According to its annual report on the Argentine banking industry, Moody\'s Investors Service says that the ratings of the country\'s banks have a stable outlook. In general, Moody\'s believes that the banks\' ratings are underpinned by the rebuilding of both loans and deposits, and the increasing portion of private sector assets in the banks\' balance sheets that have had a positive effect on the banks\' earnings quality. The ratings are also supported by a relative improvement in the macroeconomic scenario, which has allowed for growth in financial intermediation.
Among the supporting factors for the outlook, the agency cites the following: (a) double- digit loan growth for the past two years -- an indication of recovering economy; (b) low interest rates, lighter provisions, and better efficiency, which have boosted bank results in 2006 and 2007; (c) continuing improvement in asset quality and provisioning; (d) the steady reduction in the Argentine banking system\'s high public-sector exposure. Moreover, there has been steady support from the monetary authorities, underpinning the deposit ratings.
The report\'s author, Andrea Manavella, says that the rated Argentine banks, and the banking system as a whole, have done much to enhance solvency and become financially viable. According to the analyst, the banks\' gradually improving earnings, along with capital contributions, are strengthening the financial system\'s solvency.
\"However,\" she states, the banks\' profitability is still influenced by inflation and by negative interest rates. Profitability is also bolstered by non-recurring gains and charges such as securities gains and legal proceedings (\"amparos\"). Moreover, competition is also beginning to pressure the spreads of various banking products.
Asset quality indicators continued to improve from their post-crisis levels, as banks build up their loan books, and as the credit quality of both corporate and consumers strengthens. Reserve coverage has also been beefed up to reach levels in excess of 100%. \"Nevertheless,\" Ms. Manavella says, \"the fast growth of the loan portfolios -- a trend observed all across Latin America -- may result in asset quality deterioration as loans season -- and therefore, loan growth is a point of concern and will receive Moody\'s attention.\"
The analyst also points to certain other factors that could be negative rating drivers for the system. She notes the following: (a) the still-challenging operating environment constrains the evolution of banks\' ratings, despite a favorable business cycle; (b) Competition continues to intensify because most banks are targeting the same segments; (c) deposit confidence is still lacking, so very short-term deposit funding is preferred; and (d) changes in accounting rules and forbearance create transparency issues, which may undermine the assessment of banks\' true economic capital. |