In 2001 an economic depression and the Argentine peso being pegged to the US dollar led to the country defaulting on sovereign debt by approximately $93bn, which prevented Argentina from accessing international markets and resulted in the cancellation of IMF loans. The subsequent crisis deeply impacted credit penetration, with credit to the private sector as a percentage of GDP dropping from a 10-year peak of 24.8% in 1999 to less than 10% in 2004. The resulting loss in confidence and increased regulation led to stagnation that lasted more than a decade, with the this figure growing by only one point in 14 years to reach approximately 13.7% in 2016, according to data from the World Bank.
However, 2017 marked the first year of improved gains, with a 22% increase in credit, when adjusted for inflation. Nevertheless, as credit to GDP reached 16.1% for that year, the country remains some way behind its regional peers: the ratio for Paraguay and Brazil reached 53.4% and 59.7%, respectively, while Chile’s stood higher again at 112.5% in 2017.
These low penetration levels can be attributed to a number of factors, including high interest rates, a lack of transparency and high volatility, as well as little trust in the industry overall. Walter Ramirez, research director at Banco Supervielle, spoke to OBG about the correlation between credit penetration and levels of inflation. According to research that compiled the data of 47 countries, under the current inflation levels of 25%, credit penetration usually stood within a 12-15% range. “In this context and under our recent projections, we expect that financing to the private sector will increase in line with the drop in inflation, reaching 17.6% in 2020 and rising to 21.1% by 2022,” Ramirez told OBG.
By the Numbers
Since the new administration took office in 2015, consumer confidence indicators have remained virtually static, except for a number of upswings during the first few months after the 2015 presidential and 2017 legislative elections. In 2017 consumer lending grew by 22.6% in real terms, while January 2018 posted a 2.2% increase. However, the number of individuals that have taken out a loan has not grown substantially. Between October 2015 to October 2017, the number of households that had a loan from a financial institution rose by 11%, demonstrating that credit growth was unevenly distributed.
In the corporate segment, credit expanded by 20.8% in 2017 and 1.8% in the first month of 2018. Public banks were the most active, issuing business loans that accounted for 35.7% of all new credit, followed by local private banks which had a market share of 17.3%, while foreign banks had 13.8%. In 2017 the construction sector was the most dynamic in attracting financing, but credit to the industrial sector still accounted for the largest share of corporate lending. However, credit growth in the corporate segment was not necessarily widespread. Similar to the consumer segment, the number of corporate debtors in October 2017 was 165,000 compared to 155,000 in October 2016, representing an increase of 7%, according to the Central Bank of Argentina (Banco Central de la Republica Argentina, BCRA).
The disparity between credit growth and the number of new creditors is representative of some of the broader challenges of financial inclusion the country faces. “Most new loans, whether for individual or corporate, have been granted to those that were originally solvent, and thus always had the capacity to pay us back,” Ramirez told OBG.
Mortgages
The housing mortgage segment has become one of the more dynamic areas of the financial services industry, albeit starting from a small base. Stock of mortgages to households increased by 148.3% over the 12 months leading to December 2017, and posted a 76.3% increase over the previous year’s figure in January 2018. Throughout 2017, nearly 58,500 mortgages to new lenders were issued.
Reducing the housing deficit, which was estimated at 3.5m units in 2017, has been a priority of the government’s agenda. Demand has also been fuelled by the creation of an inflation-adjusted acquisition value unit (Unidad de Valor Adquisitivo, UVA) in April 2016, as it enabled citizens to obtain long-term credit at accessible rates. UVA-denominated mortgages accounted for 92% of total lending in 2017, and since their creation until January 2018, they amounted to $104.8bn, with mortgages accounting for 72% of this figure. In March 2017 legislature was passed approving the reduction of the rate of tax on mortgage payments by 6.5% to further bolster the market.
Rates & Loans
Rates on loans were also impacted by changing policies in 2017. In March the three largest public lenders launched UVA-denominated loans, with rates ranging between 3.5% and 7.5%. However, in November the BCRA raised the rates of its central bank bills (letras del banco central, LEBACs) to 28.75% annually. This resulted in increased refinancing costs, in turn driving major banks to raise their rates by an average one percentage point. Private banks followed suit, with Banco Galicia and Banco Supervielle both increasing their rates to 5.9%.
As expected, the three largest public banks accounted for the bulk of mortgage loans as of November 2017. Banco Nación was in first place with a 42.3% share of the mortgage market, followed by Banco Ciudad with 11.86% and Banco Provincia holding 11.68%. Private banks represent a much smaller share of the market, with the leading players Banco Macro, Banco Galicia and Santander Rio accounting for 5.5%, 4%,and 3.5%, respectively.
However, the government has stated that from 2018 onwards the mortgage market is expected to be increasingly carried forwards by the private sector. For instance, Banco Supervielle saw its mortgage loan portfolio grow from AR50m ($2.6m) in December 2015 to AR1.2bn ($62.1m) by November 2017, with its product and benefits director, Javier Tiburzio, telling local media that they are forecasting their mortgage loans to grow by as much as 100% in 2018.
In an effort to continue this upward trend, the government has also made it possible for banks to bundle UVA-backed mortgages into mortgage securities that can be traded in the stock exchange, enabling banks to refinance themselves with outside sources.
Notwithstanding, the mortgage segment is still underdeveloped compared to other countries in the region, such as in Chile and Uruguay, where this number is closer to 20% and 5%, respectively. At 1% of total GDP, Argentina’s mortgages market has a strong prospect for growth.
NPL
Traditionally, Argentina has had some of the lowest levels of non-performing loans (NPLs) in the region. “High levels of inflation have traditionally made Argentines opt for fixed interest rates, meaning that when inflation grew, credit became cheaper, easing payments. As inflation-adjusted products become more popular, we might see this trend change,” Damián Wilson, an economist at the Argentine Association of Banks, told OBG. Despite lending growth levels, this asset quality has been maintained, with NPLs for households dropping to 2.9% of total loans in 2017, and NPLs for companies remaining at just under 1%. Moreover, NPLs are well covered by a ratio of provisions of 139%.
Keeping Up
While credit continues to grow, deposits are struggling to keep pace. Throughout 2017, private sector deposits in pesos grew by 2.2%, while those in foreign currency rose by 17.5%. However, when adjusted for inflation, deposits saw no change in real terms. In light of this, liquidity levels were hit by a 6.4-percentage-point drop. In January 2018 the financial sector increased its liquidity ratios to reach 45.3% of deposits, up from 42.6% in December 2017.
Many hoped that the disinflationary measures would push the BCRA to ease its monetary policy and reduce its rates on monetary instruments, such as LEBACs and liquidity bills (stock de letras de liquide, LELIQs), which are peso-denominated instruments with seven-day maturity available only to financial institutions. However, in early August 2018 the BCRA fixed the LELIQ rate at 40%, stating that it would maintain a contractionary monetary policy until inflation was aligned with the targets set for 2019. In the months prior inflation had accelerated more than expected, reaching 29.5% year-on-year in June.
While the banking sector has successfully been able to keep up with credit growth through the use of its large liquidity buffers created pre-2015, as well as funds raised through initial public offerings, share issuances or new lines of credit, the sector will still depend on increased deposits. However, with inflation levels moving downwards slower than expected and the government already expecting to overshoot its initial estimates for 2018, it is improbable that the authorities will be able to substantially ease their grip on monetary policy, which in turn restricts the ability of banks to cater to the increased demand for loans.
