S&P warns of banking risk in Argentina

The risk rating agency Standard & Poor’s (S&P) anticipa More volatility in the region’s markets over the next few quarters due to the Political uncertainty perceived by investors regarding the policies of the new administrations and the balance of power which will drive the legislative agenda in the coming years. Which, according to S&P, will affect the region’s banking systems and their risk levels.

In this regard, it evaluated these levels for each country, and from the analysis of the The regional banking industry showed that both Argentina and El Salvador have the highest risk levels: 9 on a scale of 1 to 10. They follow him Paraguay, Costa Rica, Honduras and Jamaica with a risk level of 8, then Guatemala with 7 and behind with a level of 6 are Brazil, Colombia, Trinidad and Tobago, and with 5 Mexico, Panama, Uruguay and Peru, and Chile closes. with the lowest risk level at 3.

While the rating agency is optimistic about regional prospects, assuming that the Fed will delay the interest rate cut and this will result in maintaining restrictive monetary policies, it expects the asset quality indicators are expected to stabilise by the end of this year and begin to improve in 2025.

“Provisions are likely to remain high, weighing on profitability. However, we expect operating performance to remain strong thanks to banks’ higher margins than their international peers. Banks will continue to operate with strong capitalisation and liquidity,” points out.

Banking Outlook

For the next 12 months, expectations are that the pace of credit growth will remain in the single digits and that there will be a rebound in credit demand in the business sector once interest rates fall to more affordable levels. “But Banks are likely to continue to implement conservative origination practicesgiven the tepid pace of stabilization of asset quality.”

S&P acknowledges that banks in Latin America are accustomed to operating in challenging conditions and have strong regulatory levels of capital and liquidity, which will help them navigate a more difficult environment. But what is your view specifically on the Argentine case?

Banking risk in Argentina

He says that in the Argentine banking industry prevails significant challenges arising from sovereign conditionswhich hinder business and limit the ratings of financial institutions. “The current government is working to address economic imbalances and clean up the central bank’s balance sheet, but improvements will take time to materialize,” points out.

Therefore, he adds, Profitability will continue to be highly dependent on government bonds and monetary regulation bills in the face of slow lending, at least in the first half of the year. “Asset quality indicators remain manageable, given the focus of creditors on less risky segments and satisfactory provisioning levels.”

What else does it say?: The current government has achieved Initial progress in reducing the fiscal deficit and inflation; has also made significant improvements in the cleaning up the Central Bank’s balance sheet, which has changed the composition of banks’ assets, replacing central bank repurchase agreements with government bonds and Treasury-issued Liquidity Bills (Lefi). “Banks maintain high liquidity and regulatory solvency to cope with volatility, high regulatory capital indicators amid a greater weight of liquid assets, as well as manageable dividend distributions given the continued generation of profits. The implementation of the aforementioned instruments should not affect the availability of liquidity in the system.”

“Banks continue to generate profitability in real terms, but at a lower level than in 2023. For 2024, we expect lower profitability given lower rate levels and change in asset mix, partly mitigated by the elimination of minimum interest rates for term deposits and lower inflation.”

Asset quality indicators will remain manageable: they improved earlier this year with the write-off of corporate cases at government banks (which still have a lower credit quality compared to private banks), although we expect higher unemployment rates and a contraction in economic activity, overall system-wide credit losses will remain manageable given banks’ focus on less risky segments and clients and adequate provisioning.

What to expect next year: “We believe that the Government’s ability to maintain its economic policies will depend on strengthening political support for the reform program. The Banking Industry Risk Analysis by Country for Argentina has a “The negative industry risk trend incorporates the potential impact that adverse events at the sovereign level could have on the funding and credit profile of the financial system.”