (170 employees more than at the end of 2003).
• Although, in January, private banks did not register new capital contributions, there are committed capitalizations of almost $1,200 million. This month there was no significant variation in the levels of capital integration of private banks, which remain at 15% of risk-weighted assets. Following the programmed increase in the capital requirement for public sector assets, the normative capital position fell by 40 p.p. from the requirement, although there is still significant slack in the aggregate of banks.
• The assets of the consolidated financial system accelerated their pace of expansion in January, growing 22%y, with a year-on-year variation of 9.6% (the highest in the last 20 months). Credit from the financial system to the private sector continued to expand, with consumption lines maintaining special dynamism (they grew 71% y/y in January).
• The quality of the portfolio for the private sector has made further progress. For the system as a whole, its irregularity fell 0.6 p.p. to 18.1%, while in the case of private banks the decrease was 0.7 p.p. to 14.6%.
• Deposits from the private sector (3.1%) and the public sector (2.6%) grew, consolidating the channeling of private deposits to private banks. The increase in total private deposits was led by fixed-term placements, which grew 4.2% (64%y). Two-thirds of this movement was explained by the adjustable time deposits by CER, which rose 22% (990%y), mobilized by the AFJPs.
• In January, private banks received funding through private deposits for $1,550 million and public deposits for $200 million, in addition to reducing their holdings of public securities. Of these funds, $660 million were channeled into new loans to the private sector.