Analysts divided on impact of Fernández's run for reelection on banking system

Wednesday, June 22, 2011

Local and foreign analysts seem divided on how local banks will be affected by Argentine President Cristina Fernández's Tuesday (Jun 21) announcement that she is seeking another term in the October elections, but they agree a possible global economic slowdown will impact the country's financial system.

While many expected Fernández to run for reelection (and likely win), there had been recent speculation that she may not run due to health and family issues, according to a Deutsche Bank (NYSE: DB) report.

This sparked a mini-rally among Argentine banks' stocks in the last week or so, as they rose 7% while their Latin American peers stayed basically flat.

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"Therefore, we think her confirmation last night could be received negatively by the market, given the likely continuation of unorthodox economic policies - namely those causing the high inflation - if she is reelected," analyst Tito Labarta wrote in the report.

Argentine banks have posted ROEs above 25% and should remain highly profitable for another year at least. But Deutsche Bank is forecasting banks' earnings to fall 9% in 2012, using its economists' forecast of 29% inflation for next year.

"While this has not been an issue with a relatively stable Argentine peso, as well as positive earnings growth in US dollars, we think the continuation of current economic policies could eventually lead to a slowdown in the economy and significant depreciation of the currency," the report reads.

Indeed, Deutsche Bank economists expect Argentina's GDP growth to slow to 3.3% in 2012 from 6.9% in 2011 and the peso to depreciate 17% next year.

Argentina's economy expanded by 9.9% in 2011's first quarter compared to the same period a year ago, the national statistics institute Indec reported last week.


"Domestic consumption has been growing strongly over the last few months, and it should continue to do so at least until October, which should in turn give [the president] strong political support," chief economist at Argentine financial services group Grupo SBS, Marcelo Olguín, told BNamericas.

The impact of this element on Fernández's political image is explained by the fact that despite very high annual inflation (which economists calculate at around 25%), consumers' perception is that they have comfortable access to consumption, he said.

According to the analyst, Argentina's sovereign debt is unlikely to be affected by the announcement, which means banks' profitability will remain strong underpinned by returns from government-backed securities, strong consumer loan growth - especially in the middle and lower-income segments - and fee income.

Argentine banks hold a significant portion of government debt.

An imminent third presidential period under the Kirchners - as Fernández, who was first elected as her late husband Nestor Kirchner left office, already leads the polls for the October elections - is unlikely to have a significant effect on the dynamics of local banks and financial institutions, said Andrés Méndez, director at Argentine consulting company AMF-Economía.

"And by that I mean that banks should keep showing good profitability, low leverage levels and strong and atomized growth in the consumer loan segment. I don't see the administration introducing significant changes to the script."

"Having said that, the only factor that could introduce uncertainty in this plan is the foreign economic environment," he added.

Argentina's economy is strongly tied to the global economy's comings and goings, such as commodity prices and interest rates. So far, those conditions have benefited the country, but the question arises as to whether they will remain during Fernández' expected second term, Méndez said.

"The key factor here will be how [Fernández] will react to a less benign foreign environment scenario," he said, adding that a slowdown in the global economy could translate into higher levels of loan defaults and lower profitability in the local banking system.

To read Fernández' announcement, in Spanish, that she would seek reelection, go to this link


Argentine banks posted combined earnings of 4.38bn pesos (US$1.07bn) in January-April, up 44.2% from the same period in 2010, thanks to higher revenues and fees, according to the latest report published by central bank BCRA.

Lending to the private sector grew 42.2% in the 12 months through April, to 220bn pesos. Deposits from the private sector were up 34.1% to 282bn pesos in the same period.

The sector's non-performing loan ratio fell 1.8% of total assets as of April 30, compared to 3.1% the same time a year ago, according to BCRA's report.

Argentine banks had 556bn pesos in assets and 58.6bn pesos in equity as of end-April.