Friday, November 20, 2015

Foreign banks hang hopes on runoff vote

A local branch of Citibank is seen in a file photo.

Austerity measures could weigh on the economy but growth expected to revive in 2017

Foreign banks are hoping for a period of high profits and more flexible rules after Sunday’s presidential runoff.

Let’s Change (Cambiemos) presidential hopeful Mauricio Macri has vowed to unwind policies that he says fuelled stagflation and limited the country’s access to foreign markets, while Victory Front (FpV) contender Daniel Scioli agreed to take on these types of measures although on a more gradual basis.

President Cristina Fernández de Kirchner imposed measures on banks such as rate caps and fee limits that impeded their ability to profit from loans, all of which could be reviewed by the next administration.

Local units of Spain’s Banco Santander and Banco Bilbao Vizcaya Argentaria lead foreign banks in deposits, loans and assets, putting them in the best position to capitalize if reforms revive credit growth that has flagged.

While austerity measures such as higher interest rates may initially weigh on the economy, analysts surveyed by Bloomberg say growth will revive by 2017, at about 2.5 percent.

“One hope is that if the opposition wins, all these distortions will disappear and banks can begin functioning normally,” Juan Manuel Vázquez, a bank analyst at Buenos Aires based brokerage Puente Hnos, said. “In that scenario, there’s great potential for foreign banks like Santander and BBVA to grow and eventually utilize all the excess capital they have — which is a lot.”

Ulla Karppinen, a BBVA spokeswoman, declined to comment, as did a Santander press official who asked not to be identified, citing company policy.

Citigroup, based in New York, has been in Argentina more than 100 years, while London’s HSBC Holdings, Brazil’s Banco Itau BBA and the Industrial & Commercial Bank of China also have operations in the country. Banco do Brasil is the majority shareholder of Buenos Aires-based Banco Patagonia.

Awash with pesos, banks have mainly used their excess cash to buy high-yielding central bank notes instead of making more loans — which has kept their credit quality in good condition, Vázquez said.

Estimated inflation of 26 percent has made banks reluctant to approve long-term loans at fixed rates, he said. At the same time, consumers are balking at floating-rate debt, because costs might soar, as overall demand slows with the economy. The nation’s mortgage market, which accounts for less than 10 percent of total lending, could boom once inflation is contained, Vázquez said.

Scioli has pledged that at least 250,000 mortgages for new properties will be offered per year through Procrear if he is elected. Meanwhile, Macri agreed on hoping to reach one million mortgages over a four-year term, to be paid in 30 years. The number of new mortgages being issued in Argentina has slumped to its lowest level in 15 years, accounting for just one percentage point of the country’s total GDP.

In 2003, fixed-rate deposits accounted for 18 percent of total deposits, while now they represent less than one percentage point. This type of a drop makes it impossible for a private bank to give out long-term loans, according to a recent report by Ecolatina consultancy. Less than one percent of the registered workers qualify for access to a 20-year mortgage from Banco Nación, according to an analysis by Reporte Inmobiliario

Measures to be changed

Banks suffered from measures that sapped profits from the lending businesses, imposed by the Fernández de Kirchner administration to spur consumption and limit the outflow of dollars. They include interest-rate caps on consumer loans, forced lending to small companies at negative real interest rates, a minimum rate banks have to pay on deposits, and limits on fees, commissions, dividend payments and foreign-currency holdings.

“All of our banks have positive hopes for the next phase of our country,” Claudio Cesario, president of the Argentine Banking Association, said in an email. “There’s consensus that the next government will make the necessary and appropriate measures to rid the obstacles that provoke our isolation from the rest of the world and prevent sustained economic growth.”

Sceptics abound. The upcoming government will need to show concrete progress before analysts such as Banco BPI’s Carlos Joaquim Peixoto believe Argentina can be a genuine source of revenue growth for foreign banks.

“After such a long period of turbulence, particularly with inflation, you need to actually start seeing changes to start believing in them,” Peixoto said in an interview from Porto, Portugal. “If indeed a positive scenario materializes, you have the scope for Argentina to regain some momentum, and of course Santander and BBVA as relevant players in the market will be well-placed to benefit from that.”

Herald with Bloomberg