What effect will the October presidential elections have on credit demand?

- Friday, May 27, 2011

Recent lending appeals by Argentina's government will probably give a boost to credit demand ahead of the October presidential elections.

In mid-May, President Cristina Fernández called on bankers to improve and expand their lending capacity, particularly loans aimed at boosting productivity and stimulating investment.

Fernández reminded bankers that their sector was one of the local economy's most profitable, and demanded a greater effort to grow lending.

In turn, central bank BCRA president Mercedes Marcó del Pont also said the monetary entity was studying a different reserve requirement structure that would reward banks that lend most to SMEs and provincial and local governments.

To find out more about what can be expected in the Argentine banking sector over the rest of the year, BNamericas spoke with Andrés Méndez, director at local consulting company AMF-Economía.

BNamericas: How do you think the presidential elections in October might affect the demand for credit in Argentina?

Méndez: The government recently called on bankers to increase lending. This will likely boost credit demand ahead of the October presidential elections. What's more, it's not only that elections won't [negatively] affect lending, but that they will likely encourage it thanks to government initiatives that point in that direction.

Government-owned banks have a significant loan market share, and they could be used as a tool that can underpin government actions in a particularly sensitive time such as this.

BNamericas: According to the central bank's latest report, lending to the private sector grew 42.5% in the 12 months ending in March to 213bn pesos [US$52.1bn]. How much faster do you think lending could grow between now and year-end?

Méndez: Lending has continued to grow rapidly since March, at about 43% in the 12 months through May. Considering the current growth rate, lending should grow another couple of percentage points over the next few months. Loan growth should end this year at around 50%.

BNamericas: According to the same report, Argentine banks posted combined earnings of 3.27bn pesos in Q1, up 54.2% from the same period last year. Are the factors that have driven the increase in banks' profits so far this year sustainable?

Méndez: The nominal increase in the entities' recurring income is occurring thanks to an increase in the volume of activity, and not because of a rise in unit margins, which seem to be decreasing.

That is to say, banks have been growing revenues over the last few months through increased volume in loans, credit cards and government-backed securities, rather than higher spreads. This is reasonable if you understand that the sector has been going through a continuous process of expansion.

The banks' income structure during Q1 was more or less divided as follows: about 37% of revenues came from net interest income, 32.2% from fees and 22.1% from returns on government-backed securities, mostly government bonds.

Improved asset quality also fueled banks' bottom line. The sector's non-performing loan ratio has been falling, dropping to 1.9% of total assets as of March this year, compared to 2.1% in December.

BNamericas: Considering all of the factors previously mentioned, how will banks perform in terms of profits during the remainder of the year?

Méndez: I would say that financial institutions' earnings will stay at a very good level for the rest of 2011. While a sector wage adjustment that will have a significant impact on operating costs is imminent, the pillars that support the banks' income remain strong. For one thing, lending to the private sector, as I said before, could expand around 50% during 2011, guaranteeing recurring interest income.

At the same time, the steady income from banking services and fees will persist, while gains from government-backed securities will continue to underpin the current income structure.

BNamericas: Do you think banks will maintain a similar level of government-backed securities in their asset portfolios for the rest of the year?

Méndez: There could be somewhat of a slowdown in the growth of central bank securities in the banks' portfolio during H2. But that would not significantly affect the performance of their portfolio this year.

Now, with respect to revenues coming from changes in the exchange rate, there's a big question mark regarding how the peso will perform against the US dollar after the elections. While this adjustment could gain steam, it's not clear if it would occur during 2011, in November or December, or if we won't see it before next year.

About the company

Consulting company AMF-Economía was created in 2005 by Andrés Méndez.

The consulting team includes specialists that focus on analysis of economic and financial issues with experience working in consulting and education.