Should Argentine Banks Brace for Trouble Ahead?
Argentina’s Merval stock index fell more than 8 percent in trading June 27. The banking sector took a particularly hard hit, with some bank stocks falling more than 10 percent in value. Fears of a recession among economists are increasing, Bloomberg News reported, as a severe drought has cut economic growth sharply, and pressure continues to weigh on the country’s currency, which has lost more than 30 percent of its value against the dollar this year. With this stormy economic backdrop, what does the future hold for Argentina’s banks? What forces are most shaping the financial sector’s outlook? How resilient are Argentina’s banks to further tumult? Will Argentine depositors remain confident in local banks and keep their money in the system?
Cynthia Cohen Freue, director and sector lead for financial institutions ratings at S&P Global in Buenos Aires: “We expect the currency depreciation, higher interest rates and inflation, and lower economic growth to impair banks’ asset quality. Weaker economic prospects will pressure the already struggling small- and mid-size enterprises (SMEs), while households will further struggle to cope with rising living costs, especially those with mortgages and personal loans denominated in UVA (an inflation-linked value unit). However, the low proportion of credit to GDP and banks’ low exposures to loans to SMEs and lower-income borrowers will mitigate asset quality deterioration. We consider deposit stability as a major risk, given the country’s recent history of unstable deposits. Total deposits have remained relatively stable in light of the recent sharp currency depreciation. However, further uncertainty about currency fluctuations could result in deposit withdrawals, which would pressure banks’ funding and liquidity positions. Banks have been increasingly providing dollar-denominated loans, although most of them are for borrowers that generate income in U.S. dollars, such as exporters, which alleviates the potential risk. We expect…”Read More
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