Bloomberg / Buenos Aires
Argentine banks are among the clear winners from the central bank’s plan to lower inflation and restore confidence in the peso.
Interest rates above 70%, paid by the central bank through its 7-day notes known as Leliq, have become irresistible for banks in a context of low loan demand by companies and individuals. Private banks obtained, combined, a profit of $1.2bn (ARS53.5bn) in the first quarter, 45% more than in the same period of 2018, according to central bank data. When compared to their assets, it’s the highest quarterly figure in 5 years.
The explanation behind these results are the banks’ holdings of central bank notes, used by the entities to place their extra liquidity. Investment in these securities increased 50% in the first three months of the year since the end of December 2018.
Profitability is largely explained by the differential between the yields that banks receive for their holdings in Leliq and the rate they pay for their deposits, known as Badlar, according to Valeria Azconegui, an analyst at Moody’s Investors Service in Buenos Aires. In March, the spread reached a maximum of 24 percentage points. When the crisis began in March 2018, that spread was only 5 percentage points.
“This large differential allows banks to have a certain cushion to offset the negative effects that are being seen with the rise of non-performing loans and the need to set aside funds,” Azconegui said.
The Central Bank’s goal is to take money out of circulation, curbing inflation and propping up a currency that has lost half its value in the last year. However, the opposite effect is the rising cost of credit, and, therefore, the drop in loans.
For consumers, the central bank policy doesn’t seem as favorable, given the high rates they face. As a result, delays in the payment of debt obligations continue to increase and the proportion of non-performing loans in the financial system is at its highest level in 9 years.
Moody’s expects non-performing loans to continue growing in the short term, reaching at least 4.5 percent. The situation could improve in the second half of the year.
“In October, it’s likely that the interest rate will drop as we see inflation deceleration, and that banks will find a better scenario of activity to increase their supply of products, both to companies and households,” Azconegui said.
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