S&P: Four Argentine Banks On CreditWatch Negative After Similar Action On The Sovereign

Tuesday, September 4, 2018

Press release by S&P Global Ratings

BUENOS AIRES (S&P Global Ratings) Sept. 3, 2018--S&P Global Ratings said that it had placed its issuer credit ratings on Banco Patagonia S.A., Banco de Galicia y Buenos Aires S.A. (Banco Galicia), Banco Hipotecario S.A., and Banco de la Provincia de Buenos Aires on CreditWatch with negative implications.

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At the same time, we also placed our senior unsecured debt ratings on Banco Hipotecario's debt and our subordinated debt ratings on Banco Galicia's debt on CreditWatch negative.

The CreditWatch placement of Banco Patagonia, Banco Galicia, Banco Hipotecario, and Banco de la Provincia de Buenos Aires mirrors the rating action on the sovereign. See "Argentina 'B+/B' Ratings Placed On CreditWatch Negative On Risks To Implementation Of Economic Adjustment Measures," published on RatingsDirect.

Banking Industry Country Risk Assessment (BICRA) on Argentina

We have recently revised our economic growth projections for Argentina, with a real GDP contraction of 0.5% in 2018, against 2.9% growth seen in 2017. We incorporate the impact of the drought in the country on soy crops; the impact of external events related to increasing U.S. interest rates and volatility in Turkey, a sovereign that is also dependent on external funding; and internal factors that have resulted in volatile economic variables, with depreciation of the peso and increases in interest rates and projected inflation.

We expect high inflation and economic contraction to dent GDP per capita in 2018 to levels of about $12,500, from $14,470 in 2017. We expect these factors to pressure credit quality, but from healthy levels and still comparable with peers'. Argentine banks have been increasingly providing dollar-denominated loans, but most of these are to borrowers that generate income in dollars, such as exporters, which alleviates potential risk. They represent 25% of total credit as of August 2018 (factoring in the impact of the devaluation of the Argentine peso against the U.S. dollar). We also see the low banking penetration as measured by credit to GDP at about 17% as a mitigating factor.

Indexed currency mortgages have significantly grown since 2017, but access to these loans is still low--they're mainly to higher income segments--and we expect mortgage lending to decelerate during the rest of 2018.

Our industry risk assessment incorporates Argentina's enhanced institutional framework, stemming from the country's stronger regulatory framework after it implemented Basel III principles for capital requirement calculations and liquidity ratios, and rolled out aspects of international accounting rules.

These factors align Argentina's financial system more closely with international standards. Despite this progress, risks for banks operating in Argentina are still high, in our view, because of historically weak depositor confidence and the lack of diversified long-term funding. In our opinion, the country also has a narrow capital market and Argentine entities still have limited access to foreign capital markets, resulting in a narrow range of funding sources.

BICRA trends

The stable economic risk trend captures the more challenging conditions for banks operating in the country. In the current situation, we predict that distortions will diminish and inflation will decrease only gradually. We expect Argentina's recent currency depreciation, higher interest rate, increasing inflation, and consequently lower economic growth will result in slowing credit quality and some worsening--although manageable--of asset quality metrics.

We see Argentina's industry risk trend as negative, reflecting our view that there is a one-in-three chance that the funding scenario and volatility could deteriorate. Although the funding structure of the system has somewhat diversified, we expect it to still be mainly funded by deposits. Despite volatile conditions in the country over the last months, the deposit base has continued growing. However, further uncertainty about currency fluctuations could result in withdrawals and pressure banks' funding and liquidity positions, although we note that liquidity levels in the system are high (also incorporating recent increases in reserves as required by the central bank).

Over the next few months, we expect one-time events (including the impact of the recent domestic currency depreciation), results from positions in central bank securities, and higher interest rates charged to customers will allow banks to maintain profitability.

The negative CreditWatch on Banco Patagonia, Banco Galicia, Banco Hipotecario, and Banco de la Provincia de Buenos Aires reflects the risk of the sovereign's worsening creditworthiness due to potentially weakened implementation of the government's strategy to stabilize the economy. We rarely rate financial institutions above the sovereign in which they operate, because we consider it unlikely that these institutions would be unaffected by developments in their domestic economies. We expect to resolve the CreditWatch within the next three months.

We could remove the banks from CreditWatch if we remove Argentina from CreditWatch.