Following a well-publicised period of recession and turbulence, Argentina’s banking industry has seen optimism return. But consolidation and lower inflation bring their own problems, as Silvia Pavoni reports.

Banco Galicia

Javier Ortiz Batalla is proud that, in 2017 his bank was able to grant a 30-year loan to a young couple in Burzaco, a town on the outskirts of Buenos Aires, to buy their first house. Like everyone else in Argentina’s banking sector, the CEO of public sector bank Banco Ciudad has grown accustomed to loans that would stretch to 20 years at most. 

Traditionally, long tenures and mortgages have been the remit of lenders with a social and economic development mandate, such as Banco Ciudad. In a banking market characterised by high inflation and weary bank customers, it would be hard to overstate this achievement. With time, long-term lending in both retail and wholesale banking is set to become a regular part of bank life for private sector lenders too.

Fresh approach

Following the election of Mauricio Macri as Argentina’s president in 2015, a number of market reforms have been introduced, and policy changes have allowed for an independent, inflation-targeting central bank. This has led to the release of reliable numbers, compared with the widely discredited figures circulated by the previous government. From 41.2% in 2016, inflation is now hovering around the 25% mark; the central bank aims to slash this to 15% by the end of 2018.

An independent central bank and reforms to move towards a more orthodox and open economy have helped restore business confidence and will, bankers hope, encourage Argentinians to trust financial institution with their savings and investments. This will help banks’ funding of longer term loans.

The resurgence of long-term credit is possibly best exemplified by figures from Banco de la Nación Argentina, the country’s dominant lender and the main public sector bank: its loan portfolio almost doubled in 2017, driven by an exceptional 260% growth in the mortgage portfolio. Banco Nación now gives credit every 80 seconds of branch working hours, according to president Javier Gonzalez Fraga.

But it will take time and sustained macroeconomic stability to win back the people’s long-term deposits and savings, says Mario Blejer, a former central bank governor who is now deputy chairman of Banco Hipotecario, a specialist mortgage lender that is majority owned by the government. Because of high inflation and measures that froze bank deposits during the economic crisis of the early 2000s, Argentinians have grown wary of the banking system.

“The problem will not be [entirely] solved until there’s macroeconomic stability and people feel comfortable leaving their money [with banks] for two or three years, to buy government bonds or [other products]. You can’t logically give mortgages with 30-day deposits,” he says.

Financing a future

Although encouraged by the new economic and financial markets policy, Mr Blejer is also concerned about the real chances of a competitive mortgage market developing. As long as public sector lenders’ development mandate – and their lesser need to meet profitability targets – allows them to offer products significantly below market rates, private sector banks might find it hard to compete across various lines of customers.

The average mortgage rate was 18.61% as of November 2017, the latest available figure; this is substantially lower than the current benchmark rate of 27.25%. The discrepancy is explained by a market-wide government-sponsored initiative to offer lower rates to middle-income customers (not traditionally served by public sector banks, which tend to focus on low-income customers) as well as by government-sponsored inflation index mortgages.

However, some in the industry believe that this asymmetry is simply part of a transition period to market-based mortgage rates.

A resurgent economy should help the movement towards a more competitive market. After swinging between positive and negative growth numbers over the past five years, gross domestic product (GDP) now appears to be comfortably on an upward trajectory, according to Martin Castellano, chief economist for Latin America at the Institute of International Finance: GDP growth is expected to rise to 3.3% this year from 3% in 2017. Bank loans, too, are on the increase.

Numbers up

Despite still representing only about 1% of Argentina's GDP, mortgages had nearly doubled in the 12 months to February 2018, according to the country's central bank. It is instructive to compare this with neighbouring Chile, Latin America’s deepest financial market, where the mortgage rate is more than 20% of GDP. At 14% of GDP in 2016 – also low compared with Chile’s 81% or Brazil’s 62% – overall bank loans to Argentina's private sector are growing too. “Higher confidence and decelerating inflation have boosted the financial system, and loans to GDP reached 16% [in 2017],” says Santander Rio CEO Enrique Cristofani. “We expect the system to double its size in the next three to four years.”

The trend is set to continue. Banco Nación, for example, expects to increase lending activity to the private sector at a rate of 60% in 2018. The lender has a 40% share of the market but, as conditions improve, Mr Gonzalez Fraga is convinced that private sector banks will be well placed to gain ground.

“Our objective is to grow the mortgage market, not just through Banco Nación. With time, [our participation in this market] will lower to 30% or 25% [of the total market grows],” he says.

New products have been created too. In August 2017, Banco Nación launched mobile payment product PIM, which allows for transfers without the need for an underlying credit or debit card or a bank account. PIM has 400,000 users and the potential to grow exponentially as retailers get used to the platform. The government might even begin to pay certain benefits through it, rather than paying them out in cash.

Banco Galicia CEO Fabian Kon says that the bank has started expanding its staff numbers to create and support new digital products and services: there will be a total of 200 new hires by the end of 2018, he adds.

Consolidation and concern

Though a more stable macroeconomic environment would benefit the whole market, falling inflation comes with challenges too. On the one hand, a declining inflation rate moves the market towards a stable position, but on the other it dents profitability. The local financial system is still characterised by low volumes and high margins – Argentina remains one of the most profitable banking markets in Latin America, with average return on capital of 43.22% in 2016 – and banks will likely soon need to adapt to higher volumes and lower spreads with new models and structures.

“Argentina suffered because of high inflation, but the inflation reduction process is also dangerous for banks because it reduces spreads in real terms,” says Mr Gonzalez Fraga. “We’re dealing with this by rationalising costs and by increasing the size of the bank.”

Other, smaller players might need to follow a different path. “We think that the [banking] market will consolidate,” says Banco Galicia’s Mr Kon. “With inflation going down, naturally interest rates will go down and there will [be a push] for efficiencies. There are more than 70 banks in Argentina; small banks will have incentives to consolidate operations among themselves or with big banks.” He adds that Banco Galicia is indeed ready to take advantage of any potential movement in the market, which has remained stagnant in terms of buying opportunities for some time. The only notable exception is Citi selling its local consumer business to Santander Rio in 2016. Banco do Brasil’s plans to list its Argentinian lender, Banco Patagonia, were put on hold earlier in 2018, according to Reuters, and followed a failed attempt to sell it to Banco Macro in 2017. If a bank such as Patagonia were up for sale, Galicia would consider it, according to Mr Kon.

The number of local banks might shrink in line with the inflation rate, and products and services would likely become more competitive. Argentina is set to provide better banking services to customers, and present appealing opportunities to investors.

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