The direction of credit conditions in the Argentine banking system is stable, Moody's Investors Service concluded in its yearly report on the industry.
The stable outlook incorporates the rating agency's expectations that banks' financial fundamentals will remain largely adequate, despite the many challenges of the domestic operating environment. The system's resilience and its ability so far to absorb the impact of the global financial crisis and difficult macroeconomic conditions are also taken into account.
"Moreover," the report's author, Maria Andrea Manavella stated, "the rated banks' well-established franchises, their good earnings, their broader product and services offerings -- which should benefit operating efficiency -- and their adequate capital levels are all incorporated in Moody's weighted-average bank financial strength rating BFSR of D for the Argentine banks."
Over the course of 2009, Moody's unsupported ratings for Argentine banks have been mostly stable. "The deposit ratings of many banks, however, have been downgraded by, on average, one notch," the analyst said, "following our reassessment of the systemic support indicator, which is incorporated into these ratings."
Argentine banks are now more liquid than they have been in previous years, which is actually a reflection of the low economic activity and thus modest credit intermediation. "Nevertheless," Manavella noted, "this liquidity -- both in local and foreign currency -- and the system's deep capital buffers, coupled with very limited currency mismatching and reduction of exposure to the public sector, have all supported the banks' performance in 2009. However, the analyst notes "the credit intermediation is affected by the instability of the economy so the Argentine banks deal with a largely transactional banking system."
Moody's also believes the Argentine banks will manage to retain their liquidity, which is supported by the banks' conservative policies and the high reserves required, however Manavella explained "the recent conflict between the Argentine government and the Central Bank could negatively affect the banking system's liquidity management if it results in an implicit loss of autonomy of the Central Bank, thus ultimately aligning the risk profiles of both institutions."
Despite declining interest rates, the banking system has continued to enjoy robust financial margins, which Moody's expects will boost profitability levels, despite higher credit costs. These profits basically derive from favorable deposit repricing and wider credit spreads, together with growing income from securities. The banks' high liquidity levels and accumulated earnings should also benefit their capital ratios.
"However," she adds, "the Argentine banks need to remain vigilant regarding their cost structure because high inflation could significantly affect the banks' operating expenses." The analyst pointed out that likely further interest rate cuts and high inflation will call for increased business volumes next year, which is critical to sustaining the banks' profitability."
"Their ability to grow with quality will be key in 2010," Manavella concluded.