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February 23, 2011updated 04 Apr 2017 1:08pm

Argentinian banks bullish about profits

Argentinas banks are expected to post their best results for a decade in 2010, having escaped the worst of the global financial crisis Looking ahead, sustained economic growth means the prospects are even brighter for 2011, offering the prospects of record sector profits

By Rodrigo Amaral

Argentina’s banks are expected to post their best results for a decade in 2010, having escaped the worst of the global financial crisis. Looking ahead, sustained economic growth means the prospects are even brighter for 2011, offering the prospects of record sector profits. Rodrigo Amaral reports.

 

Box out showing Banco de Galicia in numbersLeading bankers from Argentina have expressed optimism about the year ahead, as the mixture of fast economic growth and a still underdeveloped financial services market offers the promise of more riches to come.

The banking sector enjoyed a strong 2010, with firms posting high profits while their activities expanded. It is estimated that, by the end of 2010, the combined profits of banks operating in the country will have reached ARS11bn ($2.8bn): the best results for a decade.

Such a figure may not be headline-grabbing by the standards of more mature markets, but the profits highlight a market that has undergone a complete reversal of fortunes since the dark days of the early 2000s.

After a nasty financial crisis in 2001, which eroded confidence in the sector, the industry accumulated losses of ARS23.8bn between 2000 and 2005.

Out of 200 banks that existed before 2001, only about 80 have survived. But now the future is looking bright again.

Daniel Llambías, the CEO of Banco Galicia, the sixth-largest bank in Argentina by assets, told RBI: “Argentina’s economy did very well in 2010, so the banking business had a good performance too. And we don’t see any reason why it should be different in 2011.”

Last year, Argentina’s economy grew by up to 9%, thanks to the ongoing commodities boom and its tight trade links with Brazil, a star among the emerging markets.

Argentina’s economy, although not perhaps its political situation, have also stabilised to a considerable degree. The government has even managed to sign peace agreements with several of the international creditors who suffered a default in the early 2000s, enabling banks and companies in the private sector to tap global financial markets again.

The relative stability has helped to boost an economy that has been growing strongly for several years. Argentina has even managed to escape almost unscathed from the global financial crisis. Credit growth slowed down a bit, and GDP growth slowed considerably.

Bar chart showing a regional comparison of ATM branches in Argentina per 100,000 adults

But the country was operating at full-throttle in 2010 and according to ABA, the association of foreign-owned banks in the country, the volume of credit grew by 37% in 2010, after a 20% hike in 2009- a clear sign that confidence has returned to the economy.

Jorge Brito, the chairman of Banco Macro, the fifth-largest bank by assets, told RBI: “We expect the dynamics of the credit market to be even better in 2011.”

Having suffered for a long time from a dire economy and unstable politics, Argentines look determined to make up for some of the lost time. Consumer consumption has started to accelerate, which has even fuelled fears that inflation could start to pose problems in the short to medium term.

But according to Adeba, the association of domestically-owned banks, the ratio of loans to GDP in Argentina is a mere 22%.

That is low even by regional standards: in neighbouring Brazil, which is at a more advanced stage in terms of banking development, the rate has already reached 55%.

Mortgage loans amount to a puny 1% of GDP in Argentina while in Chile, the ratio has already hit 7%.

The underdevelopment of credit markets is a symptom of a wider phenomenon: Argentines still make very little use of banks.

“Bank penetration rates remain very low in Argentina, even compared to our neighbours,” said Llambías.

Bar chart showing the largest banks ranked by branches in ArgentinaThe chronic economic instability of the early 2000s, symbolised by the infamous corralito, the restriction to the withdrawal of money from accounts to avoid a bank run, made many people warm to the idea of buying as many dollars as they could and to keep them under their mattresses.

But Llambías argued that the problem went further than that.

“Even in the peak days of the 1990s, the ratio of deposits to GDP did not breach the 20% threshold and today it stands at about 16%.

“The upside, of course, is that there is much potential for growth in the banking market.”

According to Brito, who is also Adeba president, convincing his compatriots that they have much to gain by using banks in their daily lives is the greatest challenge that the industry faces right now.

The Argentinian government has stepped in with enthusiasm to do its bit, as higher bank penetration rates would be a valuable tool in its efforts to manage the economy and to raise the country’s tax revenues.

Campaigns by trade bodies and the government are under way to popularise electronic transactions and the use of plastic cards when citizens go out shopping.

Low-cost and even free banking accounts have been implemented, aimed at particular segments of clients – and banks will have to increase their presence in low-populated regions if they want to expand their networks in richer metropolitan areas.

It will not be easy though.

Anti-government criticism has grown on the internet, claiming the government wants people to use more electronic transactions to compensate for the scarcity of ARS100 banknotes that has been afflicting the country.

Others say people would be more eager to go to the bank if there were not so many robberies, as has been the case of-late. Security is a hot issue in Argentina and from the end of April, clients will be forbidden to take their mobile phones inside bank branches.

The measure has been designed by the central bank to fight the action of ‘spotters’ who warn their crime partners outside when someone leaves the bank after a large cash withdrawal.

Bar chart showing Bank Galicia's performanceIn addition to that, analysts have warned that banks are unlikely to repeat the solid profits of 2010, as the strong appreciation in the value of government bonds, which account for a large share of banks’ assets, was a key contributor to profits.

That may not happen again in 2011, according to a number of analysts.

Brito argued that banks must find a way to ensure that deposits grow at a similar pace to the rise in the growth of lending.

The volume of money kept in local currency accounts has been growing steadily, to the detriment of dollar-linked products.

Deposits by the private sector increased by 28% according to ABA, but there still is much room for progress.

Inflation remains a concern for all Argentineans, including the banking sector, as there is uncertainty as regards the extent of the problem.

Repeated allegations that the government has manipulated inflation statistics for political reasons have also emerged.

But bankers are upbeat as the opportunities still seem likely to surpass the obstacles to business growth.

“We expect to attract 250,000 new clients in 2011, adding to our current base of 1.4m,” said Llambías.

“We are also projecting an additional 500,000 clients to add to our 4m credit cardholders.”

Banco Galicia and Banco Macro are the two largest domestically-owned banks listed in the Buenos Aires Exchange.

Only two official outfits and two foreign banks have larger presences in the banking market.

One dramatic result of the strong financial performance of Banco Galicia and Banco Macro was a rally in their market capitalisations.

Banco Macro’s shares soared by 80% in the course of the year and Banco Galicia’s by 200%.

“Argentinean banks will carry on delivering good results in 2011,” Brito concluded.

 

Bar chart showing the top 10 private sector deposits in Argentina

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